UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               -------------------
                                    FORM 10-K


         [X]      Annual  Report   Pursuant  to  Section  13  or  15(d)  of  the
                  Securities  Exchange  Act of 1934 For the  fiscal  year  ended
                  December 31, 1996.

         [  ]     Transition Report Pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934
                  For the transition period from              to

                         Commission file number 0-14599
                             -----------------------


                 PLM Transportation Equipment Partners VIIC 1985
               Income Fund (Exact name of registrant as specified
                                 in its charter)


       California                                         94-2946248
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                        Identification No.)

One Market, Steuart Street Tower
 Suite 800, San Francisco, CA                              94105-1301
  (Address of principal                                    (Zip code)
   executive offices)


        Registrant's telephone number, including area code (415) 974-1399
                             -----------------------


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for 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 ______

Aggregate Market Value of Voting Stock:  N/A

An index of exhibits filed with this Form 10-K is located at page 46.

Total number of pages:  49.



<PAGE>




                                     PART I

ITEM 1.        BUSINESS

(A)  Background

PLM  Transportation  Equipment  Partners  VIIB 1985 Income Fund (TEP VIIB or the
Partnership)  and PLM  Transportation  Equipment  Partners VIIC 1985 Income Fund
(TEP  VIIC or the  Partnership)  (together,  the  Partnerships)  are  California
limited  partnerships which were formed in October 1984, and began operations in
January  1985.  The  Partnerships   operate  under  their   respective   Limited
Partnership  Agreements  (Partnership  Agreement)  for the purpose of acquiring,
owning and leasing transportation equipment. PLM Financial Services, Inc. (FSI),
a wholly-owned subsidiary of PLM International, Inc. (PLM International), serves
as the General Partner for both TEP VIIB and TEP VIIC.

     The  Partnerships  were  formed  to engage in the  business  of owning  and
managing diversified pools of transportation  equipment.  The primary objectives
of each Partnership are to invest in equipment which will:

     (i) generate cash distributions to investors on a quarterly basis;

     (ii)  maintain  substantial  residual  value for  continued  operation  and
ultimate sale;

     (iii) provide certain federal income tax benefits, including investment tax
credits,  to the  extent  available,  in 1986 and tax  deductions  in  excess of
Partnership  income during early years which investors may use to offset taxable
income from other sources.

     (iv)to  endeavor to reduce  certain of the risks of equipment  ownership by
acquiring a diversified portfolio of varying equipment types.

     The 1986  Tax  Reform  Act  (the  Act)  substantially  altered  some of the
Partnership   objectives.   Specifically,   the  ability  of  investors  in  the
Partnership  to use tax  deductions  in excess of  Partnership  income to offset
taxable  income from other  sources was not only  limited in duration by the Act
(no offsets were allowed after 1990), but also limited to a declining percentage
that could be applied against other income beginning in 1987.
The Act also eliminated the investment tax credit.

(B)  Management of Partnership Equipment

The  Partnerships  have entered into equipment  management  agreements  with PLM
Investment  Management,  Inc.  (IMI), a wholly-owned  subsidiary of FSI, for the
management of the equipment. IMI has agreed to perform all services necessary to
manage transportation  equipment on behalf of the Partnerships and to perform or
contract  for  the  performance  of all  obligations  of the  lessor  under  the
Partnerships'  leases.  In  consideration  for its  services and pursuant to the
Partnership Agreements,  IMI is entitled to a monthly management fee. Management
fees are  calculated  as 10% of cash flow  available  for  distribution  and are
payable monthly (see Financial Statements, Notes 1 and 2).

                                    TEP VIIB

     The offering of limited partnership units (the Units) of PLM Transportation
Equipment Partners VIIB 1985 Income Fund (TEP VIIB or the Partnership) closed on
August 27,  1985  having  sold 22,276  Units.  FSI  contributed  $100 for its 1%
general partnership interest in TEP VIIB.

     As of December 31, 1996, TEP VIIB owned the following equipment:  27 marine
containers,  five tank cars, and 189 trailers.  All of the Partnership's trailer
equipment  operates in rental yards owned and  maintained by an affiliate of the
General Partner.  Revenue  collected under short-term rental agreements with the
rental yards'  customers are credited to the owners of the related  equipment as
received.  Direct expenses associated with the equipment are charged directly to
the  Partnership.  An  allocation  of other  direct  expenses of the rental yard
operations are billed to the  Partnership  monthly.  All equipment  owned by TEP
VIIB was on lease as of December 31, 1996.

Lessees of the equipment in the TEP VIIB portfolio include,  but are not limited
to: Transamerica Leasing, Dupont SA, and Pines Trailer, Ltd.

                                    TEP VIIC

     The offering of limited partnership units (the Units) of PLM Transportation
Equipment Partners VIIC 1985 Income Fund (TEP VIIC or the Partnership) closed on
December  6, 1985  having sold 33,727  Units.  FSI  contributed  $100 for its 1%
general partnership interest in TEP VIIC.

     As of December 31, 1996, TEP VIIC owned the following equipment:  26 marine
containers,  172 trailers, and an interest in an entity which owns one aircraft.
The aircraft is jointly owned by TEP VIIC (80%) and PLM International (20%). All
of the  Partnership's  trailer  equipment  operates  in rental  yards  owned and
maintained  by an  affiliate of the General  Partner.  Revenue  collected  under
short-term  rental  agreements with the rental yards'  customers are credited to
the owners of the related equipment as received. Direct expenses associated with
the equipment are charged  directly to the  Partnership.  An allocation of other
direct  expenses of the rental  yard  operations  are billed to the  Partnership
monthly.  All of the  equipment  owned by TEP VIIC was either  operating  in the
rental facilities or on lease as of December 31, 1996.

Lessees of the equipment in the TEP VIIC portfolio include,  but are not limited
to: Horizon Air Industries, Inc., and Transamerica Leasing.

(C)  Competition

(1)  Operating Leases vs. Full Payout Leases

Generally, the equipment owned by the Partnerships is leased out on an operating
lease basis wherein the rents owed during the initial non-cancelable term of the
lease  are  insufficient  to  recover  the  Partnerships  purchase  price of the
equipment. The short to mid-term nature of operating leases generally commands a
higher  rental rate than longer  term,  full  payout  leases and offers  lessees
relative  flexibility in their  equipment  commitment.  In addition,  the rental
obligation  under the operating  lease need not be  capitalized  on the lessee's
balance sheet.

     The Partnerships encounter considerable  competition from lessors utilizing
full payout leases on new equipment,  i.e., leases which have terms equal to the
expected  economic  life of the  equipment.  Full payout  leases are written for
longer terms and for lower rates than the Partnerships offer. While some lessees
prefer the flexibility  offered by a shorter term operating lease, other lessees
prefer the rate advantages possible with a full payout lease. Competitors of the
Partnerships may write full payout leases at considerably lower rates, or larger
competitors  with a lower cost of capital  may offer  operating  leases at lower
rates, and as a result, the Partnerships may be at a competitive disadvantage.

(2)  Manufacturers and Equipment Lessors

The Partnerships  also compete with equipment  manufacturers who offer operating
leases and full payout  leases.  Manufacturers  may provide  ancillary  services
which the Partnerships  cannot offer, such as specialized  maintenance  services
(including possible substitution of equipment),  training, warranty services and
trade-in privileges.

     The  Partnerships  compete with many equipment  lessors,  including,  among
others,   ACF  Industries,   Inc.   (Shippers  Car  Line  Division),   Transport
International  Pool, General Electric Railcar Services  Corporation,  Greenbrier
Leasing Company,  and other limited  partnerships  which lease the same types of
equipment.

(D)  Government Regulations

The use, maintenance, and ownership of equipment is regulated by federal, state,
local and/or foreign governmental authorities. Such regulations which may impose
restrictions and financial burdens on the Partnerships'  ownership and operation
of  equipment,  which  may  affect  the  Partnerships'  liquidity.   Changes  in
government regulations, industry standards, or deregulation, may also affect the
ownership,  operation and resale of the equipment.  Certain of the Partnerships'
equipment is subject to extensive  safety and  operating  regulations  which may
require the removal  from  service or extensive  modification,  at  considerable
cost, of such equipment to meet the regulations.  Such regulations  include (but
are not limited to):

     (1)      the U.S. Department of  Transportation's  Aircraft Capacity Act of
              1990 (which  limits or  eliminates  the  operation  of  commercial
              aircraft in the U.S. that do not meet certain  noise,  aging,  and
              corrosion criteria);

     (2)      the Montreal  Protocol on Substances  that Deplete the Ozone Layer
              and the U.S.  Clean Air Act  Amendments of 1990 which call for the
              control of and eventual  replacement of substances  that have been
              found to cause or contribute  significantly  to harmful effects on
              the  stratospheric  ozone layer and which are used  extensively as
              refrigerants    in   refrigerated    marine   cargo    containers,
              over-the-road trailers, etc.;

     (3)      the  U.S.  Department  of  Transportation's   Hazardous  Materials
              Regulations  which  regulate the  classification  of and packaging
              requirements for hazardous  materials and which apply particularly
              to the Partnerships' tankcars.

(E)  Demand

The Partnerships invested in Transportation-related  capital equipment. With the
exception  of aircraft  leased to  passenger  air  carriers,  the  Partnerships'
equipment is used  primarily  for the  transport  of  materials.  The  following
describes the markets for the Partnerships' equipment:

(1)  Commuter Aircraft/Regional Aircraft

Independent  forecasts show the regional aircraft market is growing at a rate of
5.5% per year through 2013. This is slightly  higher than the comparable  growth
rate in commercial  aircraft of 4.7% over the same period.  Currently  there are
4,390  regional  aircraft  in  service in the 15 to 70 seat  class.  Independent
forecasts show this will grow to over 5,000  aircraft  during the next 17 years.
The highest growth markets are the 30 to 50 seat turboprops. The emphasis on the
larger aircraft in the future is a result of growing passenger numbers,  airport
congestion and the extension of regional airline route networks requiring longer
range  aircraft.  These  events will  continue  the  current  trend of the major
airlines  to hand down the  operations  of their  marginal  shorthaul  routes to
affiliated regional carriers.

     At December 31, 1996,  the  Partnership  had an interest in an entity which
owns a commuter  aircraft  that is in the 19 seat  category  operating  in North
America. The Partnership expects to sell this investment in 1997.

(2)  Marine Containers

At the end of 1995,  the  consensus of industry  sources was that 1996 would see
both higher  container  utilization and  strengthening  of per diem lease rates.
Such was not the case, as there was no appreciable  cyclical  improvement in the
container market following the traditional winter slowdown. Industry utilization
continues to be under pressure, with per diem rates being impacted as well.

     A  substantial  portion of the  Partnership's  containers  are on long-term
utilization  leases which were entered into with Trans Ocean  Leasing as lessee.
The industry has seen a major consolidation,  as Transamerica  Leasing,  late in
the fourth quarter of 1996, acquired Trans Ocean Leasing.  Transamerica  Leasing
is the second  largest  container  leasing  company  in the world.  Transamerica
Leasing  is the  substitute  lessee for Trans  Ocean  Leasing.  Long term,  such
industry  consolidation  should  bring  more  rationalization  to the market and
result in higher utilization and per diem rates.

(3)  Railcars

General-purpose,  or  nonpressurized,  tank  cars are used to  transport  a wide
variety of bulk liquid commodities,  such as petroleum fuels,  lubricating oils,
vegetable oils, molten sulphur,  corn syrup,  asphalt,  and specialty chemicals.
Demand for  general  purpose  tank cars in the  Partnership  fleet has  remained
healthy  over  the  last  two  years  with  utilization   remaining  above  98%.
Independent  projections  show the demand for petroleum  growing  during 1997 to
1999,  as  the  developing   world,   former   Communist   countries,   and  the
industrialized world all increase their demand for energy.  Chemical carloadings
for the  first 40 weeks of 1996  were up one  tenth  of one  percent  (0.1%)  as
compared to the same period in 1995.



<PAGE>


(4)  Over-the-Road Dry Trailers

The  over-the-road  dry trailer market was weak in 1996, with  utilization  down
15%. The trailer  industry  experienced a record year in 1994 for new production
and 1995 production levels were similar to 1994's.  However, in 1996 , the truck
freight recession,  along with an overbuilding situation,  contributed to 1996's
poor  performance.  The year 1996 had too little  freight and too much equipment
industrywide.

(5)  Over-the-Road Refrigerated Trailers

PLM  experienced  fairly  strong  demand  levels  in 1996  for its  refrigerated
trailers.  With  over 15% of the  fleet in  refrigerated  trailers,  PLM and the
Partnerships are the largest supplier of short-term rental refrigerated trailers
in the U.S..

ITEM 2.       PROPERTIES

The  Partnerships  neither own nor lease any properties other than the equipment
they  have  purchased  for  lease to  others.  As of  December  31,  1996,  each
Partnership owned a portfolio of  transportation  equipment as described in Part
I, Item 1. It is not contemplated that any more equipment will be acquired.

     The Partnerships  maintain their principal  offices at One Market,  Steuart
Street  Tower,  Suite 800,  San  Francisco,  California  94105-1301.  All office
facilities are provided by FSI without reimbursement by the Partnerships.

ITEM 3.       LEGAL PROCEEDINGS

None.

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

No matters were submitted to a vote of the Partnerships' Limited Partners during
the fourth quarter of its fiscal year ended December 31, 1996.





<PAGE>


                                     PART II

ITEM 5.       MARKET FOR THE PARTNERSHIPS' EQUITY AND RELATED UNITHOLDER MATTERS

Pursuant to the terms of the  Partnership  Agreements,  the  General  Partner is
entitled  to a 1%  interest  in the  profits,  losses and  distributions  of the
Partnerships.  The General  Partner also is entitled to a special  allocation of
any net  profit  or gains  from sale of each  Partnership's  assets  during  the
liquidation  phase in an amount equal to the excess of the net losses previously
allocated  to the General  Partner  over the capital  contributions  made by the
General  Partner.  FSI is the sole holder of such  interests.  Ownership  of the
remaining  99%  interest  in the  profits  and losses and  distributions  of the
respective Partnerships is represented as follows:

                                                TEP VIIB            TEP VIIC
                                                -------------------------------

   Holders of Limited Partnership Units
     as of December 31, 1996                        835              1,226




There are several  secondary  exchanges which may purchase  limited  partnership
units.  Secondary  markets  are  characterized  as having few buyers for limited
partnership  interests  and,  therefore,  generally  are  viewed as  inefficient
vehicles for the sale of partnership  units. There is no public market for these
Limited Partnership Units and none is likely to develop.  Moreover,  the Limited
Partnership Units are subject to substantial restrictions on transferability.


<PAGE>


ITEM 6.       SELECTED FINANCIAL DATA

Tables 1, below, lists selected financial data for the respective Partnerships.

                                     TABLE 1

                        For the years ended December 31,
<TABLE>
<CAPTION>

  TEP VIIB                                            1996              1995             1994             1993              1992
  ---------------------------------------------------------------------------------------------------------------------------------

  <S>                                             <C>              <C>               <C>              <C>               <C>
  Operating results:
    Total revenues                                $    487,226     $    732,844      $    813,152     $    861,606      $   915,874
    Loss on revaluation
      of equipment                                          --               --                --          (65,475 )        (35,000)
    Gain (loss) on disposition
      of equipment                                      62,907           27,563            14,663          (15,985 )          2,562
    Equity in net income of unconsolidated
      special purpose entity                           265,108               --                --               --               --
    Net income                                         238,083           29,306            88,689          139,613          189,710

  At year-end:
    Total assets                                  $    523,019     $    867,962      $  1,269,667     $  1,653,415      $ 2,155,868
    Total liabilities                                   37,477           26,193            61,017           58,033          119,031

  Cash distributions                              $    394,310     $    396,187      $    475,421     $    581,068      $   954,181

  Cash distributions and special distributions
  which represent a return of capital to Limited
  Partners                                        $    352,665     $    363,212      $    382,865     $    437,040      $   756,826

  Special distributions                           $    200,000     $         --      $         --     $         --      $        --

  Per weighted average limited partnership unit:
  Net income                                      $      10.58     $       1.30      $       3.94     $       6.20      $      8.43

  Cash distributions                              $      17.52     $      17.61      $      21.13     $      25.82      $     42.41

  Cash distributions and special distributions
  which represent a return of capital to Limited
  Partners                                        $      15.83     $      16.31      $      17.19     $      19.62      $     33.97

  Special distributions                           $       8.89     $         --      $         --     $         --      $        --

</TABLE>



<PAGE>



                                         For the years ended December 31,

<TABLE>
<CAPTION>

  TEP VIIC                                            1996              1995             1994             1993              1992
  ---------------------------------------------------------------------------------------------------------------------------------

  <S>                                             <C>              <C>               <C>              <C>             <C>
  Operating results:
    Total revenues                                $    565,080     $  1,254,597      $  1,712,474     $  1,682,390    $  1,822,559
    Loss on revaluation
      of equipment                                          --               --                --          (11,698 )            --
    Gain (loss) on disposition
      of equipment                                     133,840           84,289            68,223         (131,532 )        (9,970 )
    Equity in net income of unconsolidated
      special purpose entities                         653,740               --                --               --              --
    Net income                                         600,944          175,174           441,222          359,895         366,686

  At year-end:
    Total assets                                  $    792,790     $  1,648,364      $  2,526,952     $  3,199,276    $  4,154,778
    Total liabilities                                   20,066           22,228            28,451           46,293         141,876

  Cash distributions                              $    654,356     $    847,539      $    995,704     $  1,049,476    $  1,053,534

  Cash distributions and special distributions
  which represent a return of capital to Limited
  Partners                                        $    844,877     $    863,642      $    647,937     $    851,320    $    778,980

  Special distributions                           $    800,000     $    200,000      $    100,000     $    170,338    $    100,000

  Per weighted average limited partnership unit:
  Net income                                      $      17.64     $       5.14      $      12.95     $      10.56    $      10.76

  Cash distributions                              $      19.21     $      24.88      $      29.23     $      30.81    $      30.92

  Cash distributions and special distribution
  which represent a return of capital to Limited
  Partners                                        $      25.05     $      25.61      $      19.21     $      25.24    $      23.10

  Special distributions                           $      23.48     $       5.87      $       2.94     $       5.00    $       2.94


</TABLE>

<PAGE>


ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

Liquidity and Capital Resources

(A)  Sources

The Partnerships'  primary source of liquidity is operating cash flow.  Proceeds
realized from the sale or disposal of equipment are generally distributed to the
partners.  The  Partnerships'  original  source of capital was proceeds from its
initial public offering of limited partnership units.

(B)  Asset Sales

Equipment sales and dispositions prior to the Partnerships'  planned liquidation
phase generally  result from either the exercise by lessees of fair market value
purchase  options  provided for in certain leases,  or the payment of stipulated
loss values on equipment lost or disposed during the time it is subject to lease
agreements.  Such  disposal of equipment is  unpredictable  and results from the
wear, tear, and general risk of normal  operations.  As discussed in note 6, the
Partnerships  have  entered  the  portfolio  liquidation  phase as of the  third
quarter  of 1995.  The  General  Partner is  actively  marketing  the  remaining
equipment portfolio with the intent of maximizing sale proceeds.

(C)  Market Values

In March 1995, the Financial  Accounting Standards Board (FASB) issued Statement
No. 121,  "Accounting  for the  Impairment of Long-Lived  Assets and  Long-Lived
Assets to be Disposed  Of" (SFAS 121).  This  standard  is  effective  for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995.
In accordance  with SFAS 121, the General  Partner reviews the carrying value of
its equipment  portfolio at least annually in relation to expected future market
conditions for the purpose of assessing  recoverability of the recorded amounts.
If  projected  future  lease  revenue  plus  residual  values  are less than the
carrying  value  of the  equipment,  a  loss  on  revaluation  is  recorded.  No
adjustments to reflect  impairment of individual  equipment carrying values were
required for the year ended December 31, 1996.

As of December 31, 1996, the General Partner  estimated the fair market value of
each   Partnerships'   equipment   portfolio,   including   equipment  owned  by
unconsolidated special purpose entities (USPE's), to be approximately:
$1.0 million and $1.8 million for TEP VIIB and TEP VIIC respectively.

(D)  Government Regulations

The General  Partner  operates the  Partnerships'  equipment in accordance  with
current  regulations  (see  Item 1 (D)  Government  Regulations).  However,  the
continuing  implementation  of  new  or  modified  regulations  by  some  of the
authorities   mentioned   previously,   or  others,  may  adversely  affect  the
Partnerships'  ability to continue to own or operate equipment in its portfolio.
These  on-going  changes in the  regulatory  environment,  both in the U.S.  and
internationally,  cannot be predicted  with any  certainty and thus preclude the
General  Partner  from  accurately  determining  the  impact of such  changes on
Partnership operations, purchases and sales of equipment.

(E)  Future outlook

Pursuant to the original  operating  plan, the  Partnerships  entered into their
liquidation  phase during 1995 and the General Partner is actively  pursuing the
sale of all of the Partnerships'  equipment with the intention of winding up the
Partnerships and distributing all available cash to the Partners.


<PAGE>


(F)  Result of operations - Year To Year Summary

Comparison of the Partnerships' Operating Results for the Years Ended
December 31, 1996 and 1995

TEP VIIB:

(A)  Owned equipment operations

Lease  revenues less direct  expenses  (defined as repairs and  maintenance  and
asset specific  insurance  expenses) on owned  equipment  decreased for the year
ended  December 31, 1996 when compared to the same period of 1995. The following
table presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                              For the twelve months
                                                                                ended December 31,
                                                                             1996                1995
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>
   Trailers                                                              $  241,016          $  365,141
   Railcar equipment                                                         28,972              21,414
   Marine containers                                                         18,303              22,452

</TABLE>

Trailers: Trailer lease revenues and direct expenses were $362,500 and $121,484,
respectively,  for the year ended  December 31,  1996,  compared to $525,408 and
$160,267,  respectively,  during the same  period of 1995.  The  decrease in net
contribution was due to lower  utilization of trailers in the short-term  rental
facilities  for the twelve  months ended  December 31, 1996 when compared to the
same  period  of 1995,  and the  disposition  of eight  trailers  in 1995 and 19
trailers during 1996;

Railcar  equipment:  Railcar lease revenues and direct expenses were $30,000 and
$1,028, respectively,  for year ended December 31, 1996, compared to $28,049 and
$6,635, respectively, during the same period of 1995. Although the railcar fleet
remained  the same size for both years,  the  increase  in railcar  contribution
resulted from running repairs  required on certain  railcars in the fleet during
1995 which were not needed during 1996. In addition,  early lease termination on
four  railcars in the third  quarter of 1995  resulted in a credit given back to
the lessee.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$18,417 and $114,  respectively,  for the year ended December 31, 1996, compared
to $22,703 and $251, respectively, during the same period of 1995. The number of
marine  containers  owned by the  Partnership  has been  declining over the past
twelve months due to sales and dispositions.  The result of this declining fleet
has been a decrease in marine container net contribution.

(B)  Indirect expenses related to owned equipment operations

Total  indirect  expenses  of $391,625  for the year ended  December  31,  1996,
decreased from $485,781 for the same period in 1995. The variances are explained
as follows:

(a) a $36,165  decrease in bad debt  expense  was due to the  General  Partner's
evaluation of the  collectibility  of trade receivables from trailer rental yard
lessees;

(b) a $29,847 decrease in general and  administrative  expenses from 1995 levels
was due to decreased  accounting costs and administrative  costs associated with
the short-term rental facilities;

(c) a $24,599 decrease in depreciation  expenses from 1995 levels reflecting the
sale of certain assets during 1996 and 1995.

(d) a $3,545 decrease in management fee from 1995 levels due to a lower level of
operating  cash flow  associated  with lower lease revenue on trailers and lower
utilization  and  rates on marine  containers.  Management  fees are  calculated
monthly as the greater of 10% of the Partnership's  operating cash flow, or 1/12
of  1/2%  of  the  Partnership's  Gross  Proceeds  as  defined  in  the  Limited
Partnership Agreement.


<PAGE>


(C) For the year ended  December 31, 1996,  the  Partnership  realized a gain of
$62,907 on the sale or  disposition  of nine marine  containers and 19 trailers,
compared  to the same  period in 1995 when the  Partnership  realized  a gain of
$27,563 on the sale or disposition of eight trailers and 15 marine containers.

(D) Interest and other income  decreased to $13,402 for the year ended  December
31, 1996 from $32,119 for the same period of 1995.  This  decrease was primarily
due to income earned from an early lease termination penalty on four railcars in
the third quarter of 1995,  and lower  interest  income earned due to lower cash
balances available for investments when compared to the same period of 1995.

(E) Equity in net income of the unconsolidated special purpose entity

Equity in net income of  unconsolidated  special purpose entity was $265,108 for
the year ended December 31, 1996, and represents the Partnership share of income
($28,408)  generated from the partnership  investment in an entity which owns an
aircraft,  accounted  for  under  the  equity  method  and the  gain  ($236,700)
resulting from the sale by this entity of this aircraft  during 1996 (see Note 4
to the financial statements).

(F) Net income

The  Partnership's  net income of $238,083 for the year ended December 31, 1996,
increased from $29,306 for the year ended  December 31, 1995. The  Partnership's
ability to operate or liquidate assets, secure leases, and re-lease those assets
whose leases  expire during the duration of the  Partnership  is subject to many
factors, and the Partnership's performance in 1996 is not necessarily indicative
of future  periods.  For the year  ended  December  31,  1996,  the  Partnership
distributed  $588,367 to the Limited  Partners,  or $26.41 per weighted  average
Limited Partnership Unit which included a special  distribution from asset sales
of $8.89 per unit.

     All of the equipment owned by TEP VIIB was either  operating in the trailer
rental  facilities  or on lease  as of  December  31,  1996.  The  Partnership's
performance during 1996 is not necessarily indicative of future periods.

TEP VIIC:

(A)  Owned equipment operations

Lease  revenues less direct  expenses  (defined as repairs and  maintenance  and
asset specific insurance expenses) on owned equipment decreased during 1996 when
compared to the same period of 1995. The following table presents lease revenues
less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                              For the twelve months
                                                                                ended December 31,
                                                                             1996                1995
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>
   Trailers                                                              $  284,335          $  484,019
   Marine containers                                                         14,125              29,350

</TABLE>

Trailers: Trailer lease revenues and direct expenses were $392,542 and $108,207,
respectively,  for the year ended  December 31,  1996,  compared to $707,321 and
$223,302,  respectively  during the same period during 1995. The decrease in net
contribution was due to lower  utilization of trailers in the short-term  rental
facilities in 1996 when compared to 1995, and the  disposition of 14 trailers in
1995 and 40 trailers during 1996;

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$14,332 and $207,  respectively,  for the twelve months ended 1996,  compared to
$29,819 and $469, respectively during the same period during 1995. The number of
marine  containers  owned by the  Partnership  has been  declining over the past
twelve months due to sales and dispositions.  The result of this declining fleet
has been a decrease in marine container net contribution.



<PAGE>


(B)  Indirect expenses related to owned equipment operations

Total  indirect  expenses  of $509,462  for the year ended  December  31,  1996,
decreased from $643,725 for the same period in 1995. The variances are explained
as follows:

(a) a $63,135  decrease  in the general and  administrative  expenses  from 1995
levels due to decreased  accounting  costs and  administrative  costs associated
with the  short-term  rental  facilities  due to  decreased  volume of  trailers
operating in these facilities;

(b) a $47,340 decrease in depreciation  expenses from 1995 levels reflecting the
sale of certain assets during 1996 and 1995;

(c) a  $33,259  decrease  in bad  debt  expense  due to  the  General  Partner's
evaluation of the  collectibility  of trade receivables from trailer rental yard
lessees;

(d) a $9,471  increase in management fees due to higher levels of operating cash
flow during the comparable  periods.  Monthly  management fees are calculated as
the greater of 10% of the Partnership's  Operating Cash Flow, or 1/12 of 1/2% of
the Partnership's  Capital  Contributions as defined in the Limited  Partnership
Agreement.

(C) For the year ended  December 31, 1996,  the  Partnership  realized a gain of
$133,840 on the sale or  disposition  of 40 trailers  and 10 marine  containers,
compared to the same  period in 1995,  when the  Partnership  realized a gain of
$84,289 on the sale or disposition of 14 trailers and 17 marine containers.

(D)  Equity in net income of unconsolidated special purpose entities

Equity in net income of unconsolidated  special purpose entities of $653,740 for
the year ended  December 31, 1996,  represents the  Partnership  share of income
($117,919)  generated  from the  partnership  investment  in entities  which own
aircraft,  accounted  for  under  the  equity  method  and the  gain  ($535,821)
resulting  from the sale by this entity of the aircraft  during 1996 (see Note 4
to the financial statements).

(E) Interest and other income  decreased to $24,366 for the year ended  December
31, 1996,  from $35,376  compared to the same period of 1995.  This decrease was
primarily due to lower interest rate earned on cash investments in 1996.

(F)  Net income

The  Partnership's  net income increased to $600,944 for the year ended December
31, 1996, from $175,174 in the same period in 1995. The Partnership's ability to
operate or liquidate  assets,  secure  leases,  and re-lease  those assets whose
leases expire during the duration of the Partnership is subject to many factors,
and the  Partnership's  performance  in 1996 is not  necessarily  indicative  of
future  periods.   For  the  year  ended  December  31,  1996,  the  Partnership
distributed  $1,439,812 to the Limited Partners,  or $42.69 per weighted average
Limited Partnership Unit which included a special  distribution from asset sales
of $23.48 per unit.

     All of the equipment owned by TEP VIIC was either  operating in the trailer
rental  facilities  or on lease  as of  December  31,  1996.  The  Partnership's
performance during 1996 is not necessarily indicative of future periods.



<PAGE>


Comparison of the Partnerships' Operating Results for the Years Ended
December 31, 1995 and 1994

TEP VIIB:

(A)  Revenues

Total revenues for the years ended December 31, 1995 and 1994, were $732,844 and
$813,152,  respectively. The decrease in 1995 revenue was attributable primarily
to lower lease revenues, and lower interest and other income.

(1)  Lease revenue decreased to $673,162 in 1995 from $786,981 in 1994.

The following table lists lease revenues earned by equipment type:


                                              For the year ended December 31,
                                                  1995               1994
                                              ---------------------------------
   Trailers                                    $  525,408         $  631,161
   Aircraft                                        97,002             99,081
   Rail equipment                                  28,049             32,660
   Marine containers                               22,703             24,079
                                               ================================
                                               $  673,162         $  786,981
                                               ================================

Significant revenue component changes resulted primarily from:

     (a) Trailer revenues decreased due to off lease time on trailers previously
operating on fixed-term leases  transitioning to the  PLM-affiliated  short-term
rental  facilities  during 1995, and the  disposition  of eight trailers  during
1995;

     (b) Railcar  revenues  decreased  due to the  re-lease of some  railcars at
lower rates than  currently  available in the market for the types of cars owned
by the Partnership.

(2) Interest and other income increased to $32,119 in 1995 from $11,508 in 1994.
The increase in 1995 was primarily  attributable  to income earned from an early
lease  termination  penalty on four railcars in the second  quarter of 1995, and
higher average interest rates during 1995.

(B)  Expenses

The Partnership's  total expenses for the years ended December 31, 1995 and 1994
were  $703,538  and  $724,463,   respectively.  The  decrease  was  attributable
primarily to decreases in depreciation  expense,  repairs and  maintenance,  and
general and administrative expenses, partially offset by an increase in bad debt
expense.

(1) Direct operating  expenses (defined as repairs and maintenance and insurance
expense)  decreased to $167,475 in 1995 from  $183,155 in 1994.  The decrease in
repairs and  maintenance is primarily  attributed to a decrease in the number of
trailers   coming  off  term  leases  and  requiring   refurbishment   prior  to
transitioning into the short-term rental facilities  operated by an affiliate of
the General Partner, and the disposition of trailers during 1995.

(2) Indirect  Operating  Expenses (defined as depreciation  expense,  management
fees to affiliate,  bad debt expense,  and general and administrative  expenses)
decreased  to  $536,063  in 1995 from  $541,308  in 1994.  The  decrease  is due
primarily to:

     (a)  a  decrease  of  $15,462  in  depreciation   expense   resulting  from
disposition of trailers and marine containers during 1995;

     (b) a decrease of $5,692 in general and  administrative  expenses primarily
due to the decreased overall fleet size and decreased  indirect costs associated
with trailers in the PLM-affiliated short-term rental facilities;

     (c) an increase of $17,328 in bad debt expense due to the General Partner's
evaluation of the collectability of certain of the Partnership's  trade accounts
receivable;

(3) Gain from  disposition of equipment of $27,563 was realized from the sale or
disposition  of eight  trailers and 15 marine  containers in 1995. In 1994,  the
Partnership  realized a gain of $14,663  from the sale or  disposition  of eight
trailer and 24 marine containers.

(C)  Net Income

As a result of all of the foregoing,  net income for the year ended December 31,
1995,  decreased to $29,306  from $88,689 for the year ended  December 31, 1994.
The  Partnership's  ability to operate or liquidate assets,  secure leases,  and
re-lease those assets whose leases expire during the duration of the Partnership
is subject to many factors,  and the  Partnership's  performance  in 1995 is not
necessarily indicative of future periods. In 1995, TEP VIIB distributed $392,225
to the Limited Partners, or $17.61 per Unit.

TEP VIIC:

(A)  Revenues

Total revenues for the years ended December 31, 1995 and 1994,  were  $1,254,597
and  $1,712,474,  respectively.  The decrease in 1995  revenue was  attributable
primarily  to a decrease in lease  revenues  partially  offset by an increase in
interest and other income, and an increase in gain on disposition of equipment.

(1)  Lease revenue decreased in 1995 to $1,134,932 as compared to $1,616,995
in 1994.

The following table lists lease revenues earned by equipment type:
<TABLE>
<CAPTION>

                                                       For the year ended
                                                          December 31,
                                                   1995                 1994
                                              -------------------------------------

   <S>                                         <C>                 <C>
   Trailers                                    $    707,321        $   1,073,039
   Aircraft                                         397,791              514,617
   Marine containers                                 29,820               29,339
                                               ===================================
                                               $  1,134,932        $   1,616,995
                                               ===================================
</TABLE>

Significant revenue component changes resulted primarily from:

     (a) Trailer revenues  decreased  $365,718 due to off lease time on trailers
previously  operating on fixed-term leases  transitioning to the  PLM-affiliated
short-term  rental  facilities  during  1995,  a decline in  utilization  in the
PLM-affiliated  short-term  rental facilities during 1995 and the disposition of
14 trailers in 1995;

     (b) Aircraft revenue  decreased  $116,826 due to a reduced release rate for
one lease.

(2) Interest and other income increased to $35,376 in 1995 from $27,256 in 1994.
The increase in 1995 was primarily  attributable  to higher  interest  income in
1995 due to higher cash balance  invested and higher  average  interest rates in
1995.

(B)  Expenses

The Partnership's  total expenses for the years ended December 31, 1995 and 1994
were  $1,079,423 and  $1,271,252,  respectively.  The decrease was  attributable
primarily  to  decreases in general and  administrative  expenses,  depreciation
expense, repairs and maintenance expense, bad debt expense, and management fees.



<PAGE>


(1) Direct operating  expenses (defined as repairs and maintenance  expenses and
insurance  expense)  decreased  to $228,281 in 1995 from  $265,498 in 1994.  The
decrease is primarily  attributed to a decrease in the number of trailers coming
off term leases and  requiring  refurbishment  prior to  transitioning  into the
PLM-affiliated short-term rental facilities.

(2) Indirect  Operating  Expenses (defined as depreciation  expense,  management
fees to affiliate,  bad debt expense,  and general and administrative  expenses)
decreased  to  $851,142 in 1995 from  $1,005,754  in 1994.  The  decrease is due
primarily to:

     (a) a decrease of $57,537 in general and administrative  expenses primarily
due to the decreased overall fleet size and decreased  indirect costs associated
with trailers in the PLM-affiliated short-term rental facilities.

     (b) a decrease of $46,198 in depreciation expense due to the disposition of
trailers and marine containers during 1995;

     (c)  a  decrease   of  $25,830  in  bad  debt   expense   due  to  improved
collectability of trade accounts receivable;

     (d) a decrease of $25,047 in  management  fees to affiliate  due to a lower
level of operating cash flow associated with lower lease revenue on trailers and
lower utilization and rates on marine containers. Management fees are calculated
monthly as the greater of 10% of the Partnership's  operating cash flow, or 1/12
of  1/2%  of  the  Partnership's  Gross  Proceeds  as  defined  in  the  Limited
Partnership Agreement;

(3) Gain from  disposition of equipment of $84,289 was realized from the sale or
disposition of 17 marine  containers  and 14 trailers  during 1995. In 1994, the
Partnership realized a gain of $68,223 on the sale or disposition of 18 trailers
and 21 marine containers.

(C)  Net Income

As a result of all the  foregoing,  net income for the year ended  December  31,
1995,  decreased to $175,174 from $441,222 for the year ended December 31, 1994.
The  Partnership's  ability to operate or liquidate assets,  secure leases,  and
re-lease   those  assets  whose  leases  expired  during  the  duration  of  the
Partnership  is subject to many factors,  and the  Partnership's  performance in
1995 is not  necessarily  indicative  of  future  periods.  In  1995,  TEP  VIIC
distributed $1,037,064 to the Limited Partners, or $30.75 per Unit.

     All of the equipment owned by TEP VIIC was either  operating in the trailer
rental  facilities  or on lease  as of  December  31,  1995.  The  Partnership's
performance during 1995 is not necessarily indicative of future periods.

Inflation

Inflation  and  changing  prices did not  materially  impact  the  Partnerships'
revenues or net income during the reported periods.

Forward Looking Information

Except for historical  information contained herein, the discussion in this Form
10-K contains  forward-looking  statements that involve risks and uncertainties,
such as statements of the  Partnership's  plans,  objectives,  expectations  and
intentions.  The cautionary  statements made in this Form 10-K should be read as
being applicable to all related forward-looking  statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.



<PAGE>


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  financial   statements  and  financial  statement  schedules  for  the
Partnerships  are listed on the Index to Financial  Statements  included in Item
14(a) of this Annual Report.

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

     None.





                      (This space intentionally left blank)


<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP

      As of the date of this Annual Report, the directors and executive officers
of PLM  International  (and key executive  officers of its  subsidiaries) are as
follows:
<TABLE>
<CAPTION>

Name                                   Age                 Position
-------------------------------------- ------------------- -------------------------------------------------------

<S>                                    <C>                 <C>
J. Alec Merriam                        61                  Director, Chairman of the Board, PLM International,
                                                           Inc.; Director, PLM Financial Services, Inc.

Douglas P. Goodrich                    50                  Director and Senior Vice President, PLM
                                                           International; Director and President, PLM Financial
                                                           Services, Inc.; Senior Vice President PLM
                                                           Transportation Equipment Corporation; President, PLM
                                                           Railcar Management Services, Inc.

Walter E. Hoadley                      80                  Director, PLM International, Inc.

Robert L. Pagel                        60                  Director, Chairman of the Executive Committee, PLM
                                                           International, Inc.; Director, PLM Financial
                                                           Services, Inc.

Harold R. Somerset                     62                  Director, PLM International, Inc.

Robert N. Tidball                      58                  Director, President and Chief Executive Officer, PLM
                                                           International, Inc.

J. Michael Allgood                     48                  Vice President and Chief Financial Officer, PLM
                                                           International, Inc. and PLM Financial Services, Inc.

Stephen M. Bess                        50                  President, PLM Investment Management, Inc. and PLM
                                                           Securities, Corp.; Vice President, PLM Financial
                                                           Services, Inc.

David J. Davis                         40                  Vice President and Corporate Controller, PLM
                                                           International and PLM Financial Services, Inc.

Frank Diodati                          42                  President, PLM Railcar Management Services Canada
                                                           Limited.

Steven O. Layne                        42                  Vice President, PLM Transportation Equipment
                                                           Corporation; Vice President and Director, PLM
                                                           Worldwide Management Services, Ltd.

Stephen Peary                          48                  Senior Vice President, General Counsel and Secretary,
                                                           PLM International, Inc.; Vice President, General
                                                           Counsel and Secretary, PLM Financial Services, Inc.,
                                                           PLM Investment Management, Inc., PLM Transportation
                                                           Equipment Corporation; Vice President, PLM
                                                           Securities, Corp.

Thomas L. Wilmore                      54                  Vice President, PLM Transportation Equipment
                                                           Corporation; Vice President, PLM Railcar Management
                                                           Services, Inc.
</TABLE>

     J. Alec  Merriam was  appointed  Chairman of the Board of  Directors of PLM
International  in September  1990,  having served as a director  since  February
1988. In October 1988 he became a member of the Executive Committee of the Board
of Directors of PLM  International.  From 1972 to 1988 Mr. Merriam was Executive
Vice President and Chief Financial  Officer of Crowley Maritime  Corporation,  a
San Francisco area-based company engaged in maritime shipping and transportation
services.  Previously,  he  was  Chairman  of the  Board  and  Treasurer  of LOA
Corporation of Omaha,  Nebraska and served in various  financial  positions with
Northern Natural Gas Company, also of Omaha.

     Douglas P.  Goodrich  was elected to the Board of  Directors  in July 1996,
appointed Director and President of PLM Financial Services,  Inc. in June, 1996,
and appointed  Senior Vice  President of PLM  International  in March 1994.  Mr.
Goodrich  has  also  served  as  Senior  Vice  President  of PLM  Transportation
Equipment  Corporation  since  July  1989,  and  as  President  of  PLM  Railcar
Management  Services,  Inc.  since  September  1992  having  been a Senior  Vice
President  since June 1987.  Mr.  Goodrich  was an Executive  Vice  President of
G.I.C. Financial Services Corporation, a subsidiary of Guardian Industries Corp.
of Chicago, Illinois from December 1980 to September 1985.

     Dr. Hoadley joined PLM International's Board of Directors and its Executive
Committee in September, 1989. He served as a Director of PLM, Inc. from November
1982 to June 1984 and PLM  Companies,  Inc. from October 1985 to February  1988.
Dr.  Hoadley has been a Senior  Research  Fellow at the Hoover  Institute  since
1981.  He was  Executive  Vice  President  and Chief  Economist  for the Bank of
America  from  1968  to  1981  and  Chairman  of the  Federal  Reserve  Bank  of
Philadelphia  from  1962 to 1966.  Dr.  Hoadley  has  served  as a  Director  of
Transcisco Industries, Inc. from February 1988 through August 1995.

     Robert L. Pagel was appointed  Chairman of the  Executive  Committee of the
Board of Directors of PLM  International  in September 1990,  having served as a
director  since  February  1988.  In  October  1988 he  became a  member  of the
Executive  Committee of the Board of Directors of PLM  International.  From June
1990 to April 1991 Mr. Pagel was President and Co-Chief Executive Officer of The
Diana Corporation,  a holding company traded on the New York Stock Exchange.  He
is the former President and Chief Executive Officer of FanFair Corporation which
specializes  in sports fans' gift shops.  He previously  served as President and
Chief  Executive  Officer of Super Sky  International,  Inc., a publicly  traded
company,  located in Mequon,  Wisconsin,  engaged in the manufacture of skylight
systems.  He was formerly Chairman and Chief Executive Officer of Blunt, Ellis &
Loewi,  Inc., a  Milwaukee-based  investment firm. Mr. Pagel retired from Blunt,
Ellis & Loewi in 1985  after a career  spanning  20 years in all  phases  of the
brokerage  and financial  industries.  Mr. Pagel has also served on the Board of
Governors of the Midwest Stock Exchange.

     Harold  R.   Somerset  was  elected  to  the  Board  of  Directors  of  PLM
International  in 1994.  From February 1988 to December 1993,  Mr.  Somerset was
President  and  Chief   Executive   Officer  of  California  &  Hawaiian   Sugar
Corporation,  (C&H) a recently-acquired  subsidiary of Alexander & Baldwin, Inc.
Mr.  Somerset joined C&H in 1984 as Executive Vice President and Chief Operating
Officer, having served on its Board of Directors since 1978, a position in which
he continues to serve.  Between 1972 and 1984,  Mr.  Somerset  served in various
capacities with Alexander & Baldwin,  Inc., a publicly-held land and agriculture
company headquartered in Honolulu,  Hawaii, including Executive Vice President -
Agricultures,  Vice President,  General Counsel and Secretary.  In addition to a
law degree from Harvard Law School,  Mr.  Somerset  also holds  degrees in civil
engineering from the Rensselaer  Polytechnic Institute and in marine engineering
from the U.S. Naval Academy. Mr. Somerset also serves on the Boards of Directors
for various other  companies  and  organizations,  including  Longs Drug Stores,
Inc., a publicly-held company.

     Robert N. Tidball was appointed  President and Chief  Executive  Officer of
PLM  International  in  March  1989.  At the  time  of his  appointment,  he was
Executive Vice President of PLM International.  Mr. Tidball became a director of
PLM International in April, 1989 and a member of the Executive  Committee of the
Board of  Directors of PLM  International  in September  1990.  Mr.  Tidball was
elected President of PLM Railcar Management Services,  Inc. in January 1986. Mr.
Tidball was Executive Vice President of Hunter Keith, Inc., a  Minneapolis-based
investment banking firm, from March 1984 to January 1986. Prior to Hunter Keith,
Inc., he was Vice President,  a General Manager and a Director of North American
Car  Corporation,  and a Director  of the  American  Railcar  Institute  and the
Railway Supply Association.

     J. Michael Allgood was appointed Vice President and Chief Financial Officer
of PLM  International  in October 1992.  Between July 1991 and October 1992, Mr.
Allgood was a consultant  to various  private and public  sector  companies  and
institutions  specializing  in financial  operational  systems  development.  In
October 1987, Mr. Allgood  co-founded  Electra  Aviation Limited and its holding
company,  Aviation  Holdings  Plc of London  where he served as Chief  Financial
Officer until July 1991.  Between June 1981 and October 1987, Mr. Allgood served
as a First Vice President with American Express Bank, Ltd. In February 1978, Mr.
Allgood  founded  and until June 1981,  served as a director  of Trade  Projects
International/Philadelphia  Overseas  Finance  Company,  a  joint  venture  with
Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served
in various capacities with Citibank, N.A.

     Stephen M. Bess was appointed  President of PLM Securities,  Corp. in June,
1996 and President of PLM  Investment  Management,  Inc. in August 1989,  having
served as Senior Vice President of PLM Investment Management,  Inc. beginning in
February  1984 and as  Corporate  Controller  of PLM  Financial  Services,  Inc.
beginning in October 1983. Mr. Bess served as Corporate Controller of PLM, Inc.,
beginning  in December  1982.  Mr. Bess was Vice  President-Controller  of Trans
Ocean Leasing  Corporation,  a container leasing company,  from November 1978 to
November  1982,  and Group Finance  Manager with the Field  Operations  Group of
Memorex Corp., a manufacturer  of computer  peripheral  equipment,  from October
1975 to November 1978.

     David  J.  Davis  was  appointed  Vice  President  and  Controller  of  PLM
International  in January 1994.  From March 1993 through January 1994, Mr. Davis
was engaged as a consultant for various firms,  including PLM. Prior to that Mr.
Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from
July  1991 to March  1993.  From  April  1989 to May  1991,  Mr.  Davis was Vice
President and Controller for ITEL Containers International Corporation which was
located  in San  Francisco.  Between  May 1978 and April  1989,  Mr.  Davis held
various positions with Transamerica Leasing Inc., in New York, including that of
Assistant Controller for their rail leasing division.

     Frank Diodati was appointed  President of PLM Railcar  Management  Services
Canada  Limited in 1986.  Previously,  Mr.  Diodati was Manager of Marketing and
Sales for G.E. Railcar Services Canada Limited.

     Steven O. Layne was appointed Vice President,  PLM Transportation Equipment
Corporation's  Air Group in November  1992,  was  appointed  Vice  President and
Director of PLM Worldwide  Management  Services,  Ltd. in September,  1995.  Mr.
Layne was its Vice President,  Commuter and Corporate Aircraft beginning in July
1990. Prior to joining PLM, Mr. Layne was the Director, Commercial Marketing for
Bromon Aircraft Corporation, a joint venture of General Electric Corporation and
the  Government  Development  Bank of Puerto  Rico.  Mr. Layne is a major in the
United States Air Force  Reserves and senior pilot with 13 years of  accumulated
service.

     Stephen Peary became Vice President,  Secretary, and General Counsel of PLM
International  in February  1988 and Senior Vice  President  in March 1994.  Mr.
Peary was Assistant General Counsel of PLM Financial Services,  Inc. from August
1987  through  January  1988.  Previously,  Mr. Peary was engaged in the private
practice of law in San  Francisco.  Mr. Peary is a graduate of the University of
Illinois,  Georgetown  University Law Center, and Boston University  (Masters of
Taxation Program).

     Thomas L. Wilmore was appointed Vice  President - Rail, PLM  Transportation
Equipment Corporation, in March 1994 and has served as Vice President, Marketing
for PLM Railcar Management Services,  Inc. since May 1988. Prior to joining PLM,
Mr. Wilmore was Assistant Vice President  Regional Manager for MNC Leasing Corp.
in Towson, Maryland from February 1987 to April 1988. From July 1985 to February
1987, he was President and Co-Owner of Guardian Industries Corp.,  Chicago, July
Illinois and between  December 1980 and July 1985,  Mr. Wilmore was an Executive
Vice President for its subsidiary,  G.I.C.  Financial Services Corporation.  Mr.
Wilmore  also served as Vice  President  of Sales for Gould  Financial  Services
located in Rolling Meadows, Illinois from June 1978 to December 1980.

     The  directors  of the General  Partner are elected for a one-year  term or
until  their  successors  are  elected  and  qualified.   There  are  no  family
relationships  between  any  director  or any  executive  officer of the General
Partner.

ITEM 11.  EXECUTIVE COMPENSATION

The Partnerships  have no directors,  officers,  or employees.  The Partnerships
have no pension, profit sharing,  retirement,  or similar benefit plan in effect
as of December 31, 1996.



<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      (a)     Security Ownership of Certain Beneficial Owners

     At December  31,  1996,  no  investor  is known by the  General  Partner to
     beneficially own more than 5% of the Units of either TEP VIIB or TEP VIIC.

      (b)     Security Ownership of Management

     Neither the General  Partner and its affiliates nor any officer or director
     of the General  Partner and its  affiliates  beneficially  own any Units of
     either TEP VIIB or TEP VIIC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      (a)     Transactions with Management and Others.

     During 1996, management fees to IMI were incurred in the amounts of $52,145
     and  $97,439  for  TEP  VIIB  and  TEP  VIIC,  respectively.  During  1996,
     administrative  services  performed  on  behalf  of the  Partnerships  were
     reimbursed to FSI and its affiliates in the amounts of $77,237 and $112,550
     by TEP VIIB and TEP VIIC, respectively.

      During 1996, the unconsolidated  special purpose entities (USPE's) paid or
     accrued  (based  on the  Partnership's  proportional  share of  ownership):
     management  fees to IMI in the  amounts of $3,056 and  $15,596 for TEP VIIB
     and TEP VIIC, respectively;  administrative services in the amounts of $594
     for TEP VIIC.

      (b)     Certain Business Relationships

      None.

      (c)     Indebtedness of Management

      None.

      (d)     Transactions with Promoters

      None.


<PAGE>


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a) 1.   Financial Statements

     The  financial  statements  listed in the  accompanying  Index to Financial
     Statements are filed as part of this Annual Report.

     (b) Reports on Form 8-K

     None.

     (c) Exhibits

       4.Limited  Partnership  Agreement of each  Partnership.  Incorporated  by
         reference to the Partnership's Registration Statement on Form S-1 (Reg.
         No.  2-93640)  which became  effective with the Securities and Exchange
         Commission on January 7, 1985.

     10. Equipment   Management  Agreement  between  each  Partnership  and  PLM
         Investment   Management,   Inc.   Incorporated   by  reference  to  the
         Registration  Statement  on Form S-1 (Reg.  No.  2-93640)  which became
         effective  with the  Securities  and Exchange  Commission on January 7,
         1985.

     25. Powers of Attorney.



<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the  Partnership  has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

     The  Partnership  has no  directors or  officers.  The General  Partner has
signed on behalf of the Partnership by duly authorized officers.

Dated:  March 14, 1997               PLM Transportation Equipment Partners VIIB
                                     1985 Income Fund
                                     Partnership


                                     By:      PLM Financial Services, Inc.
                                              General Partner



                                     By:      /s/ Douglas P. Goodrich
                                              -------------------------------
                                              Douglas P. Goodrich
                                              President & Director



                                     By:      /s/ David J. Davis
                                              -------------------------------
                                              David J. Davis
                                              Vice President and
                                              Corporate Controller







<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the  Partnership  has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

     The  Partnership  has no  directors or  officers.  The General  Partner has
signed on behalf of the Partnership by duly authorized officers.

Dated:  March 14, 1997               PLM Transportation Equipment Partners VIIC
                                     1985 Income Fund
                                     Partnership


                                     By:      PLM Financial Services, Inc.
                                              General Partner



                                     By:      /s/ Douglas P. Goodrich
                                              -----------------------------
                                              Douglas P. Goodrich
                                              President and Director



                                     By:      /s/ David J. Davis
                                              -----------------------------
                                              David J. Davis
                                              Vice President and
                                              Corporate Controller






<PAGE>


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following  directors of the Partnerships'  Managing
General Partner on the dates indicated.


Name                                    Capacity                   Date



*_____________________________
J. Alec Merriam                        Director-FSI            March 14, 1997



*_____________________________
Robert L. Pagel                        Director-FSI            March 14, 1997



* Stephen Peary,  by signing his name hereto,  does sign this document on behalf
of the persons  indicated  above pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.


/s/ Stephen Peary
-----------------------
Stephen Peary
Attorney-in-Fact


<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                          INDEX TO FINANCIAL STATEMENTS

                                  (Item 14(a))


TEP VIIB                                                                Page

Report of Independent Auditors                                            26

Balance sheets at December 31, 1996 and 1995                              27

Statements of income for the years ended December 31, 1996,
     1995, and 1994                                                       28

Statements of changes in partners' capital for the years
     ended December 31, 1996, 1995, and 1994                              29

Statements of cash flows for the years ended December 31, 1996,
     1995, and 1994                                                       30

Notes to financial statements                                          31-35

All other  financial  statement  schedules  have been  omitted  as the  required
information  is not pertinent to the  Registrant or is not material,  or because
the  information  required  is included in the  financial  statements  and notes
thereto.





<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                          INDEX TO FINANCIAL STATEMENTS

                                  (Item 14(a))



TEP VIIC                                                                 Page

Report of Independent Auditors                                             36

Balance sheets at December 31, 1996 and 1995                               37

Statements of income for the years ended December 31, 1996,
     1995, and 1994                                                        38

Statements of changes in partners' capital for the years
     ended December 31, 1996, 1995, and 1994                               39

Statements of cash flows for the years ended December 31, 1996,
     1995, and 1994   40

Notes to financial statements                                           41-45

All other  financial  statement  schedules  have been  omitted  as the  required
information  is not pertinent to the  Registrant or is not material,  or because
the  information  required  is included in the  financial  statements  and notes
thereto.



<PAGE>


                         REPORT OF INDEPENDENT AUDITORS




The Partners
PLM Transportation Equipment Partners VIIB 1985 Income Fund:


We  have  audited  the  financial  statements  of PLM  Transportation  Equipment
Partners  VIIB  1985  Income  Fund as listed in the  accompanying  index.  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.  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.

The Partnership  completed its tenth year of operations during 1995, and entered
the  liquidation  phase of the  Partnership.  The  General  Partner is  actively
pursuing the sale of all of the  Partnership's  equipment  with the intention of
winding up the Partnership and  distributing all available cash to the Partners.
Management's plans in regard to this matter are more fully described in note 6.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of PLM Transportation  Equipment
Partners VIIB 1985 Income Fund as of December 31, 1996, and 1995 and the results
of its  operations  and its cash  flows for each of the years in the  three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.


/S/ KPMG PEAT MARWICK LLP
-----------------------------------

SAN FRANCISCO, CALIFORNIA
March 14, 1997



<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                                 BALANCE SHEETS
                                  December 31,


                                     ASSETS

<TABLE>
<CAPTION>

                                                                                   1996                 1995
                                                                             --------------------------------------

   <S>                                                                        <C>                  <C>
   Transportation equipment on operating leases held for sale, at cost        $    3,550,990       $    3,972,722
   Less accumulated depreciation                                                  (3,427,418 )         (3,616,132 )
                                                                              --------------------------------------
     Net equipment                                                                   123,572              356,590

   Cash and cash equivalents                                                         269,628              293,808
   Investment in unconsolidated special purpose entity                                    --               79,116
   Accounts receivable, net of allowance for doubtful accounts of
     $5,082 in 1996 and $26,718 in 1995                                              127,105              135,320
   Prepaid insurance                                                                   2,714                3,128
                                                                              --------------------------------------

   Total assets                                                               $      523,019       $      867,962
                                                                              ======================================

                        LIABILITIES AND PARTNERS' CAPITAL

   Liabilities:
     Due to affiliates                                                        $        4,641       $        4,641
     Accounts payable                                                                 32,221               21,292
     Lessee deposits and engine reserves                                                 615                  260
                                                                              --------------------------------------
       Total liabilities                                                              37,477               26,193

   Partners' capital (deficit):
     Limited Partners (22,276 units)                                                 578,736              931,401
     General Partner                                                                 (93,194 )            (89,632 )
                                                                              --------------------------------------
       Total partners' capital                                                       485,542              841,769
                                                                              --------------------------------------

   Total liabilities and partners' capital                                    $      523,019       $      867,962
                                                                              ======================================

</TABLE>


                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                              STATEMENTS OF INCOME
                        For the years ended December 31,
<TABLE>
<CAPTION>


                                                                   1996             1995            1994
                                                               -----------------------------------------------
  <S>                                                           <C>             <C>             <C>
  Revenues:
     Lease revenue                                              $  410,917      $  673,162      $   786,981
     Interest and other income                                      13,402          32,119           11,508
     Gain from disposition of equipment                             62,907          27,563           14,663
                                                                ----------------------------------------------
       Total revenues                                              487,226         732,844          813,152

   Expenses:
     Depreciation                                                  204,118         278,129          293,591
     Management fees to affiliate                                   52,145          55,690           57,109
     Insurance expense                                               4,566           8,406            7,735
     (Recovery of ) provision for bad debts                         (1,083)         35,082           17,754
     Repairs and maintenance                                       120,060         159,069          175,420
     General and administrative expenses
       to affiliates                                                77,237         130,286          127,227
     Other general and administrative expenses                      57,208          36,876           45,627
                                                                ----------------------------------------------
       Total expenses                                              514,251         703,538          724,463
                                                                ----------------------------------------------

   Equity in net income of unconsolidated
       special purpose entity                                      265,108              --               --
                                                                ----------------------------------------------
       Net income                                               $  238,083      $   29,306      $    88,689
                                                                ==============================================

   Partners' share of net income:

     Limited Partners - 99%                                     $  235,702      $   29,013      $    87,802
     General Partner -   1%                                          2,381             293              887
                                                                ----------------
                                                                                ==============================
       Total                                                    $  238,083      $   29,306      $    88,689
                                                                ==============================================

   Net income per Limited Partnership
     Unit (22,276 units)                                        $    10.58      $     1.30      $      3.94
                                                                ==============================================

   Cash distributions                                           $  394,310      $  396,187      $   475,421
                                                                ==============================================

   Cash distributions per Limited
     Partnership Unit                                           $    17.52      $    17.61      $     21.13
                                                                ==============================================

   Special cash distributions                                   $  200,000      $       --      $        --
                                                                ==============================================

   Special cash distributions per
     Limited Partnership Unit                                   $     8.89      $       --      $        --
                                                                ==============================================

   Total cash distributions per
     Limited Partnership Unit                                   $    26.41      $    17.61      $     21.13
                                                                ==============================================
</TABLE>

                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
              For the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>



                                                       Limited           General
                                                      Partners           Partner             Total
                                                   -----------------------------------------------------

   <S>                                              <C>                 <C>               <C>
   Partners' capital (deficit)
     at December 31, 1993                           $  1,677,478        $  (82,096 )      $  1,595,382

   Net income                                             87,802               887              88,689

   Cash distributions                                   (470,667 )          (4,754 )          (475,421 )
                                                    -----------------------------------------------------

   Partners' capital (deficit)
     at December 31, 1994                              1,294,613           (85,963 )         1,208,650

   Net income                                             29,013               293              29,306

   Cash distributions                                   (392,225 )          (3,962 )          (396,187 )
                                                    -----------------------------------------------------

   Partners' capital (deficit)
     at December 31, 1995                                931,401           (89,632 )           841,769

   Net income                                            235,702             2,381             238,083

   Quarterly cash distributions                         (390,367 )          (3,943 )          (394,310 )

   Special distributions                                (198,000 )          (2,000 )          (200,000 )
                                                    -----------------------------------------------------

   Partners' capital (deficit)
     at December 31, 1996                           $    578,736        $  (93,194 )      $    485,542
                                                    =====================================================

</TABLE>


                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                            STATEMENTS OF CASH FLOWS
                        for the years ended December 31,
<TABLE>
<CAPTION>


                                                                    1996             1995              1994
                                                               -------------------------------------------------
  <S>                                                           <C>              <C>              <C>
  Operating activities:
   Net income                                                   $   238,083      $    29,306      $    88,689
     Adjustments to reconcile net
         income to net cash provided by
           operating activities:
       Gain from disposition of  equipment                          (62,907 )        (27,563 )        (14,663 )
       Depreciation                                                 204,118          278,129          293,591
       Equity in net income of unconsolidated
        special purpose entity                                     (265,108 )             --               --
       Changes in operating assets
           and liabilities:
         Restricted cash                                                 --             (526 )            (93 )
         Accounts receivable, net                                     8,215          (13,616 )          7,178
         Prepaid insurance                                              414              158            2,183
         Due to affiliates                                               --              654           (8,502 )
         Accounts payable                                            10,929          (11,186 )         11,264
         Prepaid deposits and engine
           reserves                                                     355             (576 )            222
                                                                ------------------------------------------------
                                                                                 -------------------------------
   Net cash provided by operating
     activities                                                     134,099          254,780          379,869
                                                                ------------------------------------------------

   Investing activities:
     Capitalized equipment repairs                                       --              (45 )           (877 )
     Proceeds from disposition of
      equipment                                                      91,807           76,396           69,114
     Liquidation distributions from unconsolidated
       special purpose entity                                       303,144               --               --
     Distributions from unconsolidated
       special purpose entity                                        41,080               --               --
                                                                ------------------------------------------------
   Cash flows provided by investing
     activities                                                     436,031           76,351           68,237
                                                                ------------------------------------------------

   Cash flows used in financing activities:
     Cash distributions paid to Limited Partners                   (588,367 )       (392,225 )       (470,667 )
     Cash distributions paid to General Partner                      (5,943 )         (3,962 )         (4,754 )
                                                                ------------------------------------------------
   Cash used in financing activities                               (594,310 )       (396,187 )       (475,421 )
                                                                ------------------------------------------------

   Net decrease in cash
     and cash equivalents                                           (24,180 )        (65,056 )        (27,315 )

   Cash and cash equivalents at
     beginning of year                                              293,808          358,864          386,179
                                                                ------------------------------------------------

   Cash and cash equivalents at
     end of year                                                $   269,628      $   293,808      $   358,864
                                                                ================================================
</TABLE>

                       See accompanying notes to financial
                                  statements.



<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996


1.   Basis of Presentation

     Organization

     PLM  Transportation  Equipment Partners VIIB 1985 Income Fund, a California
     limited  partnership (the  Partnership) was formed on October 19, 1984. The
     Partnership  engages in the  business of owning and leasing  transportation
     equipment.  The  Partnership  commenced  significant  operations in August,
     1985. PLM Financial Services,  Inc. (FSI) is the General Partner.  FSI is a
     wholly-owned subsidiary of PLM International, Inc.
     (PLM International) and manages the affairs of the Partnership.

         The  net  income  (loss)  and  distributions  of  the  Partnership  are
     allocated 99% to the Limited  Partners and 1% to the General  Partner.  The
     General  Partner is entitled to an  incentive  fee equal to 15% of "Surplus
     Distributions" as defined in the Partnership  Agreement remaining after the
     Limited Partners have received a certain minimum rate of return.

         These  financial  statements have been prepared on the accrual basis of
     accounting in accordance  with generally  accepted  accounting  principles.
     This requires  management to make estimates and assumptions that affect the
     reported  amounts of assets and  liabilities  and disclosures of contingent
     assets and  liabilities  at the date of the  financial  statements  and the
     reported  amounts of revenues and  expenses  during the  reporting  period.
     Actual results could differ from those estimates.

     Operations

     The equipment of the Partnership is managed,  under a continuing  Equipment
     Management  Agreement,   by  PLM  Investment  Management,   Inc.  (IMI),  a
     wholly-owned  subsidiary  of FSI.  IMI  receives an annual  management  fee
     payable  monthly from the  Partnership for managing the equipment (see Note
     2).  FSI,  in  conjunction  with  its  subsidiaries,  sells  transportation
     equipment  to  investor  programs  and  third  parties,  manages  pools  of
     transportation  equipment under agreements with the investor programs,  and
     is a general partner of other affiliated limited partnerships.

     Accounting for Leases

     The Partnership's leasing operations generally consist of operating leases.
     Under  the  operating  lease  method of  accounting,  the  leased  asset is
     recorded at cost and  depreciated  over its estimated  useful life.  Rental
     payments  are recorded as revenue  over the lease term.  Lease  origination
     costs are capitalized and amortized over the term of the lease.

     Depreciation

     Depreciation  is computed on the 200%  declining  balance method based upon
     estimated  useful  lives  of 15  years  for rail  equipment,  12 years  for
     aircraft,  trailers,  and marine containers,  and 8 years for tractors. The
     depreciation  method  changes to  straight  line when  annual  depreciation
     expense using the straight line method exceeds that  calculated by the 200%
     declining balance method.  Major  expenditures which are expected to extend
     the useful  lives or reduce  future  operating  expenses of  equipment  are
     capitalized.


<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996


1.   Basis of Presentation (continued):

     Transportation Equipment

     In March 1995,  the  Financial  Accounting  Standards  Board (FASB)  issued
     Statement No. 121,  "Accounting for the Impairment of Long-Lived Assets and
     Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is effective
     for years  beginning  after December 15, 1995. In accordance with SFAS 121,
     the General Partner  reviews the carrying value of its equipment  portfolio
     at least annually in relation to expected future market  conditions for the
     purpose of assessing  recoverability of the recorded amounts.  If projected
     future lease revenue plus residual  values are less than the carrying value
     of the  equipment,  a loss on  revaluation  is recorded.  No adjustments to
     reflect  impairment of individual  equipment  carrying values were required
     for the year ended December 31, 1996.

     Investments in Unconsolidated Special Purpose Entities

     Until the third  quarter of 1996,  the  Partnership  had an  interest  in a
     special purpose entity which owned transportation  equipment. This interest
     was accounted for using the equity method.

         The Partnership's  investment in unconsolidated  special purpose entity
     included  acquisition and lease negotiation fees paid by the Partnership to
     TEC.  The  Partnership's  equity  interest in net income of  unconsolidated
     special  purpose entity is reflected net of management fees paid or payable
     to IMI and the amortization of acquisition and lease  negotiation fees paid
     to TEC.

     Repairs and Maintenance

     Maintenance costs are usually the obligation of the lessee. If they are not
     covered by the lessee they are charged against operations as incurred.

     Net Income (Loss) and Distributions per Limited Partnership Unit

     Net income  (loss) per Limited  Partnership  Unit is computed  based on the
     number of Limited  Partnership Units outstanding  during the period (22,276
     for 1996,  1995, and 1994).  The General Partner is allocated a 1% share of
     the net income (loss) and the Limited Partners are allocated a 99% share of
     the net income (loss).

         Cash  distributions  are  recorded  when paid.  Cash  distributions  to
     investors in excess of net income are  considered  to represent a return of
     capital. Cash distributions to Limited Partners of $352,665,  $363,212, and
     $382,865 in 1996, 1995, and 1994, respectively,  were deemed to be a return
     of capital.

     Cash and Cash Equivalents

     The  Partnership  considers  highly  liquid  investments  that are  readily
     convertible  to known  amounts of cash with  original  maturities  of three
     months or less as cash equivalents for the purposes of this presentation.

2.   Transactions with General Partner and Affiliates

     An officer of FSI contributed  $100 of the  Partnership's  initial capital.
     Under the Equipment Management Agreement, IMI receives an annual management
     fee  monthly  attributable  to  either  owned  equipment  or  interests  in
     equipment owned by the USPE's equal to the greater of 10% of the


<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996

2.   Transactions with General Partner and Affiliates (continued)

     Partnership's  "operating cash flow", or 1/12 of 1/2% of the  Partnership's
     "gross proceeds" as defined in the Partnership  Agreement.  Management fees
     of $4,641  were  payable  to IMI as of  December  31,  1996 and  1995.  The
     Partnership's  proportional  share of USPE's management fees expense during
     1996 was $3,056.

         As of December 31, 1996, all of the Partnership's trailer equipment has
     been  transferred  into rental  facilities  operated by an affiliate of the
     General  Partner.  Revenues  are earned by billing  the rental  facilities'
     customers  monthly or quarterly under short-term  rental agreements and are
     distributed  as  collected to the owners of the related  equipment.  Direct
     expenses  associated  with the  equipment  and an  allocation  of  indirect
     expenses of rental facility operations are charged to the Partnership.

         The Partnership  reimbursed FSI and its affiliates  $77,237,  $130,286,
     and $127,227 for  administrative  and other services performed on behalf of
     the Partnership in 1996, 1995, and 1994, respectively. At December 31, 1996
     and 1995, $4,641 was due to FSI and its affiliates.

3.   Equipment

     The components of owned equipment are as follows:
<TABLE>
<CAPTION>


                                                    1996                 1995
                                              --------------------------------------

     <S>                                       <C>                   <C>
     Trailers                                  $   3,146,140         $   3,543,334
     Marine containers                                86,201               110,739
     Rail equipment                                  318,649               318,649
                                               --------------------------------------
                                                   3,550,990             3,972,722
   Less accumulated depreciation                  (3,427,418 )          (3,616,132 )
                                               --------------------------------------
                                               ======================================
   Net equipment                               $     123,572         $     356,590
                                               ======================================
</TABLE>

     At December 31,  1996,  the  Partnership  owned 27 marine  containers,  189
trailers, and five tank cars.

         Revenues are earned by placing the equipment under operating leases and
are billed monthly or quarterly.

         Rents for all  equipment  are based on a fixed  operating  lease amount
     with the exception of marine  containers and certain  trailers,  which earn
     revenue based on  utilization.  The  Partnership's  marine  containers  are
     leased to an operator of  utilization-type  pools which  include  equipment
     owned by unaffiliated  parties.  In such instances revenues received by the
     Partnership  consist of a specified  percentage of lease revenues generated
     by leasing the pooled  equipment to sub-lessees,  after  deducting  certain
     direct operating expenses of the pooled equipment.

         During 1996, the Partnership  sold 19 trailers and disposed of 9 marine
     containers.  During 1995, the Partnership  sold eight trailers and disposed
     of 15 marine containers.

         All of the equipment  owned by the  Partnership is either  operating in
     PLM-affiliated  short-term rental facilities or on lease as of December 31,
     1996. With the exception of one trailer,  all of the equipment owned by the
     Partnership  was  either  operating  in  PLM-affiliated  short-term  rental
     facilities  or on lease as of December  31,  1995.  The  carrying  value of
     equipment off lease was $6,500 at December 31, 1995.

         All leases are being accounted for as operating leases.  Future minimum
     rentals receivable under non-cancelable  leases at December 31, 1996 during
     each of the next five  years are  approximately  $30,000  -1997;  $30,000 -
     1998; $10,000 - 1999; and $-0- thereafter. Contingent


<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996


3.   Equipment (continued)

     rentals  based upon  utilization  amounted  to $18,417 in 1996,  $22,703 in
     1995,  and $24,079 in 1994.  The lessees  accounting for 10% or more of the
     total revenues during 1996, 1995, and 1994 were Kanakakee,  Beaverville and
     Southern  Railroad (40% in 1996, 18% in 1995, and 22% in 1994), and British
     Aerospace, Inc.
     (13% in 1996, 14% in 1995, and 13% in 1994).

4.   Investment in Unconsolidated Special Purpose Entity

     Prior  to  1996,  the  Partnership   accounted  for  operating   activities
     associated with joint ownership of rental equipment as undivided interests,
     including its proportionate  share of each asset with similar  wholly-owned
     assets in its financial  statements.  Under generally  accepted  accounting
     principles, the effects of such activities, if material, should be reported
     using the equity  method of  accounting.  Therefore,  effective  January 1,
     1996,  the  Partnership  adopted  the  equity  method  to  account  for its
     investment in such jointly-held assets.

         The principle  differences  between the previous  accounting method and
     the equity method  relate to the  presentation  of  activities  relating to
     these assets in the income statement.  Whereas,  under the equity method of
     accounting the Partnership's  proportionate  share is presented as a single
     net amount,  "equity in net income (loss) of unconsolidated special purpose
     entity",  under the previous  method,  the  Partnership's  income statement
     reflected its  proportionate  share of each  individual item of revenue and
     expense.   Accordingly,  the  effect  of  adopting  the  equity  method  of
     accounting  has no  cumulative  effect  on  previously  reported  partner's
     capital  or on the  Partnership's  net  income  (loss)  for the  period  of
     adoption.  Because the effects on previously issued financial statements of
     applying the equity method of accounting to  investments  in  jointly-owned
     assets are not considered to be material to such financial statements taken
     as a whole,  previously issued financial statements have not been restated.
     However,  certain items have been  reclassified  in the  previously  issued
     balance sheet to conform to the current period presentation.

         The  following  summarizes  the financial  information  for the special
     purpose entities and the  Partnership's  interest therein as of and for the
     year ended December 31, 1996:

                                                         Net
                                     Total USPE      Interest of
                                                     Partnership
                                     ------------------------------

    Net Investments                $          --   $           --
    Revenues                             199,477           61,120
    Net Income                           865,235          265,108

         The "Investment in  unconsolidated  special purpose entity"  includes a
     31% interest in an entity which owns one commuter  aircraft at December 31,
     1995. The entity sold the aircraft in 1996.

5.   Income Taxes

     The  Partnership  is not  subject to income  taxes as any income or loss is
     included in the tax returns of the  individual  Partners.  Accordingly,  no
     provision   for  income  taxes  has  been  made  in  the  accounts  of  the
     Partnership.

         As  of  December  31,  1996,   there  were  temporary   differences  of
     approximately $1,409,857 between the financial statement carrying values of
     assets and  liabilities and the federal income tax bases of such assets and
     liabilities, principally due to differences in depreciation methods.



<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996

6.   Liquidation and special distributions

     During the first quarter of 1995, the  Partnership  completed its 10th year
     of  operations.  As  originally  anticipated  by the General  Partner,  the
     Partnership  will be liquidated  in an orderly  manner in its 11th and 12th
     years of operation. The General Partner is actively marketing the remaining
     equipment  portfolio with the intent of maximizing  sale proceeds.  As sale
     proceeds are received the General Partner  intends to periodically  declare
     special  distributions  to  distribute  the sale  proceeds to the partners.
     During the liquidation phase of the Partnership the equipment will continue
     to be leased under  operating  leases until sold.  Operating cash flows, to
     the  extent  they  exceed  Partnership   expenses,   will  continue  to  be
     distributed  on a quarterly  basis to partners.  The amounts  reflected for
     assets and liabilities of the Partnership have not been adjusted to reflect
     liquidation  values. The equipment portfolio continues to be carried at the
     lower of depreciated cost or fair value less cost to dispose.  Although the
     General  Partner assets and  liabilities,  the amounts cannot be accurately
     determined  prior  to  actual  liquidation  of the  equipment.  Any  excess
     proceeds over expected  Partnership  obligations will be distributed to the
     Partners  throughout the liquidation  period.  Upon final liquidation,  the
     Partnership will be dissolved.

         In 1996, the General  Partner paid special  distributions  of $8.89 per
     weighted average Limited  Partnership Unit. No special  distributions  were
     paid in 1995  and  1994.  The  Partnership  is not  permitted  to  reinvest
     proceeds from sales or liquidations of equipment. These proceeds, in excess
     of operational  cash  requirements,  are  periodically  paid out to limited
     partners in the form of special  distributions.  The sales and liquidations
     occur because of equipment  destructions,  the determination by the General
     Partner that it is the appropriate  time to maximize the return on an asset
     through sale of that asset, and, in some leases,  the ability of the lessee
     to exercise purchase options.




<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


The Partners
PLM Transportation Equipment Partners VIIC 1985 Income Fund:


We  have  audited  the  financial  statements  of PLM  Transportation  Equipment
Partners  VIIC  1985  Income  Fund as listed in the  accompanying  index.  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.  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.

The Partnership  completed its tenth year of operations during 1995, and entered
the  liquidation  phase of the  Partnership.  The  General  Partner is  actively
pursuing the sale of all of the  Partnership's  equipment  with the intention of
winding up the Partnership and  distributing all available cash to the Partners.
Management's plans in regard to this matter are more fully described in note 6.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of PLM Transportation  Equipment
Partners VIIC 1985 Income Fund as of December 31, 1996, and 1995 and the results
of its  operations  and its cash  flows for each of the years in the three  year
period ended December 31, 1996 in conformity with generally accepted  accounting
principles.


/S/ KPMG PEAT MARWICK LLP
------------------------------

SAN FRANCISCO, CALIFORNIA
March 14, 1997





<PAGE>



          PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                            (A Limited Partnership)

                                 BALANCE SHEETS
                                  December 31,


                                     ASSETS
<TABLE>
<CAPTION>

                                                                                   1996                 1995
                                                                             --------------------------------------

   <S>                                                                        <C>                  <C>
   Transportation equipment on operating leases held for sale, at cost        $   4,069,971        $    5,059,215
   Less accumulated depreciation                                                 (3,861,489 )          (4,536,562 )
                                                                              -------------------------------------
     Net equipment                                                                  208,482               522,653

   Cash and cash equivalents                                                        416,360               551,094
   Investments in unconsolidated special purpose entities                            99,974               425,957
   Accounts receivable less allowance for doubtful accounts of
     $633 in 1996 and $6,649 in 1995                                                 64,261               143,225
   Prepaid insurance                                                                  3,713                 5,435
                                                                              -------------------------------------

   Total assets                                                               $     792,790        $    1,648,364
                                                                              =====================================

                        LIABILITIES AND PARTNERS' CAPITAL

   Liabilities:
     Due to affiliates                                                        $       7,026        $        7,026
     Accounts payable and accrued expenses                                           13,040                15,202
                                                                              -------------------------------------
       Total liabilities                                                             20,066                22,228

   Partners' capital (deficit):
     Limited Partners (33,727 units)                                                913,500             1,758,377
     General Partner                                                               (140,776 )            (132,241 )
                                                                              -------------------------------------
       Total partners' capital                                                      772,724             1,626,136
                                                                              -------------------------------------

   Total liabilities and partners' capital                                    $     792,790        $    1,648,364
                                                                              =====================================
</TABLE>


                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                              STATEMENTS OF INCOME
                        For the years ended December 31,
<TABLE>
<CAPTION>



                                                                    1996              1995              1994
                                                               ----------------------------------------------------
   <S>                                                          <C>               <C>               <C>
   Revenues:
     Lease revenue                                              $    406,874      $  1,134,932      $  1,616,995
     Interest and other income                                        24,366            35,376            27,256
     Gain from disposition of equipment                              133,840            84,289            68,223
                                                                ---------------------------------------------------
       Total revenues                                                565,080         1,254,597         1,712,474

   Expenses:
     Depreciation                                                    241,688           511,267           557,465
     Management fees to affiliate                                     97,439            87,968           113,015
     Insurance expense                                                 7,511            11,783            13,143
     Bad debt expense                                                    122            17,200            43,030
     Repairs and maintenance                                         104,666           216,498           252,355
     General and administrative expenses
       to affiliates                                                 112,550           187,498           231,353
     Other general and administrative expenses                        53,900            47,209            60,891
                                                                ---------------------------------------------------
       Total expenses                                                617,876         1,079,423         1,271,252

   Equity in net income of unconsolidated
       special purpose entities                                      653,740                --                --
                                                                ---------------------------------------------------

       Net income                                               $    600,944      $    175,174      $    441,222
                                                                ===================================================

   Partners' share of net income:

     Limited Partners - 99%                                     $    594,935      $    173,422      $    436,810
     General Partner -   1%                                            6,009             1,752             4,412
                                                                ===================================================
       Total                                                    $    600,944      $    175,174      $    441,222
                                                                ===================================================

   Net income per Limited Partnership
     Unit (33,727 units)                                        $      17.64      $       5.14      $      12.95
                                                                ===================================================

   Cash distributions                                           $    654,356      $    847,539      $    995,704
                                                                ===================================================

   Cash distributions per Limited
     Partnership Unit                                           $      19.21      $      24.88      $      29.23
                                                                ===================================================

   Special cash distributions                                   $    800,000      $    200,000      $    100,000
                                                                ===================================================

   Special cash distributions per
     Limited Partnership Unit                                   $      23.48      $       5.87      $       2.94
                                                                ===================================================

   Total cash distributions per
     Limited Partnership Unit                                   $      42.69      $      30.75      $      32.17
                                                                ===================================================
</TABLE>

                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
              For the years ended December 31, 1996, 1995, and 1994

<TABLE>
<CAPTION>


                                                       Limited             General
                                                       Partners            Partners            Total
                                                   --------------------------------------------------------

   <S>                                              <C>                  <C>                 <C>
   Partners' capital (deficit)
     at December 31, 1993                           $   3,269,956        $   (116,973 )      $   3,152,983

   Net income                                             436,810               4,412              441,222

   Quarterly cash distributions                          (985,747 )            (9,957 )           (995,704 )

   Special distributions                                  (99,000 )            (1,000 )           (100,000 )
                                                    --------------------------------------------------------

   Partners' capital (deficit)
     at December 31, 1994                               2,622,019            (123,518 )          2,498,501

   Net income                                             173,422               1,752              175,174

   Quarterly cash distributions                          (839,064 )            (8,475 )           (847,539 )

   Special distributions                                 (198,000 )            (2,000 )           (200,000 )
                                                    --------------------------------------------------------

   Partners' capital (deficit)
     at December 31, 1995                               1,758,377            (132,241 )          1,626,136

   Net income                                             594,935               6,009              600,944

   Quarterly cash distributions                          (647,812 )            (6,544 )           (654,356 )

   Special distributions                                 (792,000 )            (8,000 )           (800,000 )
                                                    --------------------------------------------------------

   Partners' capital (deficit)
     at December 31, 1996                           $     913,500        $   (140,776 )      $     772,724
                                                    ========================================================

</TABLE>


                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                            STATEMENTS OF CASH FLOWS
                        for the years ended December 31,
<TABLE>
<CAPTION>


                                                                     1996               1995               1994
                                                               -------------------------------------------------------
  <S>                                                           <C>                  <C>               <C>
  Operating activities:
   Net income                                                   $     600,944        $    175,174      $     441,222
     Adjustments to reconcile net
         income to net cash provided by
           operating activities:
       Gain from disposition of
           equipment                                                 (133,840 )           (84,289 )          (68,223 )
       Depreciation                                                   241,688             511,267            557,465
       Equity in net income of unconsolidated
        special purpose entity                                       (653,740 )                --                 --
       Changes in operating assets
           and liabilities:
         Restricted cash                                                   --                (728 )             (710 )
         Accounts receivable, net                                      78,964               9,115             66,762
         Prepaid insurance                                              1,722                (516 )            4,076
         Due from affiliates                                               --              12,085             (5,092 )
         Due to affiliates                                                 --               7,026                 --
         Accounts payable                                              (2,162 )             4,041            (17,315 )
         Prepaid deposits and engine
           reserves                                                        --                 797               (527 )
                                                                -------------------------------------------------------
                                                                                    -----------------------------------
   Net cash provided by operating
         activities                                                   133,576             633,972            977,658
                                                                -------------------------------------------------------

   Investing activities:
     Capitalized equipment repairs                                         --                (191 )               --
     Proceeds from disposition of
       equipment                                                      206,323             165,784            156,817
     Liquidation distributions from unconsolidated
      special purpose entity                                          686,229                  --                 --
     Distributions from unconsolidated special
      special purpose entities                                        293,494                  --                 --
                                                                -------------------------------------------------------
   Cash flows provided by investing
     activities                                                     1,186,046             165,593            156,817
                                                                -------------------------------------------------------

   Financing activities:
     Cash distributions paid to Limited Partners                   (1,439,812 )        (1,037,064 )       (1,084,747 )
     Cash distributions paid to General partner                       (14,544 )           (10,475 )          (10,957 )
                                                                -------------------------------------------------------
   Cash used in financing activities                               (1,454,356 )        (1,047,539 )       (1,095,704 )
                                                                -------------------------------------------------------

   Net (decrease) increase in cash
     and cash equivalents                                            (134,734 )          (247,974 )           38,771

   Cash and cash equivalents at
     beginning of year                                                551,094             799,068            760,297
                                                                -------------------------------------------------------

   Cash and cash equivalents at
     end of year                                                $     416,360        $    551,094      $     799,068
                                                                =======================================================

</TABLE>

                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996


1.   Basis of Presentation

     Organization

     PLM  Transportation  Equipment Partners VIIC 1985 Income Fund, a California
     limited  partnership  (the  Partnership)  was formed on October 19, 1984 to
     engage in the business of owning and leasing transportation  equipment. The
     Partnership  commenced  significant  operations in May, 1985. PLM Financial
     Services,  Inc.  (FSI)  is  the  General  Partner.  FSI  is a  wholly-owned
     subsidiary of PLM International,  Inc. (PLM  International) and manages the
     affairs of the Partnership.

         The  net  income  (loss)  and  distributions  of  the  Partnership  are
     allocated 99% to the Limited  Partners and 1% to the General  Partner.  The
     General  Partner is entitled to an  incentive  fee equal to 15% of "Surplus
     Distributions" as defined in the Partnership  Agreement remaining after the
     Limited Partners have received a certain minimum rate of return.

         These  financial  statements have been prepared on the accrual basis of
     accounting in accordance  with generally  accepted  accounting  principles.
     This requires  management to make estimates and assumptions that affect the
     reported  amounts of assets and  liabilities  and disclosures of contingent
     assets and  liabilities  at the date of the  financial  statements  and the
     reported  amounts of revenues and  expenses  during the  reporting  period.
     Actual results could differ from those estimates.

     Operations

     The equipment of the Partnership is managed,  under a continuing  Equipment
     Management  Agreement,   by  PLM  Investment  Management,   Inc.  (IMI),  a
     wholly-owned  subsidiary  of FSI.  IMI  receives an annual  management  fee
     payable  monthly from the  Partnership for managing the equipment (see Note
     2).  FSI,  in  conjunction  with  its  subsidiaries,  sells  transportation
     equipment  to  investor  programs  and  third  parties,  manages  pools  of
     transportation  equipment under agreements with the investor programs,  and
     is a general partner of other affiliated limited partnerships.

     Accounting for Leases

     The Partnership's leasing operations generally consist of operating leases.
     Under  the  operating  lease  method of  accounting,  the  leased  asset is
     recorded at cost and  depreciated  over its estimated  useful life.  Rental
     payments  are recorded as revenue  over the lease term.  Lease  origination
     costs are capitalized and amortized over the term of the lease.

     Depreciation

     Depreciation is computed on the 200% declining  balance method,  converting
     to the  straight-line  method  during  the second  half of the  equipments'
     estimated  useful lives,  based upon estimated useful lives of 12 years for
     aircraft,  trailers,  and marine containers,  and 8 years for tractors. The
     depreciation  method  changes to  straight  line when  annual  depreciation
     expense using the straight line method exceeds that  calculated by the 200%
     declining balance method.  Major  expenditures which are expected to extend
     the useful  lives or reduce  future  operating  expenses of  equipment  are
     capitalized.



<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996

     1.  Basis of Presentation (continued)

     Transportation Equipment

     In March 1995,  the  Financial  Accounting  Standards  Board (FASB)  issued
     Statement No. 121,  "Accounting for the Impairment of Long-Lived Assets and
     Long-Lived Assets to be Disposed Of" (SFAS 121). This standard is effective
     for years  beginning  after December 15, 1995. In accordance with SFAS 121,
     the General Partner  reviews the carrying value of its equipment  portfolio
     at least annually in relation to expected future market  conditions for the
     purpose of assessing  recoverability of the recorded amounts.  If projected
     future lease revenue plus residual  values are less than the carrying value
     of the  equipment,  a loss on  revaluation  is recorded.  No adjustments to
     reflect  impairment of individual  equipment  carrying values were required
     for the year ended December 31, 1996.

     Investments in Unconsolidated Special Purpose Entities

     The  Partnership  has  interests  in  special  purpose  entities  which own
     transportation  equipment.  These  interests  are  accounted  for using the
     equity method.

         The Partnership's investment in unconsolidated special purpose entities
     includes  acquisition and lease negotiation fees paid by the Partnership to
     TEC.  The  Partnership's  equity  interest in net income of  unconsolidated
     special  purpose  entities  is  reflected  net of  management  fees paid or
     payable to IMI and the  amortization of acquisition  and lease  negotiation
     fees paid to TEC.

     Repairs and Maintenance

     Maintenance costs are usually the obligation of the lessee. If they are not
     covered by the lessee they are charged against operations as incurred.

     Net Income (Loss) and Distributions per Limited Partnership Unit

     Net income  (loss) per Limited  Partnership  Unit is computed  based on the
     number of Limited  Partnership Units outstanding  during the period (33,727
     for 1996,  1995, and 1994).  The General Partner is allocated a 1% share of
     the net income (loss).

         Cash  distributions  are  recorded  when paid.  Cash  distributions  to
     investors in excess of net income are  considered  to represent a return of
     capital.  Cash distributions to Limited Partners of $844,877,  $863,642 and
     $647,937 in 1996, 1995, and 1994, respectively,  were deemed to be a return
     of capital.

     Cash and Cash Equivalents

     The  Partnership  considers  highly  liquid  investments  that are  readily
     convertible  to known  amounts of cash with  original  maturities  of three
     months or less as cash  equivalents for the purposes of this  presentation.
     Lessee security  deposits and required reserves held by the Partnership are
     considered restricted cash.



<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996

2.   General Partner and Transactions with Affiliates

     An  officer  of FSI  contributed  $100  of the  Partnership's  initial  net
     capital.  Under the Equipment Management Agreement,  IMI receives an annual
     management fee monthly  attributable to either owned equipment or interests
     in  equipment  owned  by the  USPE's  equal  to the  greater  of 10% of the
     Partnership's  "operating  cash  flow",  or 1/12 of 1/2% the  Partnership's
     "gross proceeds" as defined in the Partnership  Agreement.  Management fees
     of $7,026  were  payable  to IMI as of  December  31,  1996 and  1995.  The
     Partnership's  proportional  share of USPE's management fees expense during
     1996 was $15,596.

         As of December 31, 1996, all of the Partnership's trailer equipment has
     been  transferred  into rental  facilities  operated by an affiliate of the
     General Partner. Revenues collected under short-term rental agreements with
     the rental facilities'  customers are distributed  monthly to the owners of
     the related equipment. Direct expenses associated with the equipment and an
     allocation of indirect expenses of rental facility operations are billed to
     the Partnership.

         The Partnership  reimbursed FSI and its affiliates $112,550,  $187,498,
     and $231,353 for  administrative  and other services performed on behalf of
     the Partnership in 1996, 1995, and 1994,  respectively.  The  Partnership's
     proportional  share of USPE's  administrative  and other  services was $594
     during 1996.

3.   Equipment

     The components of owned equipment are as follows:

<TABLE>
<CAPTION>

                                                    1996                 1995
                                              --------------------------------------

     <S>                                       <C>                   <C>
     Trailers                                  $   3,870,247         $   4,833,449
     Marine containers                               199,724               225,766
                                               --------------------------------------
                                                   4,069,971             5,059,215
   Less accumulated depreciation                  (3,861,489 )          (4,536,562 )
                                               --------------------------------------
                                               ======================================
   Net equipment                               $     208,482         $     522,653
                                               ======================================
</TABLE>


         At December 31, 1996 the Partnership owned 172 trailers,  and 26 marine
     containers.  Revenues are earned by placing the equipment  under  operating
     leases and are billed  monthly or  quarterly.  Rents for all  equipment are
     based on a fixed  operating  lease  amount  with the  exception  of  marine
     containers.  The Partnership's marine containers are leased to the operator
     of  utilization-type  pools which include  equipment  owned by unaffiliated
     parties. In such instances, revenues received by the Partnership consist of
     a specified  percentage of lease  revenues  generated by leasing the pooled
     equipment to sub-lessees, after deducting certain direct operating expenses
     of the pooled equipment.

         All of the equipment owned by the  Partnership was either  operating in
     the PLM-affiliated  short-term rental facilities or on lease as of December
     31, 1996.

         During 1996, the Partnership sold 40 trailers and disposed of 10 marine
     containers.  During 1995, the Partnership  sold 14 trailers and disposed of
     17 marine containers.

         All leases are being accounted for as operating leases.  Future minimum
     rentals   of  owned  and   partially   owned   equipment   (USPE's)   under
     non-cancelable  leases at  December  31,  1996 during each of the next five
     years are  approximately  $174,000 - 1997;  $29,000 - 1998;  $-0- -1999 and
     thereafter.  Contingent rentals based upon utilization  amounted to $14,332
     in 1996, $29,819 in 1995, and $29,339 in 1994.



<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996


3.   Equipment (continued)

         The lessees  accounting  for 10% or more of the total  revenues  during
     1996, 1995, and 1994 were Horizon Air Industries, Inc. (24% in 1996, 15% in
     1995, and 18% in 1994),  and British  Aerospace,  Inc. (19% in 1996, 20% in
     1995, and 14% in 1994).

4.   Investments in Unconsolidated Special Purpose Entities

     Prior  to  1996,  the  Partnership   accounted  for  operating   activities
     associated with joint ownership of rental equipment as undivided interests,
     including its proportionate  share of each asset with similar  wholly-owned
     assets in its financial  statements.  Under generally  accepted  accounting
     principles, the effects of such activities, if material, should be reported
     using the equity  method of  accounting.  Therefore,  effective  January 1,
     1996,  the  Partnership  adopted  the  equity  method  to  account  for its
     investment in such jointly-held assets.

         The principle  differences  between the previous  accounting method and
     the equity method  relate to the  presentation  of  activities  relating to
     these assets in the income statement.  Whereas,  under the equity method of
     accounting the Partnership's  proportionate  share is presented as a single
     net amount,  "equity in net income (loss) of unconsolidated special purpose
     entities",  under the previous method,  the Partnership's  income statement
     reflected its  proportionate  share of each  individual item of revenue and
     expense.   Accordingly,  the  effect  of  adopting  the  equity  method  of
     accounting  has no  cumulative  effect  on  previously  reported  partner's
     capital  or on the  Partnership's  net  income  (loss)  for the  period  of
     adoption.  Because the effects on previously issued financial statements of
     applying the equity method of accounting to  investments  in  jointly-owned
     assets are not considered to be material to such financial statements taken
     as a whole,  previously issued financial statements have not been restated.
     However,  certain items have been  reclassified  in the  previously  issued
     balance sheet to conform to the current period presentation.

         The  following  summarizes  the financial  information  for the special
     purpose entities and the  Partnership's  interest therein as of and for the
     year ended December 31, 1996:

                                                         Net
                                     Total USPE      Interest of
                                                     Partnership
                                     ------------------------------

    Net Investments                $     124,423   $       99,974
    Revenues                             415,477          311,913
    Net Income                           931,963          653,740

         The "Investments in unconsolidated special purpose entities" included a
     69% interest in an entity which owns a commuter aircraft and a 80% interest
     in an entity  which owns  another  commuter  aircraft.  The entity sold the
     commuter aircraft for which the Partnership had a 69% interest in 1996.

5.   Income Taxes

     The  Partnership  is not  subject to income  taxes as any income or loss is
     included in the tax returns of the  individual  Partners.  Accordingly,  no
     provision for income taxes has been made in the financial statements of the
     Partnership.

         At December 31, 1996, there were temporary differences of approximately
     $1,997,333  between the financial  statement  carrying values of assets and
     liabilities   and  the  federal   income  tax  bases  of  such  assets  and
     liabilities.



<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996

6.   Liquidation and special distributions

     During the first quarter of 1995, the  Partnership  completed its 10th year
     of  operations.  As  originally  anticipated  by the General  Partner,  the
     Partnership  will be liquidated  in an orderly  manner in its 11th and 12th
     years of operation. The General Partner is actively marketing the remaining
     equipment  portfolio with the intent of maximizing  sale proceeds.  As sale
     proceeds are received the General Partner  intends to periodically  declare
     special  distributions  to  distribute  the sale  proceeds to the partners.
     During the liquidation phase of the Partnership the equipment will continue
     to be leased under  operating  leases until sold.  Operating cash flows, to
     the  extent  they  exceed  Partnership   expenses,   will  continue  to  be
     distributed  on a quarterly  basis to partners.  The amounts  reflected for
     assets and liabilities of the Partnership have not been adjusted to reflect
     liquidation  values. The equipment portfolio continues to be carried at the
     lower of depreciated cost or fair value less cost to dispose.  Although the
     General  Partner   estimates  that  there  will  be   distributions   after
     liquidation  of assets and  liabilities,  the amounts  cannot be accurately
     determined  prior  to  actual  liquidation  of the  equipment.  Any  excess
     proceeds over expected  Partnership  obligations will be distributed to the
     Partners  throughout the liquidation  period.  Upon final liquidation,  the
     Partnership will be dissolved.

         In 1996, 1995, and 1994, the General Partner paid special distributions
     of $23.48,  $5.87, and $2.94 per weighted average Limited Partnership Unit.
     The  Partnership  is not  permitted  to  reinvest  proceeds  from  sales or
     liquidations of equipment.  These proceeds,  in excess of operational  cash
     requirements,  are periodically paid out to limited partners in the form of
     special  distributions.   The  sales  and  liquidations  occur  because  of
     equipment destructions, the determination by the General Partner that it is
     the  appropriate  time to maximize  the return on an asset  through sale of
     that  asset,  and,  in some  leases,  the ability of the lessee to exercise
     purchase options.



<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VII 1985 INCOME FUND

                             (A Limited Partnership)

                                INDEX OF EXHIBITS



   Exhibit                                                           Page

    4.       Limited Partnership Agreement of each Partnership.         *

   10.       Management Agreement between each Partnership and          *
             PLM Investment Management, Inc.

   25.       Powers of Attorney                                     47-49




* Incorporated by reference.  See page 20 of this report.