<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                           Washington, D. C.  20549
                                 FORM 10-K/A
                                Amendment No. 2

(Mark One)

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

                   For the fiscal year ended   December 31, 1998
                                             --------------------

                                      OR

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

             For the transition period from ____________ to ____________



                        Commission file number  0-19140

                           CNL INCOME FUND VII, LTD.
                 (Exact name of registrant as specified in its charter)


                Florida                                59-2963871
      (State or other jurisdiction of       (I.R.S. Employer Identification No.)
      incorporation or organization)

                            450 South Orange Avenue
                            Orlando, Florida  32801
          (Address of principal executive offices,including zip code)


      Registrant's telephone number, including area code:  (407) 650-1000

          Securities registered pursuant to Section 12(b) of the Act:

      Title of each class:         Name of exchange on which registered:
             None                           Not Applicable

          Securities registered pursuant to Section 12(g) of the Act:

              Units of limited partnership interest ($1 per Unit)
                               (Title of class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:  Yes      X      No _____
                                         ---------

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

     Aggregate market value of the voting stock held by nonaffiliates of the
registrant:  The registrant registered an offering of 30,000,000 units of
limited partnership interest (the "Units") on Form S-11 under the Securities Act
of 1933, as amended.  Since no established market for such Units exists, there
is no market value for such Units.  Each Unit was originally sold at $1 per
Unit.

                     DOCUMENTS INCORPORATED BY REFERENCE:
                                     None
<PAGE>

     The Form 10-K of CNL Income Fund VII, Ltd. for the year ended December 31,
1998 is being amended to revise the disclosure under Item 1. Business and Item
8. Financial Statements and Supplementary Data.


                                 PART I


Item 1.  Business


     CNL Income Fund VII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 18, 1989.  The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners").  Beginning on January 30, 1990, the
Partnership offered for sale up to $30,000,000 of limited partnership interests
(the "Units") (30,000,000 Units each at $1 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended.  The
offering terminated on August 1, 1990, as of which date the maximum offering
proceeds of $30,000,000 had been received from investors who were admitted to
the Partnership as limited partners (the "Limited Partners").

     The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains").  Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$26,550,000, and were used to acquire 42 Properties, including interests in nine
Properties owned by joint ventures in which the Partnership is a co-venturer,
and to establish a working capital reserve for Partnership purposes.  During
1994, the Partnership sold its Property in St. Paul, Minnesota, and reinvested
the majority of the net sales proceeds in a Checkers Property in Winter Springs,
Florida, consisting of only land, and a Jack in the Box Property in Yuma,
Arizona, which is owned as tenants-in-common with an affiliate of the General
Partners.  The lessee of the Property consisting of only land owns the building
currently on the land.  During 1995, the Partnership sold its Properties in
Florence, South Carolina, and Jacksonville, Florida, and accepted promissory
notes in the principal sum of $1,160,000 and $240,000, respectively.  In
addition, the building located on the Partnership's Property in Daytona Beach,
Florida, was demolished in accordance with a condemnation agreement during 1995.
During the year ended December 31, 1996, the Partnership sold its Properties in
Hartland, Michigan, and Colorado Springs, Colorado, and reinvested the net sales
received from the sale of the Colorado Springs, Colorado Property in a Boston
Market Property in Marietta, Georgia.  During the year ended December 31, 1997,
the Partnership used the net sales proceeds from the sale of the Property in
Hartland, Michigan, to invest in CNL Mansfield Joint Venture with an affiliate
of the General Partners in exchange for a 79 percent interest in the joint
venture.  In addition, during 1997, the Partnership sold its Properties in
Columbus, Indiana and Dunnellon, Florida, and sold the Property in Yuma,
Arizona, which was owned as tenants-in-common with an affiliate of the General
Partners, and reinvested the net sales proceeds in a Property in Smithfield,
North Carolina, and a Property in Miami, Florida, each as tenants-in-common,
with affiliates of the General Partners.  As a result of the above transactions,
as of December 31, 1998, the Partnership owned 40 Properties.  The 40 Properties
included interests in ten Properties owned by joint ventures in which the
Partnership is a co-venturer and two Properties owned with affiliates as
tenants-in-common.   The Properties are leased on a triple-net basis with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities.

     On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains.  APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger.  At a special meeting of the partners that is expected to be held in
the fourth quarter of 1999, Limited Partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction.  If the Limited Partners at the
special meeting approve the Merger, APF will own the Properties and other assets
of the Partnership.

     In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the

                                       2
<PAGE>

Partnership's investment objectives.  In deciding whether to sell Properties,
the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations.  Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed.  The Partnership has no obligation to sell all or any portion of a
Property at any particular time, except as may be required under property
purchase options granted to certain lessees.

Leases

     Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases.  The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms ranging from five to 20 years (the average being 17 years), and expire
between 2003 and 2016.  Generally, the leases are on a triple-net basis, with
the lessee responsible for all repairs and maintenance, property taxes,
insurance and utilities.  The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $22,100 to $191,900.  The majority of the leases provide for
percentage rent, based on sales in excess of a specified amount.  In addition,
some of the leases provide that, commencing in specified lease years (generally
ranging from the sixth to the eleventh lease year), the annual base rent
required under the terms of the lease will increase.

     Generally, the leases of the Properties provide for two to four five-year
renewal options subject to the same terms and conditions as the initial lease.
Lessees of 26 of the Partnership's 40 Properties also have been granted options
to purchase Properties at the Property's then fair market value after a
specified portion of the lease term has elapsed.  Fair market value will be
determined through an appraisal by an independent appraisal firm.  Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is exercised.

     The leases also generally provide that, in the event the Partnership wishes
to sell the Property subject to that lease, the Partnership first must offer the
lessee the right to purchase that Property on the same terms and conditions, and
for the same price, as any offer which the Partnership has received for the sale
of the Property.

Major Tenants

     During 1998, three lessees of the Partnership and its consolidated joint
venture, Golden Corral Corporation, Restaurant Management Services, Inc., and
Waving Leaves, Inc., each contributed more than ten percent of the Partnership's
total rental income (including rental income from the Partnership's consolidated
joint venture and the Partnership's share of rental income from nine Properties
owned by unconsolidated joint ventures and two Properties owned with affiliates
as tenants-in-common).  As of December 31, 1998, Golden Corral Corporation was
the lessee under leases relating to five restaurants, Restaurant Management
Services, Inc. was the lessee under leases relating to seven restaurants and one
site currently consisting of land only, and Waving Leaves, Inc. was the lessee
under leases relating to four restaurants.  It is anticipated that, based on the
minimum rental payments required by the leases, these three lessees each will
continue to contribute more than ten percent of the Partnership's total rental
income in 1999.  In addition, three Restaurant Chains, Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), Hardee's, and Burger King, each
accounted for more than ten percent of the Partnership's total rental income in
1998 (including rental income from the Partnership's consolidated joint venture
and the Partnership's share of rental income from nine Properties owned by
unconsolidated joint ventures and two Properties owned with affiliates as
tenants-in-common).  In 1999, it is anticipated that these three Restaurant
Chains each will continue to account for more than ten percent of the
Partnership's total rental income to which the Partnership is entitled under the
terms of the leases.  Any failure of these lessees or Restaurant Chains could
materially affect the Partnership's income if the Partnership is not able to re-
lease the Properties in a timely manner.  As of December 31, 1998, Golden Corral
Corporation leased Properties with an aggregate carrying value in excess of 20
percent of the total assets of the Partnership.

Joint Venture and Tenancy in Common Arrangements

     The Partnership has entered into a joint venture arrangement, San Antonio
#849 Joint Venture, with an unaffiliated entity to purchase and hold one
Property.  In addition, the Partnership has entered into four separate joint
venture arrangements:  Halls Joint Venture with CNL Income Fund V, Ltd., an
affiliate of the General Partners, to purchase and hold one Property; CNL
Restaurant Investments II with CNL Income Fund VIII, Ltd. and CNL Income Fund
IX, Ltd., affiliates of the General Partners, to purchase and hold six
properties; Des Moines Real Estate

                                       3
<PAGE>

Joint Venture with CNL Income Fund XI, Ltd. and CNL Income Fund XII, Ltd.,
affiliates of the General Partners, to purchase and hold one property; and CNL
Mansfield Joint Venture with CNL Income Fund XVII, Ltd., an affiliate of the
General Partners, to purchase and hold one Property. The affiliates are limited
partnerships organized pursuant to the laws of the State of Florida. The joint
venture arrangements provide for the Partnership and its joint venture partners
to share in all costs and benefits associated with the joint venture in
accordance with their respective percentage interests in the joint venture. The
Partnership has an 83 percent interest in San Antonio #849 Joint Venture, a 51.1
percent interest in Halls Joint Venture, an 18 percent interest in CNL
Restaurant Investments II, a 4.79% interest in Des Moines Real Estate Joint
Venture, and a 79% interest in CNL Mansfield Joint Venture. The Partnership and
its joint venture partners are also jointly and severally liable for all debts,
obligations and other liabilities of the joint venture.

     San Antonio #849 Joint Venture, Halls Joint Venture, Des Moines Real Estate
Joint Venture, and CNL Mansfield Joint Venture each have an initial term of 20
years and, after the expiration of the initial term, continue in existence from
year to year unless terminated at the option of any joint venturer or by an
event of dissolution.  Events of dissolution include the bankruptcy, insolvency
or termination of any joint venturer, sale of the Property owned by the joint
venture and mutual agreement of the Partnership and each joint venture partner
to dissolve the joint venture.  CNL Restaurant Investments II's joint venture
agreement does not provide a fixed term, but continues in existence until
terminated by any of the joint venturers.

     The Partnership has management control of the San Antonio #849 Joint
Venture and shares management control equally with affiliates of the General
Partners for Halls Joint Venture, CNL Restaurant Investments II, Des Moines Real
Estate Joint Venture, and CNL Mansfield Joint Venture.  The joint venture
agreements restrict each venturer's ability to sell, transfer or assign its
joint venture interest without first offering it for sale to its joint venture
partner, either upon such terms and conditions as to which the venturers may
agree or, in the event the venturers cannot agree, on the same terms and
conditions as any offer from a third party to purchase such joint venture
interest.

     Net cash flow from operations of San Antonio #849 Joint Venture, Halls
Joint Venture, CNL Restaurant Investments II, Des Moines Real Estate Joint
Venture, and CNL Mansfield Joint Venture is distributed 83.3%, 51.1%, 18
percent, 4.79% and 79 percent, respectively, to the Partnership and the balance
is distributed to each of the other joint venture partners in accordance with
their respective percentage interests in the joint venture.  Any liquidation
proceeds, after paying joint venture debts and liabilities and funding reserves
for contingent liabilities, will be distributed first to the joint venture
partners with positive capital account balances in proportion to such balances
until such balances equal zero, and thereafter in proportion to each joint
venture partner's percentage interest in the joint venture.

     In addition to the above joint venture agreements, in July 1994, the
Partnership entered into an agreement to hold a Jack in the Box Property as
tenants-in-common with CNL Income Fund VI, Ltd., an affiliate of the General
Partners.  The agreement provided for the Partnership and the affiliate to share
in the profits and losses of the Property in proportion to each co-tenant's
percentage.  The Partnership owned a 48.33% interest in this Property.  In
October 1997, the Partnership and the affiliate, as tenants-in-common, sold the
Jack in the Box Property in Yuma, Arizona.  In December 1997, the Partnership
entered into an agreement to hold a Property in Miami, Florida, as tenants-in-
common with CNL Income Fund III, Ltd., CNL Income Fund X, Ltd. and CNL Income
Fund XIII, Ltd., affiliates of the General Partners, and in conjunction
therewith, reinvested its portion of the net sales proceeds received from the
sale of the Property in Yuma, Arizona, along with additional funds from the sale
of the Property in Columbus, Indiana.  The agreement provides for the
Partnership and the affiliate to share in the profits and losses of the Property
in proportion to each co-tenant's percentage interest.  The Partnership owns a
35.64% interest in the Property in Miami, Florida.

     In addition, in December 1997, the Partnership entered into an agreement to
hold a Golden Corral Property in Smithfield, North Carolina, as tenants-in-
common with CNL Income Fund II, Ltd., an affiliate of the General Partners.  The
agreement provides for the Partnership and the affiliate to share in the profits
and losses of the Property in proportion to each co-tenant's percentage
interest.  The Partnership owns a 53 percent interest in this Property.

     Each of the affiliates is a limited partnership organized pursuant to the
laws of the State of Florida.  The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.

     The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available.  The
use of joint venture and ten-

                                       4
<PAGE>

ancy in common arrangements also provides the Partnership with increased
diversification of its portfolio among a greater number of properties. In
addition, tenancy in common arrangements may allow the Partnership to defer the
gain for federal income tax purposes upon the sale of the property if the
proceeds are reinvested in an additional property. The affiliates are limited
partnerships organized pursuant to the laws of the State of Florida.

Certain Management Services

     CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership.  Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties.  CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases.  For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one percent of the sum of gross rental
revenues from Properties wholly owned by the Partnership plus the Partnership's
allocable share of gross revenues of joint ventures in which the Partnership is
a co-venturer and the Property held as tenants-in-common with an affiliate, but
not in excess of competitive fees for comparable services.  Under the management
agreement, the management fee is subordinated to receipt by the Limited Partners
of an aggregate, ten percent, cumulative, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return"), calculated in
accordance with the Partnership's limited partnership agreement (the
"Partnership Agreement").  In any year in which the Limited Partners have not
received the 10% Preferred Return, no property management fee will be paid.

     The management agreement continues until the Partnership no longer owns an
interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.

Employees

     The Partnership has no employees.  The officers of CNL Realty Corporation
and the officers and employees of CNL Fund Advisors, Inc. perform certain
services for the Partnership.  In addition, the General Partners have available
to them the resources and expertise of the officers and employees of CNL Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.

Item 8.   Financial Statements and Supplementary Data

                                       5
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                                   CONTENTS
                                   --------



<TABLE>
<CAPTION>


                                                            Page
                                                            ----
<S>                                                         <C>

Report of Independent Accountants                              7

Financial Statements:

  Balance Sheets                                               8

  Statements of Income                                         9

  Statements of Partners' Capital                             10

  Statements of Cash Flows                                    11

  Notes to Financial Statements                               13

Additional Financial Information regarding Golden Corral      27
</TABLE>

                                       6
<PAGE>

                       Report of Independent Accountants
                       ---------------------------------


To the Partners
CNL Income Fund VII, Ltd..


In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund VII, Ltd. (a Florida limited partnership) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.  In addition, in our opinion, the
financial statement schedules listed in the index appearing  under item 14(a)(2)
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related financial statements.  These financial
statements and financial statement schedules are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.  We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.



/s/  PricewaterhouseCoopers LLP


Orlando, Florida
January 25, 1999, except for Note 11 for which the date is March 11, 1999

                                       7
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                                BALANCE SHEETS
                                --------------

<TABLE>
<CAPTION>
                                                        December 31,
                                                  1998                 1997
                                                -----------         -----------

                       ASSETS
                       ------

<S>                                            <C>                 <C>
Land and buildings on operating leases, less
   accumulated depreciation                     $15,078,507         $15,382,863
Net investment indirect financing leases          3,365,392           3,447,152
Investment in joint ventures                      3,327,934           3,393,932
Mortgage notes receivable, less deferred gain     1,241,056           1,250,597
Cash and cash equivalents                           856,825             761,317
Receivables, less allowance for doubtful
   accounts of $28,853 and $32,959                   78,478              64,092
Prepaid expenses                                      4,116               4,755
Accrued rental income, less allowance for
   doubtful accounts of $9,845 in 1998
   and 1997                                       1,205,528           1,114,632
Other assets                                         60,422              60,422
                                               ------------        ------------

                                                $25,218,258         $25,479,762
                                               ============        ============


        LIABILITIES AND PARTNERS' CAPITAL
        ---------------------------------

Accounts payable                                $     2,885         $     6,131
Escrowed real estate taxes payable                    5,834               7,785
Distributions payable                               675,000             675,000
Due to related parties                               25,111              34,883
Rents paid in advance and deposits                   49,027              60,671
                                               ------------        ------------
   Total liabilities                                757,857             784,470

Minority interest                                   146,605             147,514

Partners' capital                                24,313,796          24,547,778
                                               ------------        ------------

                                                $25,218,258         $25,479,762
                                               ============        ============
</TABLE>



                See accompanying notes to financial statements.

                                       8
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                             STATEMENTS OF INCOME
                             --------------------

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                          1998          1997            1996
                                                      ----------    -----------      ------------

Revenues:
<S>                                               <C>           <C>               <C>
 Rental income from operating leases                 $ 1,976,709   $ 1,960,724       $ 1,954,033
 Earned income from direct financing leases              413,848       475,498           505,061
 Contingent rental income                                 93,906        51,345            44,973
 Interest and other income                               171,263       183,579           240,079
                                                       2,655,726     2,671,146         2,744,146
                                                    ------------   -----------       -----------
Expenses:
 General operating and administrative                    133,915       143,173           159,001
 Professional services                                    23,443        23,546            27,640
 Real estate taxes                                            --         2,979             9,010
 State and other taxes                                     2,729         4,560             2,448
 Depreciation                                            304,356       304,356           317,957
 Transaction costs                                        18,781            --                --
                                                    ------------   -----------       -----------
                                                         483,224       478,614           516,056
                                                    ------------   -----------       -----------

Income Before Minority Interest in Income  of
 Consolidated Joint Venture, Equity in
 Earnings of Unconsolidated Joint Ventures,
 and Gain (Loss) on Sale of Land
 and Buildings                                         2,172,502     2,192,532         2,228,090

Minority Interest in Income of Consolidated
 Joint Venture                                           (18,590)      (18,663)          (18,691)

 Equity in Earnings of Unconsolidated Joint
 Ventures                                                311,081       267,251           157,254

Gain (Loss) on Sale of Land and Buildings                  1,025       164,888           (39,790)
                                                    ------------   -----------       -----------

Net Income                                           $ 2,466,018   $ 2,606,008       $ 2,326,863
                                                    ============   ===========       ===========

Allocation of Net Income:
 General partners                                    $    24,659   $    24,300       $    23,586
 Limited partners                                      2,441,359     2,581,708         2,303,277
                                                     -----------   -----------       -----------

                                                     $ 2,466,018   $ 2,606,008       $ 2,326,863
                                                     ===========   ===========       ===========

Net Income Per Limited Partner Unit                  $     0.081   $     0.086       $     0.077
                                                     ===========   ===========       ===========

Weighted Average Number of
 Limited Partner Units Outstanding                    30,000,000    30,000,000        30,000,000
                                                      ==========   ===========       ===========
</TABLE>



                See accompanying notes to financial statements.

                                       9
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)


                        STATEMENTS OF PARTNERS' CAPITAL
                        -------------------------------

                 Years Ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                    General Partners                              Limited Partners
                           ------------------------------   -------------------------------------------------------------
                                             Accumulated                                      Accumulated   Syndication
                             Contributions     Earnings     Contributions    Distributions     Earnings     Costs          Total
                           ---------------  -------------  --------------   -------------    -------------  ----------  ------------

<S>                            <C>          <C>            <C>              <C>              <C>             <C>        <C>
Balance, December 31, 1995       $1,000       $132,199      $30,000,000     $(14,777,623)     $13,099,331  $(3,440,000) $25,014,907

 Distributions to limited
   partners ($0.090 per
   Limited partner unit)             --             --               --       (2,700,000)              --          --   (2,700,000)

 Net income                          --         23,586               --               --        2,303,277          --     2,326,863
                           --------------   ------------   -------------    ------------     ------------   ----------  ------------

Balance, December 31, 1996        1,000        155,785       30,000,000      (17,477,623)      15,402,608   (3,440,000)  24,641,770

 Distributions to limited
   partners ($0.090 per
   limited partner unit)             --             --               --       (2,700,000)             --           --    (2,700,000)
Net income                           --         24,300               --               --       2,581,708           --     2,606,008
                           -------------    -----------    ------------     ------------     -----------    ----------  ------------

Balance, December 31, 1997        1,000        180,085       30,000,000      (20,177,623)     17,984,316    (3,440,000)  24,547,778

 Distributions to limited
   partners ($0.090 per
   limited partner unit)             --             --               --       (2,700,000)             --            --   (2,700,000)
 Net income                          --         24,659               --               --       2,441,359            --    2,466,018
                           ------------     ----------     ------------     ------------     -----------   -----------  ------------

Balance, December 31, 1998       $1,000       $204,744      $30,000,000     $(22,877,623)    $20,425,675   $(3,440,000) $24,313,796
                           ============     ==========     ============     ============     ===========   ===========  ===========



</TABLE>



                See accompanying notes to financial statements.

                                       10
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                           STATEMENTS OF CASH FLOWS
                           ------------------------

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                  1998                  1997                 1996
                                                             --------------        --------------       --------------

Increase (Decrease) in Cash and Cash Equivalents:

Cash Flows from Operating Activities:
<S>                                                      <C>                    <C>                    <C>
   Cash received from tenants                                  $ 2,435,937            $ 2,500,189         $ 2,549,406
   Distributions from unconsolidated joint ventures                376,557                300,696             191,174
   Cash paid for expenses                                         (187,925)              (140,819)           (248,523)
   Interest received                                               166,406                180,393             178,812
     Net cash provided by operating activities                   2,790,975              2,840,459           2,670,869
                                                             -------------         --------------       --------------

 Cash Flows from Investing Activities:
   Additions to land and buildings on operating leases                  --                     --          (1,041,555)
   Proceeds from sale of land and buildings                             --                976,334           1,661,943
   Investment in joint ventures                                         --             (1,650,905)                 --
   Collections on mortgage notes receivable                         10,811                  9,766               8,821
   Other                                                            13,221                     --                  --
                                                             -------------         --------------       --------------
     Net cash provided by (used in) investing
       activities                                                   24,032               (664,805)            629,209
                                                             -------------         --------------       --------------

 Cash Flows from Financing Activities:
   Distributions to limited partners                            (2,700,000)            (2,700,000)         (2,700,000)
   Distributions to holder of minority interest                    (19,499)               (19,766)            (19,723)
                                                             -------------         --------------       --------------
     Net cash used in financing activities                      (2,719,499)            (2,719,766)         (2,719,723)
                                                             -------------         --------------       --------------

Net Increase (Decrease) in Cash and Cash Equivalents                95,508               (544,112)            580,355

Cash and Cash Equivalents at Beginning of Year                     761,317              1,305,429             725,074
                                                             -------------         --------------       --------------

Cash and Cash Equivalents at End of Year                       $   856,825            $   761,317         $ 1,305,429
                                                             =============         ==============       ==============
</TABLE>



                See accompanying notes to financial statements.

                                       11
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                     STATEMENTS OF CASH FLOWS - CONTINUED
                     ------------------------------------

<TABLE>
                                                                                        Year Ended December 31,

                                                                        1998                  1997                      1996
                                                                  ---------------       -----------------       ----------------

Reconciliation of Net Income to Net Cash Provided by
Operating Activities:

<S>                                                           <C>                          <C>                   <C>
   Net income                                                        $2,466,018              $2,606,008              $2,326,863
                                                                  -------------         -----------------       ----------------
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation                                                     304,356                 304,356                 317,957
       Minority interest in income of consolidated
         joint venture                                                   18,590                  18,663                  18,691
       Loss (gain) on sale of land and buildings                         (1,025)               (164,888)                 39,790
       Equity in earnings of unconsolidated joint
         ventures, net of distributions                                  65,476                  33,445                  33,920
       Decrease (increase) in receivables                               (27,330)                 17,173                 (14,827)
       Decrease (increase) in prepaid expenses                              639                    (101)                    379
       Decrease in net investment in direct
         financing leases                                                81,760                  76,941                  70,329
       Increase in accrued rental income                                (90,896)               (102,142)               (104,639)
       Increase (decrease) in accounts
         payable and accrued expenses                                    (5,197)                  3,222                 (40,072)
       Increase (decrease) in due to related parties                     (9,772)                 25,816                  (4,244)
       Increase (decrease) in rents paid in advance
         and deposits                                                   (11,644)                 21,966                  26,722
          Total adjustments                                             324,957                 234,451                 344,006
                                                                  -------------         -----------------       ------------------

Net Cash Provided by Operating Activities                            $2,790,975              $2,840,459              $2,670,869
                                                                  =============         =================       ==================

Supplemental Schedule of Non-Cash
   Investing and Financing Activities:

Distributions declared and unpaid at
   December 31                                                       $  675,000              $  675,000              $  675,000
                                                                  =============         =================       ==================
</TABLE>



                See accompanying notes to financial statements.

                                       12
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------

                 Years Ended December 31, 1998, 1997, and 1996


1.   Significant Accounting Policies:
     -------------------------------

     Organization and Nature of Business - CNL Income Fund VII, Ltd. (the
     -----------------------------------
     "Partnership") is a Florida limited partnership that was organized for the
     purpose of acquiring both newly constructed and existing restaurant
     properties, as well as properties upon which restaurants were to be
     constructed, which are leased primarily to operators of national and
     regional fast-food and family-style restaurant chains.

     The general partners of the Partnership are CNL Realty Corporation (the
     "Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
     Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
     General Partner.  The general partners have responsibility for managing the
     day-to-day operations of the Partnership.

     Real Estate and Lease Accounting - The Partnership records the acquisition
     --------------------------------
     of land and buildings at cost, including acquisition and closing costs.
     Land and buildings are leased to unrelated third parties on a triple-net
     basis, whereby the tenant is generally responsible for all operating
     expenses relating to the property, including property taxes, insurance,
     maintenance and repairs. The leases are accounted for using either the
     direct financing or the operating methods. Such methods are described
     below:

          Direct financing method - The leases accounted for using the direct
          financing method are recorded at their net investment (which at the
          inception of the lease generally represents the cost of the asset)
          (Note 4).  Unearned income is deferred and amortized to income over
          the lease terms so as to produce a constant periodic rate of return on
          the Partnership's net investment in the leases.

          Operating method - Land and building leases accounted for using the
          operating method are recorded at cost, revenue is recognized as
          rentals are earned and depreciation is charged to operations as
          incurred.  Buildings are depreciated on the straight-line method over
          their estimated useful lives of 30 years.  When scheduled rentals vary
          during the lease term, income is recognized on a straight-line basis
          so as to produce a constant periodic rent over the lease term
          commencing on the date the property is placed in service.

                                       13
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996

1.   Significant Accounting Policies - Continued:
     -------------------------------------------

        Accrued rental income represents the aggregate amount of income
        recognized on a straight-line basis in excess of scheduled rental
        payments to date. Whenever a tenant defaults under the terms of its
        lease, or events or changes in circumstance indicate that the tenant
        will not lease the property through the end of the lease term, the
        Partnership either reserves or writes-off the cumulative accrued rental
        income balance.

     When the properties are sold, the related cost and accumulated depreciation
     for operating leases and the net investment for direct financing leases,
     plus any accrued rental income, are removed from the accounts and gains or
     losses from sales are reflected in income. The general partners of the
     Partnership review properties for impairment whenever events or changes in
     circumstances indicate that the carrying amount of the assets may not be
     recoverable through operations. The general partners determine whether an
     impairment in value has occurred by comparing the estimated future
     undiscounted cash flows, including the residual value of the property, with
     the carrying cost of the individual property. If an impairment is
     indicated, the assets are adjusted to their fair value. Although the
     general partners have made their best estimate of these factors based on
     current conditions, it is reasonably possible that changes could occur in
     the near term which could adversely affect the general partners' estimate
     of net cash flows expected to be generated from its properties and the need
     for asset impairment write-downs.

     When the collection of amounts recorded as rental or other income is
     considered to be doubtful, an adjustment is made to increase the allowance
     for doubtful accounts, which is netted against receivables, and to decrease
     rental or other income or increase bad debt expense for the current period,
     although the Partnership continues to pursue collection of such amounts. If
     amounts are subsequently determined to be uncollectible, the corresponding
     receivable and allowance for doubtful accounts are decreased accordingly.

     Investment in Joint Ventures - The Partnership accounts for its 83.3%
     ----------------------------
     interest in San Antonio #849 Joint Venture using the consolidation method.
     Minority interest represents the minority joint venture partner's
     proportionate share of the equity in the Partnership's consolidated joint
     venture. All significant intercompany accounts and transactions have been
     eliminated.

     The Partnership's investments in Halls Joint Venture, CNL Restaurant
     Investments II, Des Moines Real Estate Joint Venture, and CNL Mansfield
     Joint Venture, and a property in Smithfield, North Carolina, and a property
     in Miami, Florida, for which each of the two properties is held as tenants-
     in-common with affiliates, are accounted for using the equity method since
     the Partnership shares control with affiliates which have the same general
     partners.

                                       14
<PAGE>

                           CNL INCOME FUND VII, LTD.

                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


1.   Significant Accounting Policies - Continued:
     -------------------------------------------

     Cash and Cash Equivalents - The Partnership considers all highly liquid
     -------------------------
     investments with a maturity of three months or less when purchased to be
     cash equivalents.  Cash and cash equivalents consist of demand deposits at
     commercial banks and money market funds (some of which are backed by
     government securities).  Cash equivalents are stated at cost plus accrued
     interest, which approximates market value.

     Cash accounts maintained on behalf of the Partnership in demand deposits at
     commercial banks and money market funds may exceed federally insured
     levels; however, the Partnership has not experienced any losses in such
     accounts.  The Partnership limits investment of temporary cash investments
     to financial institutions with high credit standing; therefore, the
     Partnership believes it is not exposed to any significant credit risk on
     cash and cash equivalents.

     Income Taxes - Under Section 701 of the Internal Revenue Code, all income,
     ------------
     expenses and tax credit items flow through to the partners for tax
     purposes.  Therefore, no provision for federal income taxes is provided in
     the accompanying financial statements.  The Partnership is subject to
     certain state taxes on its income and property.

     Additionally, for tax purposes, syndication costs are included in
     Partnership equity and in the basis of each partner's investment. For
     financial reporting purposes, syndication costs are netted against
     partners' capital and represent a reduction of Partnership equity and a
     reduction in the basis of each partner's investment.

     Reclassification - Certain items in the prior years' financial statements
     ----------------
     have been reclassified to conform to 1998 presentation. These
     reclassifications had no effect on partners' capital or net income.

     Use of Estimates - The general partners of the Partnership have made a
     ----------------
     number of estimates and assumptions relating to the reporting of assets and
     liabilities and the disclosure of contingent assets and liabilities to
     prepare these financial statements in conformity with generally accepted
     accounting principles. The more significant areas requiring the use of
     management estimates relate to the allowance for doubtful accounts and
     future cash flows associated with long-lived assets. The more significant
     areas requiring the use of management estimates relate to the allowance for
     doubtful accounts and future cash flows associated with long-lived assets.
     Actual results could differ from those estimates.

                                       15
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


2.   Leases:
     ------

     The Partnership leases its land or land and buildings primarily to
     operators of national and regional fast-food and family-style restaurants.
     The leases are accounted for under the provisions of Statement of Financial
     Accounting Standards No. 13, "Accounting for Leases." The leases generally
     are classified as operating leases; however, some leases have been
     classified as direct financing leases. For the leases classified as direct
     financing leases, the building portions of the property leases are
     accounted for as direct financing leases while the land portions of the
     majority of these leases are operating leases. Substantially all leases are
     for 15 to 20 years and provide for minimum and contingent rentals. In
     addition, the tenant generally pays all property taxes and assessments,
     fully maintains the interior and exterior of the building and carries
     insurance coverage for public liability, property damage, fire and extended
     coverage. The lease options generally allow tenants to renew the leases for
     two to four successive five-year periods subject to the same terms and
     conditions as the initial lease. Most leases also allow the tenant to
     purchase the property at fair market value after a specified portion of the
     lease has elapsed.

3.   Land and Buildings on Operating Leases:
     --------------------------------------

     Land and buildings on operating leases consisted of the following at
     December 31:

<TABLE>
<CAPTION>
                                       1998                        1997
                              ------------------          ------------------

<S>                          <C>                         <C>
Land                             $ 8,430,465                 $ 8,430,465
Buildings                          9,121,968                   9,121,968
                              ------------------          ------------------
                                  17,552,433                  17,552,433

Less accumulated depreciation     (2,473,926)                 (2,169,570)
                              ------------------          ------------------

                                 $15,078,507                 $15,382,863
                              ==================          ==================
</TABLE>

     In May 1997, the Partnership sold its property in Columbus, Indiana, for
     $240,000 and received net sales proceeds of $223,589, resulting in a loss
     of $19,739 for financial reporting purposes.

     Some leases provide for escalating guaranteed minimum rents throughout the
     lease terms.  Income from these scheduled rent increases is recognized on a
     straight-line basis over the terms of the leases.  For the years ended
     December 31, 1998, 1997, and 1996, the Partnership recognized $90,896,
     $102,142 (net of $11,159 in reserves), and $104,639 (net of $1,631 in
     reserves), respectively, of such rental income.

                                       16
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


3.   Land and Buildings on Operating Leases - Continued:
     --------------------------------------------------

     The following is a schedule of the future minimum lease payments to be
     received on noncancellable operating leases at December 31, 1998:

<TABLE>
              <S>                            <C>
                1999                            $ 1,891,776
                2000                              1,925,741
                2001                              2,022,708
                2002                              2,034,710
                2003                              1,940,473
                Thereafter                       10,605,505
                                              -------------

                                                $20,420,913
                                              =============
</TABLE>

     Since lease renewal periods are exercisable at the option of the tenant,
     the above table only presents future minimum lease payments due during the
     initial lease terms.  In addition, this table does not include any amounts
     for future contingent rentals which may be received on the leases based on
     a percentage of the tenant's gross sales.

4.   Net Investment in Direct Financing Leases:
     -----------------------------------------

     The following lists the components of the net investment in direct
     financing leases at December 31:

<TABLE>
<CAPTION>
                                                      1998             1997
                                                   -----------     ------------

<S>                                                 <C>            <C>
               Minimum lease payments receivable   $ 5,915,553      $ 6,411,161
               Estimated residual values             1,008,935        1,008,935
               Less unearned income                 (3,559,096)      (3,972,944)
                                                   -----------     ------------

Net investment in direct financing leases          $ 3,365,392      $ 3,447,152
                                                   ===========     ============
</TABLE>

                                       17
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


4.   Net Investment in Direct Financing Leases - Continued:
     -----------------------------------------------------

     The following is a schedule of future minimum lease payments to be received
     on direct financing leases at December 31, 1998:

<TABLE>
                <S>                                             <C>
                1999                                               $  495,609
                2000                                                  495,609
                2001                                                  496,766
                2002                                                  496,766
                2003                                                  496,766
                Thereafter                                          3,434,037
                                                                -------------

                                                                   $5,915,553
                                                                =============
</TABLE>

     In October 1997, the Partnership sold its property in Dunnellon, Florida,
     for $800,000 and received net sales proceeds (net of $5,055 which
     represents amounts due to the former tenant for prepaid rent) of $752,745,
     resulting in a gain of $183,701 for financial reporting purposes.  This
     property was originally acquired by the Partnership in August 1990 and had
     a cost of approximately $546,300, excluding acquisition fees and
     miscellaneous acquisition expenses; therefore, the Partnership sold the
     property for approximately $211,500 in excess of its original purchase
     price.

     The above table does not include future minimum lease payments for renewal
     periods or for contingent rental payments that may become due in future
     periods (see Note 3).

5.   Investment in Joint Ventures:
     ----------------------------

     The Partnership has a 51.1% interest, an 18 percent interest and a 4.79%
     interest in the profits and losses of Halls Joint Venture, CNL Restaurant
     Investments II, and Des Moines Real Estate Joint Venture, respectively.
     The remaining interests in these joint ventures are held by affiliates of
     the Partnership which have the same general partners.

     In February 1997, the Partnership entered into a joint venture arrangement,
     CNL Mansfield Joint Venture, with an affiliate of the Partnership which has
     the same general partners, to hold one restaurant property in Mansfield,
     Texas.  As of December 31,  1998, the Partnership owned a   79 percent
     interest, respectively, in the profits and losses of the joint venture.
     The Partnership accounts for its investment in this joint venture under the
     equity method since the Partnership shares control with the affiliate.

                                       18
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


5.   Investment in Joint Ventures - Continued:
     ----------------------------------------

     As of January 1, 1997, the Partnership had a 48.33% interest in a property
     in Yuma, Arizona, with an affiliate of the Partnership that has the same
     general partners, as tenants-in-common.  In October 1997, the Partnership
     and the affiliate, as tenants-in-common, sold the property in Yuma,
     Arizona, for a total sales price of $1,010,000 and received net sales
     proceeds of $982,025 resulting in a gain of approximately $128,400 for
     financial reporting purposes.  The property was originally acquired in July
     1994 and had a total cost of approximately $861,700, excluding acquisition
     fees and miscellaneous acquisition expenses; therefore, the property was
     sold for approximately $120,300 in excess of its original purchase price.
     In December 1997, the Partnership reinvested its portion of the net sales
     proceeds from the sale of the Yuma, Arizona, property, along with funds
     from the sale of a wholly-owned Property in Columbus, Indiana, in a
     property in Miami, Florida, as tenants-in-common with affiliates of the
     general partners.  The Partnership accounts for its investment in the
     property in Miami, Florida, using the equity method since the Partnership
     shares control with affiliates, and amounts relating to its investment are
     included in investment in joint ventures.  As of December 31, 1998, the
     Partnership owned a 35.64% interest in the Miami, Florida property owned
     with affiliates as tenants-in-common.

     In December 1997, the Partnership acquired a property in Smithfield, North
     Carolina as tenants-in-common with an affiliate of the general partners.
     The Partnership accounts for its investment in this property using the
     equity method since the Partnership shares control with an affiliate, and
     amounts relating to its investment are included in investment in joint
     ventures.  As of December 31, 1998, the Partnership owned a 53 percent
     interest in this property.

     CNL Restaurant Investments II owns and leases six properties to an operator
     of national fast-food or family-style restaurants, and Halls Joint Venture,
     Des Moines Real Estate Joint Venture, CNL Mansfield Joint Venture, and the
     Partnership and affiliates as tenants-in-common  in  two  separate
     tenancy-in-common  arrangements,  each  own   and   lease   one

                                       19
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


5.   Investment in Joint Ventures - Continued:
     ----------------------------------------

     property to an operator of national fast-food or family-style restaurants.
     The following presents the combined, condensed financial information for
     the joint ventures and the two properties held as tenants-in-common with
     affiliates at December 31:

<TABLE>
<CAPTION>
                                           1998                1997
                                        --------------     -------------

<S>                                     <C>               <C>
Land and buildings on operating
 leases, less accumulated
 depreciation                             $10,612,379       $10,892,405
Cash                                            3,763               750
Receivables                                    21,249            18,819
Accrued rental income                         178,775           147,685
Other assets                                    1,116             1,079
Liabilities                                     8,916             8,625
Partners' capital                          10,808,366        11,052,113
Revenues                                    1,324,602         1,012,624
Gain on sale of land and building                  --           128,371
Net income                                  1,028,391           905,117
</TABLE>

     The Partnership recognized income totalling $311,081, $267,251, and
     $157,254 for the years ended December 31, 1998, 1997, and 1996,
     respectively, from these joint ventures and the two properties held as
     tenants-in-common with affiliates.

6.   Mortgage Notes Receivable:
     -------------------------

     In connection with the sale of its property in Florence, South Carolina
     during 1995, the Partnership accepted a promissory note in the principal
     sum of $1,160,000, collateralized by a mortgage on the property.  The
     promissory note bears interest at a rate of 10.25% per annum and is being
     collected in 59 equal monthly installments of $10,395, with a balloon
     payment of $1,105,715 due in July 2000.

     In addition, the Partnership accepted a promissory note in the principal
     sum of $240,000 in connection with the sale of its property in
     Jacksonville, Florida in December 1995.  The note is collateralized by a
     mortgage on the property.  The promissory note bears interest at a rate of
     ten percent per annum and is being collected in 119 equal monthly
     installments of $2,106, with a balloon payment of $218,252 due in December
     2005.

                                       20
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


6.   Mortgage Notes Receivable - Continued:
     -------------------------------------

     The mortgage notes receivable consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                  1998           1997
                                               -----------   ------------

        <S>                                    <C>           <C>
        Principal balance                       $1,357,877     $1,368,688
        Accrued interest receivable                  8,457          8,212
        Less deferred gain on sale of land
          and building                            (125,278)      (126,303)
                                               -----------   ------------

                                                $1,241,056     $1,250,597
                                               ===========   ============
</TABLE>

     The general partners believe that the estimated fair values of mortgage
     notes receivable at December 31, 1998 and 1997, approximate the outstanding
     principal amount based on estimated current rates at which similar loans
     would be made to borrowers with similar credit and for similar maturities.

7.   Allocations and Distributions:
     -----------------------------

     Generally, all net income and net losses of the Partnership, excluding
     gains and losses from the sale of properties, are allocated 99 percent to
     the limited partners and one percent to the general partners.
     Distributions of net cash flow are made 99 percent to the limited partners
     and one percent to the general partners; provided, however, that the one
     percent of net cash flow to be distributed to the general partners is
     subordinated to receipt by the limited partners of an aggregate, ten
     percent, cumulative, noncompounded annual return on their adjusted capital
     contributions (the "10% Preferred Return").

     Generally, net sales proceeds from the sale of properties not in
     liquidation of the Partnership, to the extent distributed, will be
     distributed first to the limited partners in an amount sufficient to
     provide them with their 10% Preferred Return, plus the return of their
     adjusted capital contributions.  The general partners will then receive, to
     the extent previously subordinated and unpaid, a one percent interest in
     all prior distributions of net cash flow and a return of their capital
     contributions.  Any remaining sales proceeds will be distributed 95 percent
     to the limited partners and five percent to the general partners.  Any gain
     from the sale of a property not in liquidation of the Partnership is, in
     general, allocated in the same manner as net sales proceeds are
     distributable.  Any loss from the sale of a property not in liquidation of
     the Partnership is, in general, allocated first, on a pro rata basis, to
     partners with positive balances in their capital accounts; and thereafter,
     95 percent to the limited partners and five percent to the general
     partners.

                                       21
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


7.   Allocations and Distributions - Continued:
     -----------------------------------------

     Generally, net sales proceeds from a liquidating sale of properties, will
     be used in the following order: i) first to pay and discharge all of the
     Partnership's liabilities to creditors, ii) second, to establish reserves
     that may be deemed necessary for any anticipated or unforeseen liabilities
     or obligations of the Partnership, iii) third, to pay all of the
     Partnership's liabilities, if any, to the general and limited partners, iv)
     fourth, after allocations of net income, gains and/or losses, to distribute
     to the partners with positive capital accounts balances, in proportion to
     such balances, up to amounts sufficient to reduce such positive balances to
     zero, and v) thereafter, any funds remaining shall then be distributed 95
     percent to the limited partners and five percent to the general partners.

     During each of the years ended December 31, 1998, 1997, and 1996, the
     Partnership declared distributions to the limited partners of $2,700,000.
     No distributions have been made to the general partners to date.

                                       22
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997 and 1996


8.   Income Taxes:
     ------------

     The following is a reconciliation of net income for financial reporting
     purposes to net income for federal income tax purposes for the years ended
     December 31:

<TABLE>
<CAPTION>
                                                                       1998                    1997                    1996
                                                                ---------------          --------------         ---------------

<S>                                                               <C>                      <C>                    <C>
Net income for financial reporting purposes                          $2,466,018              $2,606,008              $2,326,863

Depreciation for tax reporting purposes in excess
 of depreciation for financial reporting
 purposes                                                               (16,795)                (25,552)                (24,753)

Gain on sale of land and buildings for financial
 reporting purposes in excess of gain for tax
 reporting purposes                                                        (246)               (178,348)               (163,152)

Direct financing leases recorded as operating
 leases for tax reporting purposes                                       81,760                  76,941                  70,329

Equity in earnings of unconsolidated joint
 ventures for tax reporting purposes in excess
 of (less than) equity in earnings of
 unconsolidated joint ventures for financial
  reporting purposes                                                     11,026                 (55,911)                  1,420

Accrued rental income                                                   (90,896)               (102,142)               (104,639)

Rents paid in advance                                                   (12,644)                 21,966                  26,722

Minority interest in timing differences of
 unconsolidated joint venture                                               982                     981                     981

Allowance for uncollectible accounts                                     (4,106)                     --                      --

Capitalization of transaction costs for tax
 reporting purposes                                                      18,781                      --                      --

Other                                                                        --                 (10,275)                     --
                                                                ---------------          --------------         ---------------

Net income for federal income tax purposes                           $2,453,880              $2,333,668              $2,133,771
                                                                ===============          ==============         ===============
</TABLE>

                                       23
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


9.   Related Party Transactions:
     --------------------------

     One of the individual general partners, James M. Seneff, Jr., is one of the
     principal shareholders of CNL Group, Inc., the majority stockholder of CNL
     Fund Advisors, Inc.  The other individual general partner, Robert A.
     Bourne, serves as treasurer, director and vice chairman of the board of CNL
     Fund Advisors.  During the years ended December 31, 1998, 1997, and 1996,
     CNL Fund Advisors, Inc. (hereinafter referred to as the "Affiliate")
     performed certain services for the Partnership, as described below.

     During the years ended December 31, 1998, 1997, and 1996, the Affiliate
     acted as manager of the Partnership's properties pursuant to a management
     agreement with the Partnership.  In connection therewith, the Partnership
     agreed to pay the Affiliate an annual, noncumulative, subordinated
     management fee of one percent of the sum of gross revenues from properties
     wholly owned by the Partnership and the Partnership's allocable share of
     gross revenues from joint ventures and the properties held as tenants-in-
     common with affiliates, but not in excess of competitive fees for
     comparable services.  These fees will be incurred and will be payable only
     after the limited partners receive their 10% Preferred Return.  Due to the
     fact that these fees are noncumulative, if the limited partners have not
     received their 10% Preferred Return in any particular year, no management
     fee will be due or payable for such year.  As a result of such threshold,
     no management fees were incurred during the years ended December 31, 1998,
     1997, and 1996.

     The Affiliate is also entitled to receive a deferred, subordinated real
     estate disposition fee, payable upon the sale of one or more properties
     based on the lesser of one-half of a competitive real estate commission or
     three percent of the sales price if the Affiliate provides a substantial
     amount of services in connection with the sale.  However, if the net sales
     proceeds are reinvested in a replacement property, no such real estate
     disposition fees will be incurred until such replacement property is sold
     and the net sales proceeds are distributed.  The payment of the real estate
     disposition fee is subordinated to receipt by the limited partners of their
     aggregate  10% Preferred Return,  plus their  adjusted capital
     contributions.  No deferred, subordinated real estate disposition fees were
     incurred for the years ended December 31, 1998, 1997, and 1996.

     During the years ended December 31, 1998, 1997, and 1996, the Affiliate
     provided accounting and administrative  services to the Partnership on a
     day-to-day basis.  The Partnership incurred $87,256, $77,078, and 92,985
     for the years ended December 31, 1998, 1997, and 1996, respectively, for
     such services.

                                       24
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996

9.   Related Party Transactions - Continued:
     --------------------------------------

     The due to related parties consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                 1998                     1997
                                                           -----------------        ----------------
     Due to Affiliates:
<S>                                                        <C>                      <C>
       Expenditures incurred on behalf of the
         Partnership                                             $10,111                 $20,321
       Accounting and administrative services                      7,800                   7,362
       Deferred, subordinated real estate disposition fee          7,200                   7,200
                                                           -----------------        ----------------

                                                                 $25,111                 $34,883
                                                           =================        ================
</TABLE>

10.  Concentration of Credit Risk:
     ----------------------------

     The following schedule presents total rental and earned income from
     individual lessees, each representing more than ten percent of the
     Partnership's total rental and earned income (including the Partnership's
     share of total rental and earned income from the unconsolidated joint
     ventures and the two properties held as tenants-in-common with affiliates),
     for each of the years ended December 31:

<TABLE>
<CAPTION>
                                                               1998                 1997                 1996
                                                         ---------------      ---------------      ---------------

<S>                                                        <C>                  <C>                  <C>
Golden Corral Corporation                                       $732,650             $625,724             $608,852
Restaurant Management
 Services, Inc.                                                  448,691              444,069              446,867
Waving Leaves, Inc.                                              300,546                  N/A                   --
Flagstar Enterprises, Inc.                                           N/A              307,738              464,042
</TABLE>

     In addition, the following schedule presents total rental and earned income
     from individual restaurant chains, each representing more than ten percent
     of the Partnership's total rental and earned income (including the
     Partnership's share of total rental and earned income from the
     unconsolidated joint ventures and the two properties held as tenants-in-
     common with affiliates) for each of the years ended December 31:

<TABLE>
<CAPTION>
                                                              1998                 1997                 1996
                                                        ---------------      ---------------      ---------------

<S>                                                       <C>                  <C>                  <C>
Golden Corral Family
 Steakhouse Restaurants                                        $732,650             $625,724             $608,852
Burger King                                                     469,984              466,626              478,901
Hardees                                                         451,348              447,074              524,625
</TABLE>

                                       25
<PAGE>

                           CNL INCOME FUND VII, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


10.  Concentration of Credit Risk - Continued:
     ----------------------------------------

     The information denoted by N/A indicates that for each period presented,
     the tenant and the chains did not represent more than ten percent of the
     Partnership's total rental and earned income.

     Although the Partnership's properties are geographically diverse throughout
     the United States and the Partnership's lessees operate a variety of
     restaurant  concepts, default by  any one of these lessees or restaurant
     chains could significantly impact the results of operations of the
     Partnership if the Partnership is not able to re-lease the properties in a
     timely manner.

11.  Subsequent Event:
     ----------------

     On March 11, 1999, the Partnership entered into an Agreement and Plan of
     Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which
     the Partnership would be merged with and into a subsidiary of APF (the
     "Merger").  As consideration for the Merger, APF has agreed to issue
     3,202,371 shares of its common stock, par value $0.01 per shares (the "APF
     Shares").  In order to assist the general partners in evaluating the
     proposed merger consideration, the general partners retained Valuation
     Associates, a nationally recognized real estate appraisal firm, to appraise
     the Partnership's restaurant property portfolio.  Based on Valuation
     Associates' appraisal, the fair value of the Partnership's property
     portfolio and other assets was $31,543,529 as of December 31, 1998.  The
     APF Shares are expected to be listed for trading on the New York Stock
     Exchange concurrently with the consummation of the Merger, and, therefore,
     would be freely tradable at the option of the former limited partners.  At
     a special meeting of the partners, limited partners holding in excess of
     50% of the Partnership's outstanding limited partnership interests must
     approve the Merger prior to consummation of the transaction.  The general
     partners intend to recommend that the limited partners of the Partnership
     approve the Merger.  In connection with their recommendation, the general
     partners will solicit the consent of the limited partners at the special
     meeting.  If the limited partners reject the Merger, the Partnership will
     bear the portion of the transaction costs based upon the percentage of
     "For" votes and the general partners will bear the portion of such
     transaction costs based upon the percentage of "Against" votes and
     abstentions.

                                       26
<PAGE>

            Additional Financial Information regarding Golden Corral

     The attached combined statements of revenues and direct operating expenses
and combined statements of cash flows (the "Golden Corral Restaurant Property
Financial Statements") were prepared from financial information derived from the
audited financials of Golden Corral Corporation, the lessee of four restaurant
properties of the Partnership ("Golden Corral").  The Golden Corral Restaurant
Property Financial Statements depict the operating results and cash flows of the
individual properties owned by the Partnership and not the operations of Golden
Corral.  The audited financial statements of Golden Corral are not publicly
available, and Golden Corral does not make any guarantee regarding the future
operating results of the restaurant properties.  Golden Corral is able to
consolidate the cash generated from the Partnership's restaurant properties with
the cash generated from other properties not owned by the Partnership.  As a
result, cash generated from the Partnership's restaurant properties may be used
by Golden Corral to pay its obligations with respect to other properties in its
portfolio and for normal working capital purposes.  THEREFORE, THE CASH
GENERATED FROM THE GOLDEN CORRAL RESTAURANT PROPERTIES OWNED BY THE PARTNERSHIP
IS NOT NECESSARILY INDICATIVE OF GOLDEN CORRAL'S ABILITY TO PAY ITS LEASE
OBLIGATIONS WITH RESPECT TO SUCH PROPERTIES.

                                       27
<PAGE>

INDEPENDENT AUDITORS' REPORT
----------------------------

To the Board of Directors and Stockholders
Golden Corral Corporation and Subsidiaries
Raleigh, North Carolina


We have audited the accompanying combined statements of revenues and direct
operating expenses and cash flows of the four Golden Corral restaurants included
in CNL Income Fund VII, Ltd. ("Four Golden Corral Restaurants") for the years
ended December 30, 1998 and December 31, 1997.  These statements are the
responsibility of Golden Corral Corporation'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.

As described in Note 1, the accompanying financial statements were prepared
solely to comply with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Form 10-K/A of CNL Income Fund VII, Ltd. and are
not intended to be a complete presentation of the results of operations and cash
flows of the Four Golden Corral Restaurants.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined revenues and direct operating
expenses and cash flows of the Four Golden Corral Restaurants for the years
ended December 30, 1998 and December 31, 1997, in conformity with generally
accepted accounting principles.


Raleigh, North Carolina                                /s/ KPMG LLP
November 5, 1999

                                       28
<PAGE>

FOUR GOLDEN CORRAL RESTAURANTS

Combined Statements of Revenues and Direct Operating Expenses
For The Years Ended December 30, 1998 and December 31, 1997
------------------------------------------------------------------------------

                                                      1998            1997
                                                 --------------  --------------

Revenues
 Net restaurant sales                            $   10,084,080  $    9,540,937
                                                 --------------  --------------

Direct Operating Expenses
 Cost of sales                                        3,950,722       3,666,995
 Labor and labor expense                              2,374,992       2,280,964
 Manager controllables                                1,251,920       1,202,743
 Non-controllables                                    2,372,953       2,223,617
 Bonus expense                                          230,161         211,924
                                                 --------------  --------------
                                                     10,180,748       9,586,243
                                                 --------------  --------------

Net Loss                                         $      (96,668) $      (45,306)
                                                 ==============  ==============


See accompanying notes to financial statements.

------------------------------------------------------------------------------

                                       29
<PAGE>

FOUR GOLDEN CORRAL RESTAURANTS

Combined Statements of Cash Flows
For The Years Ended December 30, 1998 and December 31, 1997
--------------------------------------------------------------------------------

                                                      1998             1997
                                                   -----------      ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss                                           $   (96,668)     $  (45,306)
(Decrease) Increase In Cash Due To Changes In
   Receivables                                            (118)         (8,864)
   Inventories                                          23,229         (35,725)
   Other current assets                                (21,128)          2,413
   Accounts payable                                      4,547          84,497
   Accrued liabilities                                  53,305          12,742
                                                   -----------      ----------
                                                       (36,833)          9,757
                                                   -----------      ----------
CASH FLOWS FROM FINANCING ACTIVITIES
   (Decrease) increase in amounts due to Golden
    Corral Corporation
                                                       (28,787)         65,906
                                                   -----------      ----------
                                                       (28,787)         65,906
                                                   -----------      ----------
NET (DECREASE) INCREASE IN CASH                        (65,620)         75,663
CASH, BEGINNING                                        182,749         107,086
                                                   -----------      ----------

CASH, ENDING                                       $   117,129      $  182,749
                                                   ===========      ==========



See accompanying notes to financial statements.

------------------------------------------------------------------------------

                                       30
<PAGE>

FOUR GOLDEN CORRAL RESTAURANTS

Notes to Combined Statements of Revenues and Direct Operating Expenses and
Cash Flows
December 30, 1998 and December 31, 1997
------------------------------------------------------------------------------

1.   BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

     The Four Golden Corral Restaurants are parties to leasing arrangements for
     land and building leases with CNL Income Fund VII, Ltd. The Restaurants are
     located in El Paso, Midland, Harlingen and Odessa, Texas and are operated
     by Golden Corral Corporation. The accompanying combined financial
     statements present the revenues and direct operating costs and the related
     cash flows of the Four Golden Corral Restaurants.

     The combined financial statements have been prepared to comply with the
     rules and regulations of the Securities and Exchange Commission for the
     inclusion in the Form 10-K/A of CNL Income Fund VII, Ltd. and are not
     intended to be a complete presentation of the financial position, results
     of operations and cash flows as if the Four Golden Corral Restaurants had
     operated as a stand- alone company. The Four Golden Corral Restaurants were
     not operated as a stand-alone business within Golden Corral Corporation and
     the presentation does not include certain indirect expenses of the Four
     Golden Corral Restaurants which were incurred by Golden Corral Corporation.
     Therefore, the accompanying combined financial statements are not
     representative of the complete financial position, results of operations or
     cash flows of the Four Golden Corral Restaurants for the periods presented.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Use of Estimates - The combined statements of the Four Golden Corral
     ----------------
     Restaurants are presented on the accrual basis in conformity with generally
     accepted accounting principles, which require management to make estimates
     and assumptions that affect the reported amounts of assets, liabilities,
     revenues and expenses during the reporting period, and of contingent assets
     and liabilities at the date of the financial statements. Actual results
     could differ from these estimates.

     Fiscal Year - The Restaurants use a thirteen four-week period, fifty-
     -----------
     two/fifty-three week fiscal year with the year ending on the Wednesday
     closest to December 31. The years ended December 30, 1998 and December 31,
     1997, included fifty-two weeks.

     Inventories - Inventories are valued at the lower of first-in, first-out
     -----------
     cost or market.

     Income Taxes - Income taxes have not been provided in the financial
     ------------
     statements as the Four Golden Corral Restaurants are part of Golden Corral
     Corporation and Subsidiaries and income taxes were not allocated to the
     individual restaurant level.

     Non-controllables - Non-controllables consist of expenses for land and
     -----------------
     building rent, equipment rent, advertising, general liability insurance,
     property taxes and licenses, and administrative services paid by the
     restaurant.

3.   LEASE ARRANGEMENTS

                                       31
<PAGE>

     CNL Income Fund VII, Ltd. and the Four Golden Corral Restaurants are
     parties to various leasing arrangements for restaurant facilities. Leases
     for restaurant facilities are for terms of 15 years with cancellation
     provisions and purchase or substitution provisions on certain leases and
     generally provide for minimum rentals plus a percentage of sales in excess
     of stated amounts. The Four Golden Corral Restaurants are obligated for the
     cost of property taxes, insurance and maintenance.

     Lease Obligations - Minimum rental payments due under leases having terms
     -----------------
     in excess of one year at December 30, 1998 are as follows:

        1999                                                    $    591,000
        2000                                                         591,000
        2001                                                         591,000
        2002                                                         591,000
        2003                                                         591,000
        Later years                                                  870,000
                                                                ------------
        Total minimum lease commitments                         $  3,825,000
                                                                ============

  Expense - Rent expense for restaurant facilities is included in non-
  -------
  controllables and is summarized below:

                                                     1998           1997
                                                 ------------   ------------
        Minimum rentals on operating leases      $    600,000   $    600,000

        Contingent rentals                             53,000         36,000
                                                 ------------   ------------

                                                 $    653,000   $    636,000
                                                 ============   ============

4.   RELATED PARTY TRANSACTIONS

  The following summarizes transactions with related parties:

                                                     1998           1997
                                                 ------------   ------------
        Amounts paid to Golden Corral
         Corporation and Subsidiaries for:

        Administrative services, included in
         non-controllables                       $    504,435   $    477,248
                                                 ============   ============

        Equipment rent, included in
         non-controllables                       $    719,114   $    622,880
                                                 ============   ============

        Workers' compensation insurance,
         included in labor and labor expense     $    127,964   $    142,640
                                                 ============   ============

        General liability insurance,
         included in non-controllables           $     82,711   $    133,875
                                                 ============   ============
        Advertising, included in
         non-controllables                       $    212,142   $    194,309
                                                 ============   ============

     Excess cash generated by the Four Golden Corral Restaurants is transferred
     to Golden Corral Corporation. Cash shortfalls by the Four Golden Corral
     Restaurants are funded by Golden Corral

                                       32
<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 17th day of
December, 1999.

                                         CNL INCOME FUND VII, LTD.

                                         By:  CNL REALTY CORPORATION
                                              General Partner

                                              /s/ Robert A. Bourne
                                              -------------------------------
                                              ROBERT A. BOURNE, President


                                         By:  ROBERT A. BOURNE
                                              General Partner

                                              /s/ Robert A. Bourne
                                              -------------------------------
                                              ROBERT A. BOURNE

                                         By:  JAMES M. SENEFF, JR.
                                              General Partner

                                              /s/ James M. Seneff, Jr.
                                              -------------------------------
                                              JAMES M. SENEFF, JR.

                                       33
<PAGE>

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
        Signature                                 Title                                    Date
        ---------                                 -----                                    ----
<S>                                             <C>

/s/ Robert A. Bourne                     President, Treasurer and Director           December 17, 1999
----------------------------             (Principal Financial and Accounting
Robert A. Bourne                         Officer)



/s/ James M. Seneff, Jr.                 Chief Executive Officer and Director        December 17, 1999
------------------------------------     (Principal Executive  Officer)
James M. Seneff, Jr.
</TABLE>

                                       34