<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                   FORM 10-K/A
                                 Amendment No. 1

(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)

                        400 East South Street, Suite 500
                             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, Item 2.
Properties, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Item 7A. Quantitative and Qualitative Disclosures
about Market Risk (incorporated by reference into Item 7.) 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.

                                       2
<PAGE>

     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
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.
Certain lessees 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 In-

                                       3
<PAGE>

come Fund IX, Ltd., affiliates of the General Partners, to purchase and hold six
properties; Des Moines Real Estate 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

                                       4
<PAGE>

when a suitable opportunity to purchase an additional property is not available.
The use of joint venture and tenancy 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 2.  Properties

     As of December 31, 1998, the Partnership owned 40 Properties.  Of the 40
Properties, 28 are owned by the Partnership in fee simple, ten are owned through
joint venture arrangements and two are owned through tenancy in common
arrangements.  See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements.  The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement.  Reference is made to the Schedule of
Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses.  This schedule was filed with the Partnership's Form 10-K for the year
ended December 31, 1998.

Description of Properties

     Land.  The Partnership's Property sites range from approximately 10,800 to
110,200 square feet depending upon building size and local demographic factors.
Sites purchased by the Partnership are in locations zoned for commercial use
which have been reviewed for traffic patterns and volume.

                                       5
<PAGE>

     The following table lists the Properties owned by the Partnership as of
December 31, 1998 by state.  More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with the Partnership's Form 10-K for the year ended December
31, 1998.

State                                                    Number of Properties
-----                                                    --------------------
Arizona                                                            1
Colorado                                                           1
Florida                                                           10
Georgia                                                            2
Indiana                                                            1
Louisiana                                                          1
Michigan                                                           2
Minnesota                                                          1
North Carolina                                                     1
Ohio                                                               7
Tennessee                                                          4
Texas                                                              8
Washington                                                         1
                                                             --------
TOTAL PROPERTIES:                                                 40
                                                             ========

     Buildings.  Generally, each of the Properties owned by the Partnership
includes a building that is one of a Restaurant Chain's approved designs.
However, the building located on the Checkers Property is owned by the tenant,
while the land parcel is owned by the Partnership.  In addition, the building
located on the Partnership's Property in Daytona Beach, Florida, was demolished
in accordance with a condemnation agreement during 1995.  The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile.  The sizes of the buildings owned by the
Partnership range from approximately 700 to 10,600 square feet.  All buildings
on Properties are freestanding and surrounded by paved parking areas.  Buildings
are suitable for conversion to various uses, although modifications may be
required prior to use for other than restaurant operations.  As of December 31,
1998, the Partnership had no plans for renovation of the Properties.
Depreciation expense is computed for buildings and improvements using the
straight line method using depreciable lives of 40 years for federal income tax
purposes.  As of December 31, 1998, the aggregate cost of the Properties owned
by the Partnership (including its consolidated joint venture) and the
unconsolidated joint ventures (including the Properties owned through tenants-
in-common arrangements), for federal income tax purposes was $21,303,689 and
$12,109,904, respectively.

     The following table lists the Properties owned by the Partnership as of
December 31, 1998 by Restaurant Chain.

Properties                                               Number of Properties
----------                                               --------------------
Boston Market                                                      1
Burger King                                                       10
Checkers                                                           1
Chevy's Fresh Mex                                                  1
Church's                                                           2
Golden Corral                                                      5
Hardee's                                                           6
Jack in the Box                                                    3
KFC                                                                2
Popeye's                                                           5
Rally's                                                            1
Shoney's                                                           2
Taco Bell                                                          1
                                                             --------
TOTAL PROPERTIES:                                                 40
                                                             ========

     The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.

                                       6
<PAGE>

     The General Partners believe that the Properties are adequately covered by
insurance.  In addition, the General Partners have obtained contingent liability
and property coverage for the Partnership.  This insurance is intended to reduce
the Partnership's exposure in the unlikely event a tenant's insurance policy
lapses or is insufficient to cover a claim relating to the Property.

     Leases.  The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains.  The leases are generally on
a long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance.  Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain.  These capital expenditures are required to be
paid by the lessee during the term of the lease.  The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.

     At December 31, 1998, 1997, 1996, 1995, and 1994 all of the Properties were
occupied.  The following is a schedule of the average annual rent for each of
the five years ended December 31:

<TABLE>
<CAPTION>
                                            For the Year Ended December 31:
                             1998          1997          1996          1995          1994
                      ----------------------------------------------------------------------
<S>                       <C>           <C>           <C>           <C>           <C>
Rental Income (1)         $2,879,831    $2,751,418    $2,850,721    $2,699,624    $2,939,995
Properties                        40            40            40            41            43
Average per Unit          $   71,996    $   68,785    $   71,268    $   65,844    $   68,372
</TABLE>

(1)  Rental income includes the Partnership's share of rental income from the
     Properties owned through joint venture arrangements and the Properties
     owned through tenancy in common arrangements. Rental revenues have been
     adjusted, as applicable, for any amounts for which the Partnership has
     established an allowance for doubtful accounts.

     The following is a schedule of lease expirations for leases in place as of
December 31, 1998 for each of the ten years beginning with 1999 and thereafter.

                                                        Percentage of
                           Number      Annual Rental     Gross Annual
   Expiration Year        of Leases      Revenues       Rental Income
---------------------------------------------------------------------

         1999                    --               --               --
         2000                    --               --               --
         2001                    --               --               --
         2002                    --               --               --
         2003                     2          137,991             5.08%
         2004                     2          179,231             6.60%
         2005                     9          571,939            21.06%
         2006                     1           62,086             2.29%
         2007                    --               --               --
         2008                     1           92,440             3.40%
      Thereafter                 25        1,672,147            61.57%
                               ----      -----------         --------
        Totals                   40        2,715,834           100.00%
                               ====      ===========         ========

     Leases with Major Tenants.  The terms of each of the leases with the
Partnership's major tenants as of December 31, 1998 (see Item 1.  Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.

     Golden Corral Corporation leases five Golden Corral restaurants.  The
initial term of each lease is 15 years (expiring between 2004 and 2012) and the
average minimum base annual rent is approximately $148,700 (ranging from
approximately $137,100 to $166,700).

     Restaurant Management Services, Inc. leases five Popeyes restaurants, one
Shoney's restaurant, one Church's Fried Chicken restaurant and one site
currently consisting of land only (formerly operated as a Church's

                                       7
<PAGE>

Fried Chicken). The initial term of each lease is 19 to 20 years (expiring
between 2009 and 2010) and the average minimum base annual rent is approximately
$53,700 (ranging from approximately $22,100 to $121,000).

     Waving Leaves, Inc. leases four Hardee's restaurants.  The initial term of
each lease is 20 years (expiring in 2010) and the average minimum base annual
rent is approximately $79,200 (ranging from approximately $70,300 to $89,400).

Competition

     The fast-food and family-style restaurant business is characterized by
intense competition.  The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.

                                       8
<PAGE>

                                     PART II


Item 7.   Management's Discussion and Analysis of Financial Condition and
Results of Operations

     The Partnership was organized on August 18, 1989, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains.
The leases are generally triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities.  As of December 31, 1998, the Partnership owned 40 Properties, either
directly or indirectly through joint venture or tenancy in common arrangements.

Capital Resources

     The Partnership's primary source of capital for the years ended December
31, 1998, 1997, and 1996, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $2,790,975, $2,840,459, and
$2,670,869 for the years ended December 31, 1998, 1997, and 1996, respectively.
The decrease in cash from operations during 1998, as compared to 1997, is
primarily a result of changes in the Partnership's working capital.  The
increase in cash from operations during 1997, as compared to 1996, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below and changes in the Partnership's working capital.

     Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.

     In March 1996, the Partnership entered into an agreement with the tenant of
the Property in Daytona Beach, Florida, for payment of certain rental payment
deferrals the Partnership had granted to the tenant through March 31, 1996.
Under the agreement, the Partnership agreed to abate approximately $13,200 of
the rental payment deferral amounts.  The tenant made payments of approximately
$5,700 in each of April 1996, March 1997, and June 1998 in accordance with the
terms of the agreement, and has agreed to pay the Partnership the remaining
balance due of approximately $22,300 in four remaining annual installments
through 2002.

     In July 1996, the Partnership sold its Property in Colorado Springs,
Colorado, for $1,075,000, and received net sales proceeds of $1,044,909,
resulting in a gain of $194,839 for financial reporting purposes.  This Property
was originally acquired by the Partnership in July 1990 and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$144,000 in excess of its original purchase price.  In October 1996,  the
Partnership reinvested the net sales proceeds, along with additional funds, in a
Boston Market Property located in Marietta, Georgia.  A portion of the
transaction relating to the sale of the Property in Colorado Springs, Colorado,
and the reinvestment of the net sales proceeds were structured to qualify as a
like-kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code.  The Partnership distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes resulting from the sale.

     In addition, in October 1996, the Partnership sold its Property in
Hartland, Michigan, for $625,000 and received net sales proceeds of $617,035,
resulting in a loss of approximately $235,465, for financial reporting purposes.
In February 1997, the Partnership reinvested the net sales proceeds in CNL
Mansfield Joint Venture.  The Partnership has a 79 percent interest in the
profits and losses of CNL Mansfield Joint Venture and the remaining interest in
this joint venture is held by an affiliate of the Partnership which has the same
General Partners.

     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.  In December 1997, the Partnership
reinvested the net sales proceeds, along with additional funds, in a Property in
Miami, Florida, as tenants-in-common with affiliates of the General Partner, in
exchange for a 35.64% interest in this Property.

     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 acqui-

                                       9
<PAGE>

sition expenses; therefore, the Partnership sold the Property for approximately
$211,500 in excess of its original purchase price. In December 1997, the
Partnership reinvested these net sales proceeds in a Property in Smithfield,
North Carolina, as tenants-in-common with an affiliate of the General Partner.
The General Partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Dunnellon, Florida and the reinvestment
of the net sales proceeds in the Property in Smithfield, North Carolina, will
qualify as a like- kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code. However, the Partnership will distribute amounts
sufficient to enable the Limited Partners to pay federal and state income taxes,
if any, (at a level reasonably assumed by the General Partners) resulting from
the sale.

     In addition, in October 1997, the Partnership and an affiliate, as tenants-
in-common, sold the Property in Yuma, Arizona, in which the Partnership owned a
48.33% interest, for a total sales price of $1,010,000 and received net sales
proceeds of $982,025, resulting in a gain, to the tenancy-in-common, 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 the wholly-owned Property in Columbus, Indiana, in a
Property in Miami, Florida, as tenants-in-common with affiliates of the General
Partners.  The General Partners believe that the transaction, or a portion
thereof, relating to the sale of the Property in Yuma, Arizona and the
reinvestment of the net sales proceeds in the Property in Miami, Florida, will
qualify as a like-kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code.  However, the Partnership will distribute amounts
sufficient to enable the Limited Partners to pay federal and state income taxes,
if any, (at a level reasonably assumed by the General Partners) resulting from
the sale.

     None of the Properties owned by the Partnership, or the joint ventures or
tenancy in common arrangements in which the Partnership owns an interest, is or
may be encumbered.  Under its Partnership Agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf of the
Partnership.  Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.

     Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of Properties, pending reinvestment in additional
Properties, are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks, CDs and
money market accounts with less than a 30-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or make
distributions to the partners.  At December 31, 1998, the Partnership had
$856,825 invested in such short-term investments, as compared to $761,317 at
December 31, 1997.  As of December 31, 1998, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately two percent annually.  The funds remaining at December 31, 1998,
will be used for the payment of distributions and other liabilities.

Short-Term Liquidity

     The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.

     The Partnership's investment strategy of acquiring Properties for cash and
leasing them under triple-net leases to operators who generally meet specified
financial standards minimizes the Partnership's operating expenses.  The General
Partners believe that the leases will continue to generate cash flow in excess
of operating expenses.

     Due to low operating expenses and ongoing cash flow, the General Partners
believe that the Partnership has sufficient working capital reserves at this
time.  In addition, because all leases of the Partnership's Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.

     The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.

     The Partnership generally distributes cash from operations remaining after
the payment of the operating expenses of the Partnership, to the extent that the
General Partners determine that such funds are available for distribution.
Based primarily on cash from operations, the Partnership declared distributions
to the Limited Partners of

                                       10
<PAGE>

$2,700,000 for each of the years ended December 31, 1998, 1997, and 1996. This
represents distributions of $0.090 per Unit for each of the years ended December
31, 1998, 1997, and 1996. No amounts distributed to the Limited Partners for the
years ended December 31, 1998, 1997, and 1996 are required to be or have been
treated by the Partnership as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions. The
Partnership intends to continue to make distributions of cash available for
distribution to the Limited Partners on a quarterly basis.

     During 1998, 1997, and 1996, affiliates of the General Partners incurred on
behalf of the Partnership $86,851, $74,968, and $97,288, respectively, for
certain operating expenses.  As of December 31, 1998 and 1997, the Partnership
owed $17,911 and $27,683, respectively, to affiliates for such amounts and
accounting and administrative services.  As of March 11, 1999, the Partnership
had reimbursed the affiliates all such amounts.  In addition, as of December 31,
1998 and 1997, the Partnership owed $7,200 in real estate disposition fees to an
affiliate as a result of its services in connection with the 1995 sale of the
Property in Jacksonville, Florida.  The payment of such fees is deferred until
the Limited Partners have received the sum of their 10% Preferred Return and
their adjusted capital contributions.  Total liabilities, including
distributions payable, of the Partnership decreased to $732,746 at December 31,
1998, from $749,587 at December 31, 1997 primarily as a result of a decrease in
rents paid in advance at December 31, 1998.  The General Partners believe that
the Partnership has sufficient cash on hand to meet its current working capital
needs.

Long-Term Liquidity

     The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations

     During 1996, the Partnership and its consolidated joint venture, San
Antonio #849 Joint Venture, owned and leased 33 wholly owned Properties
(including two Properties in Colorado Springs, Colorado, and Hartland, Michigan,
which were sold in July and October 1996, respectively), during 1997, the
Partnership and its consolidated joint venture, San Antonio #849 Joint Venture,
owned and leased 31 wholly owned Properties (including two Properties in
Columbus, Indiana and Dunnellon, Florida, which were sold in May and October
1997, respectively), and during 1998, the Partnership and its consolidated joint
venture, San Antonio #849 Joint Venture, owned and leased 29 wholly owned
Properties.  In addition, during 1996, the Partnership and its consolidated
joint venture, San Antonio #849 Joint Venture, was a co-venturer in three
separate joint ventures which owned and leased eight Properties and owned and
leased one Property with an affiliate as tenants-in-common.  During 1997, the
Partnership and its consolidated joint venture, San Antonio #849 Joint Venture,
was a co-venturer in four separate joint ventures which owned and leased nine
Properties and owned and leased three Properties with affiliates as tenants-in-
common (including one Property in Yuma, Arizona which was sold in October 1997),
and during 1998, the Partnership and its consolidated joint venture, San Antonio
#849 Joint Venture, was a co-venturer in four separate joint ventures which
owned and leased nine Properties and owned and leased two Properties with
affiliates as tenants-in-common.  As of December 31, 1998, the Partnership and
its consolidated joint venture, San Antonio #849 Joint Venture, owned (either
directly, as tenants-in-common with an affiliate or through joint venture
arrangements) 40 Properties which are generally subject to long-term, triple-net
leases.  The leases of the Properties provide for minimum base annual rental
amounts (payable in monthly installments) ranging from approximately $22,100 to
$191,900.  Substantially all 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 the 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.  For further description of the Partnership's leases
and Properties, see Item 1.  Business - Leases and Item 2.  Properties,
respectively.

     During the years ended December 31, 1998, 1997, and 1996, the Partnership
and its consolidated joint venture, San Antonio #849 Joint Venture, earned
$2,390,557, $2,436,222, and $2,459,094, respectively, in rental income from
operating leases and earned income from direct financing leases.  The decrease
in rental and earned income during 1998 and 1997, each as compared to the
previous year, was attributable to a decrease in rental and earned income as a
result of the sales of the Properties in Colorado Springs, Colorado; Hartland,
Michigan; Columbus, Ohio and Dunnellon, Florida, in July 1996, October 1996, May
1997 and October 1997, respectively.  The decrease in 1997, as compared to 1996,
was partially offset by an increase in rental and earned income as a result of
reinvesting the net sales proceeds from the sale of the Property in Colorado,
Springs, Colorado, in a Property in Marietta, Georgia, in October 1996.  Rental
and earned income are expected to remain at reduced amounts in future years as a
result of reinvesting the proceeds from the sales of the Properties in Hartland,
Michigan; Columbus, Ohio and Dunnellon, Florida in joint ventures and in
Properties owned with affiliates, as tenants-in-common, as described below.
However, as a result of reinvesting in joint ventures and in Properties owned
with affiliates, as tenants-in-common, net income earned by unconsolidated joint
ventures increased in 1998, as described below.

                                       11
<PAGE>

     For the years ended December 31, 1998, 1997 and 1996, the Partnership also
earned $93,906, $51,345, $44,973, respectively, in contingent rental income.
The increase in contingent rental income during 1998 and 1997, each as compared
to the previous year, is primarily a result of increased gross sales of certain
restaurant Properties requiring the payment of contingent rental income.

     During the years ended December 31, 1998, 1997, and 1996, the Partnership
earned $171,263, $183,579, $240,079, respectively, in interest and other income.
The decrease in interest and other income for 1997, as compared to 1996, is
partially attributable to the fact that during 1996, the Partnership recognized
approximately $46,500 in other income due to the fact that the corporate
franchisor of the Properties in Pueblo and Colorado Springs, Colorado, paid past
due real estate taxes relating to the Properties and the Partnership reversed
such amounts during 1996 that it had previously accrued as payable during 1995.
In addition, the decrease in interest and other income during 1997, as compared
to 1996,  was due to the fact that during 1996, the Partnership earned
approximately $10,000 in interest income on the net sales proceeds held in
escrow relating to the Property in Colorado Springs, Colorado.  These proceeds
were reinvested in a Property in Marietta, Georgia, in October 1996.

     For the years ended December 31, 1998, 1997, and 1996, the Partnership also
earned $311,081, $267,251, $157,254, respectively, attributable to net income
earned by unconsolidated joint ventures in which the Partnership is a co-
venturer and Properties owned indirectly with affiliates as tenants-in-common.
The increase in net income earned by joint ventures during the year ended 1998,
as compared to 1997, is partially due to the fact that in February 1997, the
Partnership reinvested the net sales proceeds it received from the sale, in
October 1996, of the Property in Hartland, Michigan, in CNL Mansfield Joint
Venture, with an affiliate of the Partnership which has the same General
Partners.  In addition, the increase in net income earned by joint ventures
during the year ended 1998, as compared to 1997, is partially due to the
Partnership investing in a Property in Smithfield, North Carolina, in December
1997, with affiliates of the General Partners as tenants-in-common, as described
above in "Capital Resources."  In addition, the increase in net income earned by
joint ventures during 1998 was partially offset by, and the increase in net
income earned by joint ventures during 1997, as compared to 1996, is partially
attributable to, the fact that in October 1997, the Partnership and an
affiliate, as tenants-in-common, sold the Property in Yuma, Arizona, in which
the Partnership owned a 48.33% interest.  The tenancy-in-common recognized a
gain of approximately $128,400 for financial reporting purposes, as described
above in "Capital Resources."

     During the year ended December 31, 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 during 1999.  In
addition, during the year ended December 31, 1998, three Restaurant Chains,
Golden Corral, Hardee's, and Burger King, each accounted for 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).  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.

     Operating expenses, including depreciation and amortization expense, were
$483,224, $478,614, and $516,056 for the years ended December 31, 1998, 1997,
and 1996, respectively.  The increase in operating expenses during 1998, as
compared to 1997, is primarily a result of the Partnership incurring $18,781 in
transaction costs relating to the General Partners retaining financial and legal
advisors to assist them in evaluating and negotiating the proposed Merger with
APF, as described below.  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.
The increase in operating expenses during 1998, as compared to 1997, is
partially offset be a decrease in general operating and administrative expenses.

     The decrease in operating expenses during 1997, as compared to 1996, was
primarily a result of a decrease in accounting and administrative expenses
associated with operating the Partnership and its Properties.   In addition, the
decrease in operating expenses during 1997, as compared to 1996, was due to the
fact that in July 1996, the Part-

                                       12
<PAGE>

nership sold the Property in Colorado Springs, Colorado, as discussed above in
"Capital Resources," and in connection therewith, paid approximately $9,000 in
1996 real estate taxes which were due upon the sale of the Property. Because of
the sale, no real estate taxes were recorded in 1997.

     The decrease in operating expenses during 1997, as compared to 1996, was
also partially attributable to a decrease in depreciation expense due to the
sales of the Properties in Hartland, Michigan and Colorado Springs, Colorado in
1996.  The decrease in depreciation expense was partially offset by the purchase
of the Property in Marietta, Georgia, in October 1996.

     In connection with the sale of its Property in Florence, South Carolina,
during 1995, the Partnership recognized a gain for financial reporting purposes
of $1,025, $926, $836 for the years ended December 31, 1998, 1997, and 1996,
respectively.  In accordance with Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate," the Partnership recorded the sale
using the installment sales method.  As such, the gain on sale was deferred and
is being recognized as income proportionately as payments under the mortgage
note are collected.  Therefore, the balance of the deferred gain of $125,278 at
December 31, 1998 is being recognized as income in future periods as payments
are collected.  For federal income tax purposes, a gain of approximately $97,300
from the sale of this Property was also deferred during 1995 and is being
recognized as payments under the mortgage note are collected.

     As a result of the sale of the Property in Columbus, Indiana, during 1997,
as described above in "Capital Resources," the Partnership recognized a loss of
$19,739 for financial reporting purposes, for the year ended December 31, 1997.
As a result of the sale of the Property in Dunnellon, Florida, as described
above in "Capital Resources," the Partnership recognized a gain for financial
reporting purposes of  $183,701 for the year ended December 31, 1997.

     As a result of the sale of the Property in Colorado Springs, Colorado,
during 1996, as described above in "Capital Resources," the Partnership
recognized a gain of $194,839 for financial reporting purposes for the year
ended December 31, 1996.  As a result of the sale of the Property in Hartland,
Michigan, as described above in "Capital Resources," the Partnership recognized
a loss for financial reporting purposes of $235,465 for the year ended December
31, 1996.

     The Partnership's leases as of December 31, 1998, are generally triple-net
leases and contain provisions that the General Partners believe mitigate the
adverse effect of inflation.  Such provisions include clauses requiring the
payment  of  percentage  rent based on certain restaurant sales above a
specified level and/or automatic increases in base rent at specified times
during the term of the lease. Inflation has had a minimal effect on income from
operations. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also may cause capital appreciation of the
Partnership's Properties. Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.

Proposed Merger

     On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF.  As consideration for the Merger, APF has agreed to issue
3,202,371 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 tradeable at the
option of the former Limited Partners.  At a special meeting of the Limited
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.  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.

                                       13
<PAGE>

Year 2000 Readiness Disclosure

Overview of Year 2000 Problem

     The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000.  The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to the
failure of entire systems.

Information and Non-Information Technology Systems

     The Partnership does not have any information or non-information technology
systems.  The General Partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership.  The information technology
system of the General Partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers.  The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities.  The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers.  The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.

The Y2K Team

     In early 1998, the General Partners and their affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the year 2000 problem.  The Y2K
Team consists of the General Partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.

Assessing Year 2000 Readiness

     The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems.  The Y2K Team has conducted inspections,
interviews and tests to identify which of the systems used by the Partnership
could have a potential year 2000 problem.

     The information system of the General Partners' affiliates is comprised of
hardware and software applications from mainstream suppliers.  Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the non-
information technology systems providers of the affiliates.

     In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships.  Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions.  The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.

     As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties.  All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year 2000
compliant or will be year 2000 compliant prior to the year 2000.  Although the
Y2K Team continues to receive positive responses from the companies with which
the Partnership has third party relationships regarding their year 2000
compliance, the General Partners cannot be assured that the third parties have
adequately considered the impact of the year 2000.

     In addition, the Y2K Team has requested documentation from the
Partnership's tenants.  The Y2K Team is in the process of evaluating the
responses and expects to complete this process by October 31, 1999.  The
Partnership has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.

Achieving Year 2000 Compliance

     The Y2K Team has identified and completed upgrades of the hardware
equipment that was not year 2000 compliant.  In addition, the Y2K Team has
identified and completed upgrades of the software applications that were

                                       14
<PAGE>

not year 2000 compliant, although the General Partners cannot be assured that
the upgrade solutions provided by the vendors have addressed all possible year
2000 issues.

     The cost for these upgrades and other remedial measures is the
responsibility of the General Partners and their affiliates.  The General
Partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.

Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans

Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership

     The General Partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems.  Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information or non-
information technology systems used by the Partnership is not expected to have a
material impact on the results of operations of the Partnership.  Even if such
systems failed, the payment of rent under the Partnership's leases would not be
affected.  In addition, the Y2K Team is expected to correct any Y2K problems
within the control of the General Partners and their affiliates before the year
2000.

     The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time.  However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Partnership, the Y2K Team will
develop a contingency plan if deemed necessary at that time.

Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records

     The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership.  This could result in the
inability of the Partnership to accurately identify its Limited Partners for
purposes of distributions, delivery of disclosure materials and transfer of
units.  The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance.  Despite the positive response from the
transfer agent, the General Partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.

     The Y2K Team has developed a contingency plan pursuant to which the General
Partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant.  The General Partners and their affiliates would have to allocate
resources to internally perform the functions of the transfer agent.  The
General Partners do not anticipate that the additional cost of these resources
would have a material impact on the results of operations of the Partnership.

Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance

     The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such financial institutions may be temporarily
unavailable.  The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the General
Partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues.  The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis.  The General
Partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.

     Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.

Risks of Late Payment or Non-Payment of Rent by Tenants

     The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses.  The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.  The General Partners cannot

                                       15
<PAGE>

be assured that the tenants have addressed all possible year 2000 issues. The
late payment of rent by one or more tenants would affect the results of
operations of the Partnership in the short-term.

     The General Partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis.  The General
Partners are not able to determine if such predictions are true.  A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.

     Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the General Partners will
assess the remedies available to the Partnership under its lease agreements.

Interest Rate Risk

     The Partnership has provided fixed rate mortgages to borrowers.  The
principal amounts outstanding under the mortgage notes totaled $1,795,920 at
December 31, 1998.  The General Partners believe that the estimated fair value
of the mortgage notes at December 31, 1998 approximated the outstanding
principal amounts.

     The Partnership is exposed to equity loss in the event of changes in
interest rates.  The fair value of the mortgage notes decline if interest rates
rise.
     The following table presents the expected cash flows of principal that are
sensitive to these changes.

                                                    Mortgage notes
                                                      Fixed Rates
                                                ---------------------

         1999                                              $   11,968
         2000                                               1,114,132
         2001                                                   2,195
         2002                                                   2,425
         2003                                                   2,679
         Thereafter                                           224,478
                                                ---------------------

                                                           $1,357,877
                                                =====================

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

     The information is described above in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Interest Rate Risk.


Item 8.   Financial Statements and Supplementary Data

                                       16
<PAGE>

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

                                   CONTENTS
                                   --------




                                                     Page
                                                     ----

Report of Independent Accountants                      17

Financial Statements:

  Balance Sheets                                       18

  Statements of Income                                 19

  Statements of Partners' Capital                      20

  Statements of Cash Flows                             21

  Notes to Financial Statements                        23

Additional Financial Information regarding
  Golden Corral                                        38

                                       17
<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

                                       18
<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.

                                       19
<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.

                                       20
<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)            --
 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.

                                       21
<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.

                                       22
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                    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.

                                       23
<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.

                                       24
<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.

                                       25
<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.

                                       26
<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:

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

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
                                           =============     =============

     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.

                                       27
<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:

           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
                                                     ===============

     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>

                                       28
<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:

            1999                                         $  495,609
            2000                                            495,609
            2001                                            496,766
            2002                                            496,766
            2003                                            496,766
            Thereafter                                    3,434,037
                                                     --------------

                                                         $5,915,553
                                                     ==============

     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.

                                       29
<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

                                       30
<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.

                                       31
<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:

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

          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
                                                   ============   ============

     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.

                                       32
<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.

                                       33
<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>

                                       34
<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.

                                       35
<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
                                                                                    ------------     ------------
<S>                                                                                 <C>              <C>
       Due to Affiliates:
        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>

                                       36
<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.

                                       37
<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. 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.

                                       38
<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                                   KPMG LLP
November 5, 1999

                                       39
<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.

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

                                       40
<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.

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

                                       41
<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

                                       42
<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

                                       43
<PAGE>

Corporation.

                                       44
<PAGE>

                                    PART IV

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

(a)  The following documents are filed as part of this report.

     1.   Financial Statements

          Report of Independent Accountants

          Balance Sheets at December 31, 1998 and 1997

          Statements of Income for the years ended December 31, 1998, 1997, and
          1996

          Statements of Partners' Capital for the years ended December 31, 1998,
          1997, and 1996

          Statements of Cash Flows for the years ended December 31, 1998, 1997,
          and 1996

          Notes to Financial Statements

     2.   Financial Statement Schedules

          Schedule II - Valuation and Qualifying Accounts for the years ended
          December 31, 1998, 1997, and 1996

          Schedule III - Real Estate and Accumulated Depreciation at December
          31, 1998

          Notes to Schedule III - Real Estate and Accumulated Depreciation at
          December 31, 1998

          Schedule IV - Mortgage Loans on Real Estate at December 31, 1998

          All other Schedules are omitted as the required information is
          inapplicable or is presented in the financial statements or notes
          thereto.

     3.   Exhibits

          3.1  Affidavit and Certificate of Limited Partnership of CNL Income
               Fund VII, Ltd. (Included as Exhibit 3.1 to Registration Statement
               No. 33-31482 on Form S-11 and incorporated herein by reference.)

          4.1  Affidavit and Certificate of Limited Partnership of CNL Income
               Fund VII, Ltd. (Included as Exhibit 3.1 to Registration Statement
               No. 33-31482 on Form S-11 and incorporated herein by reference.)

          4.2  Amended and Restated Agreement of Limited Partnership of CNL
               Income Fund VII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed
               with the

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<PAGE>

               Securities and Exchange Commission on April 1, 1996, and
               incorporated herein by reference.)

        10.1   Management Agreement between CNL Income Fund VII, Ltd. and CNL
               Investment Company (Included as Exhibit 10.1 to Form 10-K filed
               with the Securities and Exchange Commission on April 1, 1996, and
               incorporated herein by reference.)

        10.2   Assignment of Management Agreement from CNL Investment Company to
               CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form
               10-K filed with the Securities and Exchange Commission on March
               30, 1995, and incorporated herein by reference.)

        10.3   Assignment of Management Agreement from CNL Income Fund Advisors,
               Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form
               10-K filed with the Securities and Exchange Commission on April
               1, 1996, and incorporated herein by reference.)

        27     Financial Data Schedule

(b)  The Registrant filed no reports on Form 8-K during the period from October
     1, 1998 through December 31, 1998.

(c)  Not applicable.

(d)  Other Financial Information

     The Partnership has also filed herewith other financial information as part
     of this report in Part III, Item 8 because a tenant of the Partnership,
     Golden Corral Corporation, leased more than 20 percent of the Partnership's
     total assets for the year ended December 31, 1998. The financial
     information filed is for the four Golden Corral restaurant properties
     leased by Golden Corral and includes the following: Independent Auditors'
     Report of KPMG LLP, the Combined Statements of Revenues and Direct
     Operating Expenses, the Combined Statements of Cash Flows and the Notes to
     Combined Statements of Revenues and Direct Operating Expenses and Cash
     Flows.

                                        46
<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 28th day of
October, 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.

                                       47
<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>                                               <C>
/s/ Robert A. Bourne                       President, Treasurer and Director                 October 28, 1999
------------------------------------       (Principal Financial and Accounting
Robert A. Bourne                           Officer)


/s/ James M. Seneff, Jr.                   Chief Executive Officer and Director              October 28, 1999
------------------------------------       (Principal Executive  Officer)
James M. Seneff, Jr.
</TABLE>

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