<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               _________________

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                          COMMISSION FILE NO. 0-20126
                             ____________________

                        COPLEY PENSION PROPERTIES VII;
                       A REAL ESTATE LIMITED PARTNERSHIP

            (Exact name of registrant as specified in its charter)

           MASSACHUSETTS                                   04-3035851
   (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                     Identification No.)

     225 Franklin Street, 25th Floor
     Boston, Massachusetts                                   02110
(Address of principal executive offices)                  (Zip Code)

              Registrant's telephone number, including area code:
                                (617) 261-9000

          Securities registered pursuant to Section 12(b) of the Act:
                                     None

          Securities registered pursuant to Section 12(g) of the Act:
                     Units of Limited Partnership Interest

                               (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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                              Yes  X     No  ___
                                  ---           

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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]

     No voting stock is held by nonaffiliates of the Registrant.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None
<PAGE>
 
                                    PART I

Item 1. Business.
        --------

        Copley Pension Properties VII; A Real Estate Limited Partnership (the
"Partnership") was organized under the Uniform Limited Partnership Act of the
Commonwealth of Massachusetts on October 3, 1988, to invest primarily in to-be-
developed, newly constructed and existing income-producing real properties.

        The Partnership was initially capitalized with contributions of $2,000
in the aggregate from Seventh Copley Corp. (the "Managing General Partner") and
ICOP Associates Limited Partnership (the "Associate General Partner")
(collectively, the "General Partners") and $10,000 from Copley Real Estate
Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a
Registration Statement on Form S-11 (the "Registration Statement") with the
Securities and Exchange Commission on October 17, 1988, with respect to a public
offering of 80,000 units of limited partnership interest at a price of $1,000
per unit (the "Units") with an option to sell up to an additional 80,000 Units
(an aggregate of $160,000,000). The Registration Statement was declared
effective on January 9, 1989.

        The first sale of Units occurred on April 27, 1989, at which time the
Initial Limited Partner withdrew its contribution from the Partnership.
Investors were admitted to the Partnership thereafter at monthly closings; the
offering terminated on September 30, 1990 and the last group of initial
investors was admitted to the Partnership on October 10, 1990. As of December
31, 1990, a total of 42,076 Units had been sold, a total of 5,965 investors had
been admitted as limited partners (the "Limited Partners") and a total of
$41,956,740 net of discounts had been contributed to the capital of the
Partnership. The remaining 117,924 units were deregistered on February 20, 1991.

        As of December 31, 1998, the Partnership had four real property
investments, one of which was acquired in 1995. Three additional investments
have been sold: a research and development facility in 1991 and an apartment
complex; each of in 1994 and 1998. Sales proceeds have been distributed in the
amount of $237 per Unit as a result of these sales. In addition, capital of $21
per Unit has been distributed as a result of a discretionary reduction in cash
reserves. The Partnership has no current plan to renovate, improve, or further
develop any of its existing real property. In the opinion of the Managing
General Partner of the Partnership, the properties are adequately covered by
insurance.

        The Partnership has no employees. Services are performed for the
Partnership by the Managing General Partner and affiliates of the Managing
General Partner.

        A.   Retail Center in San Jose, California ("Parkmoor Plaza").
             --------------------------------------------------------

       On September 20, 1989, the Partnership acquired a 75% interest in a joint
venture formed with SBC & D Co., Inc. As of December 31, 1998, the Partnership
had contributed $9,786,330 to the capital of the joint venture out of a maximum
commitment of $10,000,000. The joint venture agreement entitles the Partnership
to receive a preferred return on its invested capital at the rate of 10% per
annum. During the first 120 months following the date of the joint venture
agreement, to the extent sufficient cash flow is not available therefor, up to
1% of such preferred return may accrue and bear interest at the rate of 10% per
annum, compounded monthly. The balance of the preferred return will be payable
monthly on a current basis. Commencing with the 121st month following the date
of the joint venture agreement, the full amount of the preferred return will be
payable monthly on a current basis. The joint venture agreement also entitles
the Partnership to receive 75% of remaining cash flow and 75% of sale and
refinancing proceeds following the return of the Partnership's investment.
<PAGE>
 
       The joint venture owns a leasehold interest pursuant to a ground lease
in 13.791 acres of land and a fee interest in three retail buildings totaling
approximately 149,825 square feet in San Jose, California.  The ground lease
terminates on November 12, 2014 and provides for an annual rental of $73,230
payable in equal monthly installments.  The joint venture has the option to
extend the lease for an additional 25 years.  The rent for the extended term
will be determined in accordance with provisions set forth in the lease.  The
joint venture also has the option to purchase the land upon notice from the
owner of its intention to sell to an unrelated third party and its acceptance of
a bona fide offer.  The property has been fully converted from industrial to
retail use.  As of December 31, 1998, this retail center was 96% leased.

       B.    Office/Warehouse Building in Houston, Texas ("Drilex").
             ------------------------------------------------------

       On December 18, 1990, the Partnership acquired a 75% interest in a
joint venture formed with an affiliate of The Trammell Crow Company ("Trammel
Crow").  The Partnership had contributed $2,294,713 to the capital of the joint
venture. The joint venture agreement entitled the Partnership to receive a
preferred return on its invested capital at the rate of 11% per annum, which was
payable currently until the Partnership had received an aggregate of $56,115.
Upon completion of construction the preferred return would accrue, if sufficient
cash flow was not available therefor.  In addition, upon rental of the building,
the joint venture was also obligated to pay to the Partnership the amount of
$2,755 on a monthly basis.  This amount represented full amortization over a ten
year period of the cost of special tenant improvements and was applied against
both the contributed capital and the preferred return.  The joint venture
agreement also entitled the Partnership to receive 50% of the net proceeds of
sales after return of its capital if the building was sold within one year of
the tenant's occupancy for a cash price of greater than $2,800,000.  Under any
other circumstances, the Partnership's share of sale proceeds was 75%.  As of
January 1, 1993, the Partnership acquired Trammell Crow's equity interest in the
joint venture for $70,000.

       The Partnership owns approximately 3.4 acres of land in Houston, Texas,
improved with an approximately 53,750 square foot single story office/warehouse
building constructed in 1991.  As of December 31, 1998, the building was 100%
occupied by a single tenant under a long-term lease that expires in August 2001.

       C.    Industrial Building in Itasca, Illinois ("Prentiss Copystar").
             -------------------------------------------------------------

       On May 23, 1991, the Partnership acquired a 23.25% interest in a joint
venture formed with Copley Pension Properties VI; A Real Estate Limited
Partnership, an affiliate of the Partnership (the "Affiliate") with a 51.75%
interest, and with an affiliate of Prentiss Properties, Ltd.  As of December 31,
1998, the Partnership had contributed $1,027,386 to the capital of the joint
venture out of a maximum commitment of $1,029,084, of which $690,224 is
characterized as Senior Capital and $308,725 is characterized as Junior Capital.
The joint venture agreement entitles the Partnership to receive a preferred
return, compounded monthly, of 11% per annum of which the return on Senior
Capital will be payable currently and the return on Junior Capital may accrue
and compound monthly if sufficient cash flow is not available therefor.  If the
Senior Capital is repaid prior to the termination of the joint venture, the
Partnership would be entitled to receive a return on the Senior Capital at the
lesser of 11% per annum or the interest rate for treasury bonds having a
maturity date coinciding with the termination of the joint venture, plus 75
basis points.  The joint venture agreement also entitles the Partnership to
receive 23.25% of the net proceeds of sales and financings after return of its
capital and 23.25% of cash flow remaining after payment of the preferred
return.
<PAGE>
 
       The joint venture owns approximately 3.75 acres of land in Itasca,
Illinois and during 1991 completed construction thereon of an approximately
70,535 square foot single-story industrial building. As of December 31, 1998,
the building was 100% leased to a single tenant for a term which expires in
1999. The tenant has an option that commenced in September, 1995 to purchase the
facility at fair market value. As of December 31, 1998, the tenant has not
expressed any interest in exercising the option.

       D.    Apartment Complex in Sherman Oaks, California ("Regency Court
             -------------------------------------------------------------
Apartments")
------------

       On April 14, 1995, Regency Court Associates, L.P., a California limited
partnership (the "Acquisition Partnership"), acquired a 174-unit apartment
complex located in Sherman Oaks, California for $9,605,021. The sole limited
partner of the Acquisition Partnership is the Partnership, and the sole general
partner of the Acquisition Partnership is Copp VII Holding Corp., a
Massachusetts corporation which is a wholly-owned subsidiary of the Partnership
(the "Subsidiary"). As of December 31, 1998, the Partnership had contributed
$9,700,000 to the capital of the Acquisition Partnership. The partnership
agreement of the Acquisition Partnership entitles the Partnership to receive 99%
of cash flow and 99% of sale and financing proceeds. The Subsidiary has a 1%
interest in cash flow and sale and financing proceeds. The Subsidiary has been
capitalized with a $1,000,000 demand promissory note from the Partnership.

       The Acquisition Partnership owns a 174-unit apartment complex known as
Regency Court located on approximately 1.64 acres of land. As of December 31,
1998, the apartment complex was approximately 96% leased.

       The seller of Regency Court was obligated to supplement the monthly
rental income from the Apartment Complex to the extent such income was less than
$125,000 per month during the one-year period ended April 13, 1996 (the
"Supplement Period"), prorated for any partial month at the beginning or
expiration of such Supplement Period. To secure this obligation, the seller
deposited $300,000 in an interest-bearing account with First American Title
Insurance Company. The seller's total liability for its obligation to supplement
rental income was limited to the $300,000 deposit plus any interest earned
thereon. The total supplemental rental income required to be paid by the seller
was $115,323.
<PAGE>
 
Item 2. Properties
        ----------

        The following table sets forth the annual realty taxes for the
Partnership's properties and information regarding tenants who occupy 10% or
more of gross leasable area (GLA) in the Partnership's properties:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                Estimated    Number of
                                   1998       Tenants
                                  Annual    with 10% or                    Square Feet
                                  Realty      more of     Name(s) of           of       Contract    Lease     Renewal
Property                          Taxes         GLA       Tenant(s)        Each Tenant    Rent    Expiration  Options
-------------------------------------------------------------------------------------------------------------------------
<S>                             <C>         <C>          <C>                   <C>          <C>       <C>         <C>    
Retail Center in San Jose, CA    $ 88,908        4         Baby Super        25,000      $ 8.89    3/2008    Two 10 year  
                                                            Discount                                           options    
                                                           Food 4 Less       54,600      $11.87    9/2007    Six 5 year   
                                                                                                               options    
                                                         U.S. Post Office    22,000      $ 4.16    2/2001    One 5 year   
                                                                                                               option     
                                                          Family Fitness     30,000      $ 8.27    1/2014    Two 5 year   
                                                              Center                                           options    
Office/Warehouse Building in     $   0 (1)       1        Drilex Systems     53,750      $ 5.67    8/2001    One 5 year   
Houston, TX                                                                                                   option      
                                                                                                                          
Apartment Complex in             $115,938       N/A             N/A            N/A         N/A      N/A          N/A      
Sherman Oaks, CA                                                                                                          
Industrial Building, Itasca, IL  $ 72,500        1       Mita Copystar of    70,535      $ 5.30    9/1999       None      
                                                           America, Inc.                                                  
--------------------------------------------------------------------------------------------------------------------------
<CAPTION> 
                                      Line of
                                    Business of
                                     Principal
Property                              Tenants
----------------------------------------------------
<S>                                 <C> 
Retail Center in San Jose, CA       Baby retailer       
                                                        
                                    Food Retailer       
                                                        
                                      U.S. Post         
                                        Office          
                                    Fitness Center      
                                                        
Office/Warehouse Building in            Drill           
Houston, TX                         Manufacturer        
                                                        
Apartment Complex in                      N/A           
Sherman Oaks, CA                                        
Industrial Building, Itasca, IL      Photocopier        
                                     Distributor  
--------------------------------------------------- 
</TABLE> 

(1)  Tenant responsible for real property taxes.
<PAGE>
 
     The following table sets forth for each of the last five years the gross
leasable area, occupancy rates, rental revenue, and net effective rent  for the
Partnership's properties:

<TABLE>
<CAPTION>
                                                                             AVERAGE     RENTAL
                                                GROSS LEASABLE   YEAR-END   OCCUPANCY   REVENUE     NET EFFECTIVE
                   PROPERTY                          AREA       OCCUPANCY   FOR YEAR   RECOGNIZED  RENT ($/SF/YR)*
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>         <C>        <C>         <C> 
        Retail Center in San Jose, CA
        -----------------------------
                     1994                              149,825         93%             $1,384,330           $ 9.94
                     1995                              149,825        100%             $1,433,239           $ 9.74
                     1996                              149,825        100%             $1,529,230           $10.21
                     1997                              149,825        100%             $1,590,646           $10.62
                     1998                              149,825        100%             $1,586,265           $10.59
 
   Office/Warehouse Building in Houston, TX
   -----------------------------------------
                     1994                               53,750        100%             $  264,960           $ 4.93
                     1995                               53,750        100%             $  283,886           $ 5.28
                     1996                               53,750        100%             $  302,304           $ 5.62
                     1997                               53,750        100%             $  303,592           $ 5.65
                     1998                               53,750        100%             $  301,797           $ 5.61
 
       Industrial Building, Itasca, IL
       -------------------------------
                     1994                               70,535        100%             $  475,000           $ 6.73
                     1995                               70,535        100%             $  479,000           $ 6.79
                     1996                               70,535        100%             $  492,000           $ 6.98
                     1997                               70,535        100%             $  462,000           $ 6.55
                     1998                               70,535        100%             $  468,000           $ 6.64
 
    Apartment Complex, Sherman Oaks, CA(1)
    -------------------------------------
                     1994                                N/A           N/A                    N/A             N/A
                     1995                              111,540         95%             $1,001,293           $12.73
                     1996                              111,540         98%             $1,411,825           $13.36
                     1997                              111,540         95%             $1,501,502           $13.95
                     1998                              111,540         97%             $1,621,903           $14.95
-------------------------------------------------------------------------------------------------------------------
</TABLE>

*Net effective rent calculation is based on average occupancy during the
respective year.

(1) Property acquired April 14, 1995.

Note: N/A denotes that the property was not in operation.
<PAGE>
 
         Following is a schedule of lease expirations for each of the next ten
years for the Partnership's properties based on the annual contract rent in
effect at December 31, 1998:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                  TENANT AGING REPORT
 
                  PROPERTY                      # OF LEASE         TOTAL              TOTAL             PERCENTAGE OF
                                               EXPIRATIONS      SQUARE FEET      ANNUAL CONTRACT        GROSS ANNUAL
                                                                                       RENT                RENTAL
-----------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>              <C>                    <C>  
Retail Center in San Jose, CA(1)
--------------------------------
                    1999                            2              13,000             $137,760              10%         
                    2000                            0                   0             $      0               0%         
                    2001                            1              22,000             $ 91,444               6%         
                    2002*                           1                   0             $ 24,000               2%         
                    2003                            0                   0             $      0               0%         
                    2004                            0                   0             $      0               0%         
                    2005                            1               4,800             $ 54,720               4%         
                    2006                            0                   0             $      0               0%         
                    2007                            1              54,600             $648,336              45%         
                    2008                            1              25,000             $222,300              16%         
                                                                                                                        
Office/Warehouse Building in Houston, TX                                                                                
----------------------------------------                                                                                
                    1999                            0                   0             $      0               0%         
                    2000                            0                   0             $      0               0%         
                    2001                            1              53,750             $305,016             100%         
                    2002                            0                   0             $      0               0%         
                    2003                            0                   0             $      0               0%         
                    2004                            0                   0             $      0               0%         
                    2005                            0                   0             $      0               0%         
                    2006                            0                   0             $      0               0%         
                    2007                            0                   0             $      0               0%         
                    2008                            0                   0             $      0               0%         

-----------------------------------------------------------------------------------------------------------------------
</TABLE>

* Rent received for a telecommunication company satellite dish mounted on a
building at the property.
<PAGE>
 
<TABLE>

------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>                 <C>              <C>    
Industrial Building, Itasca, IL
-------------------------------
                    1999                                 1             70,535              $281,000         100%        
                    2000                                 0                  0              $      0           0%        
                    2001                                 0                  0              $      0           0%        
                    2002                                 0                  0              $      0           0%        
                    2003                                 0                  0              $      0           0%        
                    2004                                 0                  0              $      0           0%        
                    2005                                 0                  0              $      0           0%        
                    2006                                 0                  0              $      0           0%        
                    2007                                 0                  0              $      0           0%        
                    2008                                 0                  0              $      0           0%        
                                                                                                                        
Apartment Complex in Sherman Oaks, CA                                                                                   
-------------------------------------                                                                                   
                    1999                                N/A                N/A                   N/A         N/A              
                    2000                                N/A                N/A                   N/A         N/A              
                    2001                                N/A                N/A                   N/A         N/A              
                    2002                                N/A                N/A                   N/A         N/A              
                    2003                                N/A                N/A                   N/A         N/A              
                    2004                                N/A                N/A                   N/A         N/A              
                    2005                                N/A                N/A                   N/A         N/A              
                    2006                                N/A                N/A                   N/A         N/A              
                    2007                                N/A                N/A                   N/A         N/A              
                    2008                                N/A                N/A                   N/A         N/A              
------------------------------------------------------------------------------------------------------------------
</TABLE>

* Does not include expenses paid by tenants.

(1) Remaining leases do not expire within 10 years.

Note: N/A denotes that disclosure does not apply based on the nature of the 
property.
<PAGE>
 
      The following table sets forth for each of the Partnership's properties
the:  (i) federal tax basis, (ii) rate of depreciation, (iii) method of
depreciation, (iv) life claimed, and (v) accumulated depreciation,  with respect
to each property or component thereof for purposes of depreciation:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                               Rate of               Life    Accumulated
                      Entity / Property                         Tax Basis   Depreciation   Method  in years  Depreciation
----------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>          <C>            <C>     <C>       <C> 
Retail Center, San Jose, CA
-------------------------------------------------------      
Building & Improvements                                        $ 8,388,866      2.50%        SL        40      $1,872,561
Land Improvements                                                  768,437      6.67%        SL        15         311,027
Land Improvements                                                   13,000         5%        SL        20           1,381
                                                               -----------                                     ----------
Total Depreciable Assets                                       $ 9,170,303                                     $2,184,969
                                                                                                           
Office/Warehouse Building, Houston, TX                                                                     
-------------------------------------------------------                                                    
Building & Improvements                                        $ 1,975,593      2.50%        SL        40      $  365,193
                                                               -----------                                     ----------
Total Depreciable Assets                                       $ 1,975,593                                     $  365,193
                                                                                                           
Industrial Building, Itasca Illinois                                                                       
-------------------------------------------------------                                                    
Building & Improvements                                        $ 2,121,478      2.50%        SL        40      $  386,117
                                                               -----------                                     ----------
Total Depreciable Assets                                       $ 2,121,478                                     $  386,117
                                                                                                           
Apartment Complex, Sherman Oaks, CA                                                                        
-------------------------------------------------------
Building & Improvements                                        $ 7,746,808      3.64%        SL      27.5      $1,043,214
                                                               -----------                                     ----------
Total Depreciable Assets                                       $ 7,746,808                                     $1,043,214
 
Total Depreciable Assets                                       $21,014,182                                     $3,979,493
                                                               ===========                                     ==========
----------------------------------------------------------------------------------------------------------------------------
</TABLE> 

SL = Straight Line
<PAGE>
 
      Following is information regarding the competitive market conditions for
each of the Partnership's properties.  This information has been gathered from
sources deemed reliable.  However, the Partnership has not independently
verified the information and, as such, cannot guarantee its accuracy or
completeness:

     Industrial Building in Itasca, Illinois
     ---------------------------------------

This industrial building is located west of Chicago in northeast DuPage County.
Northeast DuPage has the highest concentration of industrial space of any
submarket in DuPage County.  Most tenants in this submarket rely heavily on
close proximity to O'Hare International Airport and convenient access to
Interstates 355, 290, 90 and the Elgin-O'Hare Expressway.  The O'Hare Area
market consists of approximately 109 million square feet of industrial space, of
which approximately 6.1% was vacant at year-end 1998, compared to 7.2% at year-
end 1997.  Approximately 1 million square feet of space was added to the market
and rental rates were largely unchanged during the year.

     Apartment Complex in Sherman Oaks, California
     ---------------------------------------------

This apartment complex is located in Sherman Oaks, California, which is within
the San Fernando Valley apartment market, approximately 14 miles north of
downtown Los Angeles.  All of the damage from the 1994 Northridge Earthquake has
been repaired.  Supply and demand are in equilibrium and occupancy in the market
has stabilized at around 95%.  The property continues to benefit from its large
size -- it is one of a handful of apartment complexes in Sherman Oaks with more
than 100 units per acre.  The Sherman Oaks property was sold for gross proceeds
of $13,050,000 on March 25, 1999.

     Retail Center in San Jose, California
     -------------------------------------

The center is located in the San Jose metropolitan market, which has been
negatively affected over the last year by the Asian crisis and the subsequent
decreased demand for high-tech commodities.  Demand for retail space increased
approximately 0.8% in 1998, a slowdown from 1997 when demand increased 4.1%.
The year-end 1998 retail vacancy rate was approximately 6.1%, a slight
improvement from 6.6% at the close of 1997.  While 1998 job growth in San Jose
will not match 1997's pace of nearly 6%, job growth remained healthy at
approximately 3%.

     Office/Warehouse Building in Houston, Texas
     -------------------------------------------

The property is located in the metropolitan Houston industrial market, which
contains more than 93 million square feet of high-quality, investment-grade
industrial space spread over eight submarkets.  Demand for industrial space
increased approximately 2.3% during 1998, compared to a 5.6% increase in demand
for 1997.  The overall Houston industrial vacancy rate was 6.3% at year-end
1998, down slightly from 6.6% the prior year.  More specifically, the property
is located in the Northwest Houston industrial submarket, which contains almost
33.7 million square feet of primary bulk warehouse space.  This submarket is the
largest in terms of square footage and is also the most active in terms of
development.  During 1998, new product (delivered and under construction) was
estimated at 2 million square feet.  Despite the sizeable addition of new
supply, the submarket experienced positive absorption for the year of slightly
more than 2 million square feet.  As a result, the vacancy rate in the Northwest
Houston industrial submarket declined from 5.1% at the end of 1997 to 5.0% at
the end of 1998.
<PAGE>
 
Item 3.  Legal Proceedings.
         -----------------     

         A partner in a joint venture in which the Partnership holds an interest
has filed a declaratory judgment action with respect to certain provisions of
the joint venture agreement.

Item 4.  Submission of Matters to a Vote of Security Holders.
         ---------------------------------------------------     

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K. 


                                    PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder
         -------------------------------------------------------------
Matters.
-------     

         There is no active market for the Units. Trading in the Units is
sporadic and occurs solely through private transactions.

         As of December 31, 1998, there were 5,890 holders of Units. 

         The Partnership's Amended and Restated Agreement of Limited Partnership
dated April 27, 1989, as amended to date (the "Partnership Agreement"), requires
that any Distributable Cash (as defined therein) be distributed quarterly to the
Partners in specified proportions and priorities. There are no restrictions on
the Partnership's present or future ability to make distributions of
Distributable Cash. For the year ended December 31, 1998, cash distributions
paid in 1998 or distributed after year end with respect to 1998 to the Limited
Partners totaled $8,434,977 including $5,427,804 of returned capital from the
proceeds of sale of joint venture and $541,939 of returned capital from original
working capital reserves. For the year ended December 31, 1997, cash
distributions paid in 1997 or distributed after year end with respect to 1997 to
the Limited Partners totaled $2,603,664.

         Cash distributions exceeded net income in 1998 and 1997. However,
distributions of operating cash flow were less than cash generated by operating
activities. Reference is made to the Partnership's Statement of Changes in
Partner's Capital (Deficit) and Statement of Cash Flows in Item 8 hereof.
<PAGE>
 
Item 6.  Selected Financial Data.
         ----------------------- 

<TABLE>
<CAPTION>
                        For Year       For Year     For Year      For Year      For Year     
                        Ended or       Ended or     Ended or      Ended or      Ended or     
                        As of:         As of:       As of:        As of:        As of:       
                        12/31/98 (1)   12/31/97     12/31/96 (2)  12/31/95 (3)  12/31/94 (4) 
                        ------------   --------     ------------  ---------     ------------ 
<S>                     <C>            <C>          <C>           <C>           <C>          
Revenues                $ 5,544,041    $ 3,453,194  $ 3,250,812   $ 3,235,068    $4,228,813  
                                                                                             
Net Income              $ 3,960,679    $ 1,942,196  $ 1,751,136   $ 2,060,318    $3,705,107   
                                                                                             
                                                                                             
Net Income per                                                                               
Unit of Limited                                                                              
Partnership                                                                                  
Interest                                                                                     
Outstanding             $     93.19    $     45.70  $     41.20   $     48.48   $     87.18  
                                                                                             
Total Assets            $23,685,914    $28,125,153  $28,758,619   $29,782,367   $34,628,130   

Total Cash
Distributions
per Limited
Partnership
Unit
Outstanding
for the entire
period,
including amounts
distributed after
year end with
respect to such year    $    198.47    $     61.88  $     65.90   $    135.14   $     78.80
</TABLE> 

(1)  1998 Net Income includes a gain on sale of investment of $2,076,945. Cash
distributions include a return of capital of $141.88.

(2)  1996 Cash Distributions include a return of capital of $8.00.

(3)  1995 Net Income includes a gain on sale of investment of $228,086. Cash
distributions include a return of capital of $80.00.

(4)  1994 Net Income includes a gain on sale of investment of $1,870,749. Cash
distributions include a return of capital of $24.00.
<PAGE>
 
ITEM 7.
-------

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

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     The Partnership completed its offering of units of limited partnership
interest in September, 1990 and a total of 42,076 units were sold. The
Partnership received proceeds of $36,522,542, net of selling commissions and
other offering costs, which have been used for investment in real estate and the
payment of related acquisition costs, and for working capital reserves. The
Partnership made the four investments described in Item 1 hereof, and three
additional investments which were sold in 1991, 1994 and 1998, respectively.
Through December 31, 1998, capital of $10,850,559 ($257.88 per limited
partnership unit) has been returned to the limited partners; $9,972,012 as a
result of sales, $336,608 in 1996 as a result of a discretionary reduction of
cash reserves and $541,939 in 1998 as a result of a distribution of original
working capital. As a result of sales and similar transactions, the adjusted
capital contribution was reduced to $742.12.

     On August 7, 1998, the Waterford Apartments, in Frederick, Maryland, which
was owned by the Partnership (25%) and an affiliate (75%), was sold to an
institutional buyer which is unaffiliated with the Partnership. The total gross
sale price was $21,800,000. The Partnership received its share of the net
proceeds totaling $5,446,250, after closing costs and recognized a gain of
$2,076,945 ($48.87 per limited partnership unit). A disposition fee was accrued
but not paid to the AEW Real Estate Advisors, Inc. ("AEW"). On August 26, 1998,
the Partnership made a capital distribution of $5,427,804 ($129 per limited
partnership unit) from the proceeds of the sale.

     At December 31, 1998, the Partnership had $3,985,403 in cash and cash
equivalents of which $555,063 was used for operating distributions to partners
on January 28, 1998; the remainder will primarily be used as working capital
reserves. The source of future liquidity and cash distributions to partners will
primarily be cash flow generated by the Partnership's short-term and real estate
investments and proceeds from the sale of such investments. Distributions of
cash from operations relating to the first and second quarters of 1998 were made
at an annualized rate of 7% on the adjusted capital contribution. Distributions
of cash from operations relating to the third and fourth quarters of 1998 were
made at an annualized rate of 7% on the weighted average adjusted capital
contribution which was adjusted due to the mid-quarter sale of Waterford
Apartments as well as a distribution of original working capital. Quarterly
distributions of cash from operations relating to 1997 were made at an
annualized rate of 7% on the adjusted capital contribution.

     The carrying value of real estate investments in the financial statements
at December 31, 1998 is at depreciated cost, or if the investment's carrying
value is determined not to be recoverable through expected undiscounted future
cash flows, the carrying value is reduced to estimated fair market value. The
fair market value of such investments is further reduced by the estimated cost
of sale for properties held for sale. Carrying value may be greater or less than
current appraised value. At December 31, 1998, the appraised value of each real
estate investment exceeded its carrying value; the aggregate excess was
approximately $9,000,000. The current appraised value of real estate investments
has been estimated by the Managing General Partner and is generally based on a
combination of traditional appraisal approaches performed by AEW and independent
appraisers. Because of the subjectivity inherent in the valuation process, the
estimated current appraised value may differ significantly from that which could
be realized if the real estate were actually offered for sale in the
marketplace.
<PAGE>
 
     Year 2000 Readiness Disclosure
     ------------------------------

     The Year 2000 Issue is a result of computer programs being written using
two digits rather than four to define the applicable year.  Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000.  This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business operations.

     The Partnership relies on AEW Capital Management L.P. ("AEW Capital
Management"), the parent of AEW Real Estate Advisors, Inc., to generate
financial information and to provide other services which are dependent on the
use of computers.  The Partnership has obtained assurances from AEW Capital
Management that:


     .    AEW Capital Management has developed a Year 2000 Plan (the "Plan")
          consisting of five phases: inventory, assessment, testing,
          remediation/repair and certification.

     .    As of September 30, 1998, AEW Capital Management had completed the
          inventory and assessment phases of this Plan and had commenced the
          testing and remediation/repair of internal systems.

     .    AEW Capital Management expects to conclude the internal testing,
          remediation/repair and certifications of its Plan no later than June
          30, 1999.

     The Partnership also relies on joint venture partners and/or property
managers to supply financial and other data with respect to its real properties.
The Partnership is in the process of surveying these third party providers and
assessing their compliance with Year 2000 requirements. To date, the Partnership
is not aware of any problems that would materially impact its results of
operations, liquidity or capital resources. However, the Partnership has not yet
obtained written assurances that these providers would be Year 2000 compliant.

     The Partnership currently does not have a contingency plan in the event of
a particular provider or system not being Year 2000 compliant.  Such a plan will
be developed if it becomes clear that a provider (including AEW Capital
Management) is not going to achieve its scheduled compliance objectives by June
30, 1999.  The inability of one of these providers to complete its Year 2000
resolution process could materially impact the Partnership.  In addition, the
Partnership is also subject to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions.  Given the nature of its
operations, the Partnership will not incur any costs associated with Year 2000
compliance.  All such costs are borned by AEW Capital Management and the
property managers.
<PAGE>
 
     RESULTS OF OPERATIONS
     ---------------------

     FORM OF REAL ESTATE INVESTMENTS

     The Drilex and Regency Court Apartments investments are wholly-owned
properties.  The remaining real estate investments in the portfolio are
structured as joint ventures.

OPERATING FACTORS

     The Partnership's two industrial properties, Drilex and Prentiss Copystar,
were each 100% leased by a single tenant, at December 31, 1998, as they have
been for the last six years.

     As previously discussed, the Waterford Apartments was sold on August 7,
1998, and the Partnership recognized a gain of $2,076,945.  At the time of the
sale, the Waterford Apartments were 96% leased.  At December 31, 1997 it was 93%
leased.
 
     The Partnership's  multi-family residential property, Regency Court
Apartments, ended the fourth quarter of 1998 with an occupancy level of 96%
compared to 95% for the period ended December 31, 1997.
 
     Occupancy at Parkmoor Plaza was 100% at December 31, 1998, where it has
remained since the second quarter of 1995.

     INVESTMENT RESULTS

     Interest on short-term investments and cash equivalents increased
approximately $7,400 or 3% in 1998 as compared to 1997, due to an increase in
average investment balances as a result of the receipt of the Waterford
Apartments sales proceeds.

     1998 Compared to 1997

     Total real estate operations for the twelve months ended December 31, 1998
and 1997 was $2,063,956 and $2,137,069, respectively.  The decrease of $73,113
is primarily due to lower joint venture earnings due to the sale of Waterford
Apartments. Partially offsetting this is improved operating results at Regency
Court Apartments of approximately $49,000 as a result of increased rental
revenues due to improved market conditions during 1998 as compared to 1997.
Operating results at the three remaining properties were relatively unchanged
between the respective periods.

     Cash flow from operations increased approximately $12,000 between the
respective twelve month periods.  This change is primarily due to the decrease
in investment income receivables.

     1997 Compared to 1996

     Total real estate operations for the twelve months ended December 31, 1997
and 1996 was $2,137,069 and $1,931,881, respectively.  This increase is due to
improved operating income at Regency Court Apartments of approximately $142,000
as a result of increased rental revenues due to higher average occupancy during
1997 as compared to 1996, slightly offset by increased earthquake insurance
premiums.  Operating results at Waterford Apartments increased approximately
$42,000 due to higher rental rates combined with a decrease in depreciation
expense related to personal property that became fully depreciated.  In
addition, operating results at Prentiss Copystar improved by approximately
$18,000 due to a reduction in real estate taxes combined with a 
<PAGE>
 
decrease in amortization expense related to leasing commissions that became
fully amortized. Operating results at the two remaining properties were
relatively unchanged between the respective periods.

     Cash flow from operations increased approximately $163,000 between the
respective twelve month periods. This change is primarily due to the increases
in operating results discussed above, partially offset by an increase in
property working capital.

     PORTFOLIO EXPENSES

     The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner. A portion of the cash distribution
for the third quarter of 1996 was attributable to a discretionary reduction of
cash reserves. To the extent the distributed reserves had not been generated
from operations, no management fee was payable. General and administrative
expenses primarily consist of real estate appraisal, printing, legal, accounting
and investor servicing fees.

     1998 Compared to 1997

     The Partnership management fee decrease between 1998 and 1997 due to a
decrease in distributable cash flow as a result of the sale of Waterford
Apartments on August 7, 1998. General and administrative expenses increased
approximately $6,500 primarily due to an increase in legal and investor
servicing fees.
 
     1997 Compared to 1996

     The Partnership management fee increased between 1997 and 1996 due to an
increase in distributable cash flow and a corresponding increase in operating
distributions to partners. General and administrative expenses decreased
approximately $9,000 primarily due to a decrease in professional fees for 1997
which was the result of a reduction in accounting fees. Printing expenses
decreased as well compared to 1996.

INFLATION
---------

     By their nature, real estate investments tend not to be adversely affected
by inflation. Inflation may result in appreciation in the value of the
Partnership's real estate investments over time, if rental rates and replacement
costs increase. Declines in property values during the period of Partnership
operations, due to market and economic conditions, have overshadowed the
positive affect inflation may have on the value of the Partnership's
investments.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ----------------------------------------------------------
 
     The Partnership was not party to derivative financial instruments or
derivative commodity instruments at or during the year ended December 31, 1998.
The Partnership's only other financial instruments (as defined by Financial
Accounting Standards Board Statement No. 107) are its cash and cash equivalents
for which cost approximates market value.

Item 8.  Financial Statements and Supplementary Data.
         ------------------------------------------- 

     See the Financial Statements of the Partnership included as a part of this
Annual Report on Form 10-K.
<PAGE>
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          ---------------------------------------------------------------
          Financial Disclosure.
          -------------------- 

          The Partnership has had no disagreements with its accountants on any
matters of accounting principles or practices or financial statement disclosure.


                                   PART III
                                   --------

Item 10.  Directors and Executive Officers of the Registrant.
          --------------------------------------------------     

          (a) and (b) Identification of Directors and Executive Officers.
                      --------------------------------------------------     

          The following table sets forth the names of the directors and
executive officers of the General Partner and the age and position held by each
of them as of December 31, 1998.

<TABLE>
<CAPTION>
Name                              Position(s) with the Managing General Partner                Age
----                              ---------------------------------------------                ---
<S>                               <C>                                                          <C>
J. Christopher Meyer, III         President, Chief Executive Officer and Director              51
Pamela J. Herbst                  Vice President and Director                                  43
J. Grant Monahon                  Vice President and Director                                  53
James J. Finnegan                 Vice President                                               38
Karin J. Lagerlund                Treasurer and Principal Financial and Accounting Officer     34
</TABLE> 
 
          (c)  Identification of Certain Significant Employees.
               -----------------------------------------------     

               None.

          (d)  Family Relationships.
               --------------------     

               None.

          (e)  Business Experience.
               -------------------     

               The Managing General Partner was incorporated in Massachusetts on
October 3, 1988. The background and experience of the executive officers and
directors of the Managing General Partner are as follows:

               J. Christopher Meyer, III joined AEW Real Estate Advisors, Inc.
("AEW") , formerly known as Copley Real Estate Advisors, Inc., in 1987 and has
been an officer at AEW since then. AEW is a subsidiary of AEW Capital
Management, L.P. ("AEW Capital Management"), of which he is also a Director.
Prior to joining AEW, he had senior positions with several regional real estate
development concerns, including Chief Financial Officer of Ford Motor Land
Development Corporation. His career at AEW has included asset management
responsibility for the company's Eastern Region, and portfolio manager for
several commingled real estate funds. Presently, Mr. Meyer has overall
responsibility for all the partnerships advised by AEW whose securities are
registered under the Securities and Exchange Act of 1934, and for several
commingled funds. He received a B.A. in Statistics from Princeton University and
in MBA from the Wharton School of the University of Pennsylvania.
   
       Pamela J. Herbst directs AEW Capital Management's Institutional Real
Estate Services, with oversight responsibility for the asset and portfolio
management areas. Ms. Herbst is a member of AEW Capital Management's Investment
Policy Group and Management Committee. She came to AEW Capital Management in
December 1996 as a result of the firm's merger with Copley Real Estate
<PAGE>
 
Advisors, Inc., where she held various senior level positions in asset and
portfolio management, acquisitions, and corporate operations since 1982. Ms.
Herbst is a graduate of the University of Massachusetts (B.A.) and Boston
University (M.B.A.).

       J. Grant Monahon is AEW Capital Management's General Counsel and a
member of the firm's Management Committee and Investment Policy Group.  He has
over 25 years of experience in real estate law and investments.  Prior to
joining the predecessor of AEW Capital Management in 1987, Mr. Monahon was a
partner with a major Boston law firm.  As the head of that firm's real estate
finance department, he represented a wide variety of institutional clients, both
domestic and international, in complex equity and debt transactions.  He is the
former Chairman of the General Counsel section of the National Association of
Real Estate Investment Managers.  Mr. Monahon is a graduate of Dartmouth College
(B.A.) and Georgetown University Law Center (J.D.).

       James J. Finnegan is the Assistant General Counsel of AEW Capital
Management. Mr. Finnegan served as Vice President and Assistant General Counsel
of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital Management. Mr.
Finnegan has over ten years of experience in real estate law, including seven
years of experience in private practice with major New York City and Boston law
firms. Mr. Finnegan also serves as AEW's securities and regulatory compliance
officer. Mr. Finnegan is a graduate of the University of Vermont (B.A.) and
Fordham University School of Law (J.D.).

       Karin J. Lagerlund directs the Institutional Real Estate Services
Portfolio Accounting Group at AEW Capital Management, overseeing portfolio
accounting, performance measurement and client financial reporting for AEW's
private equity investment portfolios. Ms. Lagerlund is a Certified Public
Accountant and has over ten years experience in real estate consulting and
accounting. Prior to joining AEW Capital Management in 1994, she was an Audit
Manager at EY/Kenneth Leventhal LLP. Ms. Lagerlund is a graduate of Washington
State University (B.A.).

       (f)   Involvement in Certain Legal Proceedings.
             ---------------------------------------- 

             None.

Item 11.  Executive Compensation.
          -----------------------

          Under the Partnership Agreement, the General Partners and their
affiliates are entitled to receive various fees, commissions, cash
distributions, allocations of taxable income or loss and expense reimbursements
from the Partnership. See Notes 1, 2 and 6 of Notes to Financial Statements.
<PAGE>
 
     The following table sets forth the amounts of the fees and cash
distributions and reimbursements for out-of-pocket expenses which the
Partnership paid to or accrued for the account of the General Partners and their
affiliates for the year ended December 31, 1998. Cash distributions to General
Partners include amounts paid after year end with respect to 1998.

<TABLE>
<CAPTION>
                                                                    Amount of Compensation
Receiving Entity                     Type of Compensation             and Reimbursement
----------------                     --------------------           ----------------------
<S>                                  <C>                            <C>
General Partners                     Share of Distributable Cash               $  24,902
 
AEW Real Estate Advisors, Inc.       Management Fees
(formerly known as Copley            and Expense
Real Estate Advisors, Inc.)          Reimbursements                              258,277
 
New England Securities               Servicing Fees and out
Corporation                          of pocket reimbursements                      8,911
 
Back Bay Advisors, L.P.              Servicing Fees                                    0
                                                                               ---------

                                     TOTAL                                     $ 292,090
                                                                               =========
</TABLE> 

     For the year ended December 31, 1998 the Partnership allocated $50,439 of
taxable income to the General Partners.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.
          ---------------------------------------------------------------

          (a)  Security Ownership of Certain Beneficial Owners
               -----------------------------------------------

               No person or group is known by the Partnership to be the
beneficial owner of more than 5% of the outstanding Units at December 31, 1998.
Under the Partnership Agreement, the voting rights of the Limited Partners are
limited and, in some circumstances, are subject to the prior receipt of certain
opinions of counsel or judicial decisions.

               Except as expressly provided in the Partnership Agreement, the
right to manage the business of the Partnership is vested exclusively in the
Managing General Partner.

          (b)  Security Ownership of Management.
               --------------------------------

               The General Partners of the Partnership owned no Units at
December 31, 1998.

          (c)  Changes in Control.
               ------------------

               There exists no arrangement known to the Partnership the
operation of which may at a subsequent date result in a change in control of the
Partnership.

Item 13.  Certain Relationships and Related Transactions.
          ---------------------------------------------- 

          The Partnership has no relationships or transactions to report other
than as reported in Item 11, above.
<PAGE>
 
                                    PART IV

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

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

               (1) Financial Statements--The Financial Statements listed on the
accompanying Index to Financial Statements and Schedule and Financial Statement
Index No. 2 are filed as part of this Annual Report.

               (2) Financial Statement Schedule--The Financial Statement
Schedule listed on the accompanying Index to Financial Statements and Schedule
is filed as part of this Annual Report.

               (3) Exhibits--The Exhibits listed in the accompanying Exhibit
Index are filed as a part of this Annual Report and incorporated in this Annual
Report as set forth in said Index.

          (b) Reports on Form 8-K. During the last quarter of the year ending
December 31, 1998, the Partnership filed no Current Report on Form 8-K.
<PAGE>
 
                        COPLEY PENSION PROPERTIES VII;
                       A REAL ESTATE LIMITED PARTNERSHIP



                             FINANCIAL STATEMENTS



                                 * * * * * * *



                               DECEMBER 31, 1998
<PAGE>
 
                                           COPLEY PENSION PROPERTIES VII
                                           -----------------------------
                                          A REAL ESTATE LIMITED PARTNERSHIP
                                          ---------------------------------

                                      INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
                                      ------------------------------------------

Report of Independent Accountants

Financial Statements:

      Balance Sheets--December 31, 1998 and 1997

      Statements of Operations--Years ended December 31, 1998, 1997 and 1996

      Statements of Partners' Capital (Deficit)--Years ended December 31, 1998, 
        1997 and 1996

      Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996

      Notes to Financial Statements

Financial Statement Schedule:

Schedule III--Real Estate and Accumulated Depreciation at December 31, 1998, 
1997 and 1996

<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ---------------------------------


To the Partners

COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

In our opinion, based upon our audits and the reports of other auditors for the
years ended December 31, 1998, 1997 and 1996, the financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of Copley Pension Properties VII; A Real Estate Limited Partnership
(the "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.
These financial statements are the responsibility of Seventh Copley Corp., the
Managing General Partner of the Partnership; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of the Partnership's South Bay Associates and Waterford
Apartments joint venture investees for the year ended December 31, 1996 which
results of operations are recorded using the equity method of accounting in the
Partnership's financial statements. Equity in joint venture income for South Bay
Associates and Waterford Apartments aggregated $1,177,947 for the year ended
December 31, 1996. We also did not audit the financial statements of Regency
Court Apartments, a wholly-owned property, for the year ended December 31, 1996
which statements reflect operating income of $475,408. Those statements were
audited by other auditors whose reports thereon have been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included for
the equity in joint venture income for South Bay Associates and Waterford
Apartments for the year ended December 31, 1996, and for operating income for
Regency Court Apartments for the year ended December 31, 1996, is based solely
on the reports of the other auditors. 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 the Managing General Partner, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors for the years ended December 31, 1998,
1997, and 1996 provide a reasonable basis for the opinion expressed above.



/s/ PricewaterhouseCoopers  LLP
-------------------------------
Boston, Massachusetts
March 25, 1999
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP
 
BALANCE SHEETS

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

                                                     1998          1997     
                                                  -----------   -----------  
<S>                                               <C>           <C>         
ASSETS                                                                     
                                                                           
Real estate investments:                                                   
  Joint ventures                                  $ 9,003,008   $12,693,813 
  Property, net                                     1,871,598    10,957,147
  Property held for disposition, net                8,825,905             -
                                                  -----------   -----------
                                                   19,700,511    23,650,960
                                                                           
Cash and cash equivalents                           3,985,403     3,154,152
Short-term investments                                      -     1,320,041
                                                  -----------   -----------
                                                                           
                                                  $23,685,914   $28,125,153
                                                  ===========   ===========
 

LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                                  $    91,233   $    82,215
Accrued management fee                                 54,897        65,027
Deferred disposition fees                             641,608       478,108
                                                  -----------   -----------
Total liabilities                                     787,738       625,350
                                                  -----------   -----------
 
Partners' capital (deficit):
  Limited partners ($742.12 and $884 per unit,
    respectively; 160,000 units authorized,
    42,076 units issued and outstanding)           22,923,845    27,539,153
  General partners                                    (25,669)      (39,350)
                                                  -----------   -----------
Total partners' capital                            22,898,176    27,499,803
                                                  -----------   -----------
 
                                                  $23,685,914   $28,125,153
                                                  ===========   ===========
</TABLE>

               (See accompanying notes to financial statements)
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS

<TABLE> 
<CAPTION> 
                                                       Year ended December 31,
                                              --------------------------------------
 
                                                  1998          1997         1996
                                              -----------   -----------   ----------
<S>                                           <C>           <C>           <C> 
INVESTMENT ACTIVITY
 
Property rentals                              $2,027,523    $1,900,041    $1,759,993 
Property operating expenses                     (782,646)     (709,195)     (711,552)
Depreciation and amortization                   (379,361)     (373,154)     (367,187)
                                              ----------    ----------    ---------- 
                                                 865,516       817,692       681,254 
                                                                                     
Joint venture earnings                         1,198,440     1,319,377     1,250,627 
                                              ----------    ----------    ---------- 
                                                                                     
  Total real estate operations                 2,063,956     2,137,069     1,931,881 
                                                                                     
Gain on sale of property by joint venture      2,076,945             -             - 
                                              ----------    ----------    ---------- 
                                                                                     
  Total real estate activity                   4,140,901     2,137,069     1,931,881 
                                                                                     
Interest on cash equivalents                                                         
 and short-term investments                      241,133       233,776       240,192 
                                              ----------    ----------    ---------- 
                                                                                     
  Total investment activity                    4,382,034     2,370,845     2,172,073 
                                              ----------    ----------    ---------- 
                                                                                     
PORTFOLIO EXPENSES                                                                   
                                                                                     
Management fee                                   246,277       260,106       243,377 
General and administrative                       175,078       168,543       177,560 
                                              ----------    ----------    ---------- 
                                                 421,355       428,649       420,937 
                                              ----------    ----------    ---------- 
                                                                                     
NET INCOME                                    $3,960,679    $1,942,196    $1,751,136 
                                              ==========    ==========    ========== 
                                                                                     
Net income per limited                                                               
 partnership unit                             $    93.19    $    45.70    $    41.20 
                                              ==========    ==========    ========== 
                                                                                     
Cash distributions per limited                                                       
 partnership unit                             $   202.88    $    60.81    $    65.23 
                                              ==========    ==========    ========== 
                                                                                     
Number of limited partnership units                                                  
 outstanding during the year                      42,076        42,076        42,076 
                                              ==========    ==========    ==========  
</TABLE>

               (See accompanying notes to financial statements)
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

<TABLE>
<CAPTION>
                                                 Year ended December 31,
                        -------------------------------------------------------------------------
                                 1998                    1997                      1996
                        ----------------------  -----------------------   -----------------------
 
                        General      Limited     General      Limited      General      Limited
                        Partners    Partners     Partners    Partners     Partners     Partners
                        --------   -----------   --------   -----------   ---------   -----------
<S>                     <C>        <C>           <C>        <C>           <C>         <C> 
Balance at beginning
 of year                $(39,350)  $27,539,153   $(32,927)  $28,175,021    $(26,114)  $29,186,014
 
Cash distributions       (25,926)   (8,536,380)   (25,845)   (2,558,642)    (24,324)   (2,744,618)
 
Net income                39,607     3,921,072     19,422     1,922,774      17,511     1,733,625
                        --------   -----------   --------   -----------    --------   -----------
 
Balance at end
 of year                $(25,669)  $22,923,845   $(39,350)  $27,539,153    $(32,927)  $28,175,021
                        ========   ===========   ========   ===========    ========   ===========
</TABLE>

               (See accompanying notes to financial statements)
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                   ----------------------------------------
                                                       1998          1997          1996
                                                   ------------  ------------  ------------
<S>                                                <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                        $ 3,960,679   $ 1,942,196   $ 1,751,136
 Adjustments to reconcile net income to net
    cash provided by operating activities:
   Depreciation and amortization                       379,361       373,154       367,187
   Equity in joint venture earnings                 (1,198,440)   (1,319,377)   (1,250,627)
   Cash distributions from joint ventures            1,674,686     1,688,325     1,655,764
   Gain on sale of investment by joint venture      (2,076,945)            -             -
   (Increase) decrease in investment income
    receivable                                          17,315        (1,939)       (9,615)
   Increase in property working capital                (93,588)      (41,344)      (21,351)
   (Decrease) increase in operating liabilities         (1,112)        8,825        (5,942)
                                                   -----------   -----------   -----------
 Net cash provided by operating activities           2,661,956     2,649,840     2,486,552
                                                   -----------   -----------   -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 Investment in property                                (17,375)      (54,201)       14,609
 Net proceeds from sale of investment                5,282,750             -             -
 Deferred disposition fees                             163,500             -             -
 Decrease in short-term investments, net             1,302,726       112,413       103,376
                                                   -----------   -----------   -----------
   Net cash provided by (used in) investing
   activities                                        6,731,601        58,212       117,985
                                                   -----------   -----------   -----------
 
CASH FLOWS FROM FINANCING ACTIVITY:
 Distributions to partners                          (8,562,306)   (2,584,487)   (2,768,942)
                                                   -----------   -----------   -----------
 Net cash used in financing activity                (8,562,306)   (2,584,487)   (2,768,942)
                                                   -----------   -----------   -----------
 
Net (decrease) increase in cash and cash
 equivalents                                           831,251       123,565      (164,405)
 
Cash and cash equivalents:
 Beginning of year                                   3,154,152     3,030,587     3,194,992
                                                   -----------   -----------   -----------
 
 End of year                                       $ 3,985,403   $ 3,154,152   $ 3,030,587
                                                   ===========   ===========   ===========
</TABLE>

               (See accompanying notes to financial statements)
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

Note 1 - Organization and Business
----------------------------------

     General
     -------

     Copley Pension Properties VII; A Real Estate Limited Partnership (the
"Partnership") is a Massachusetts limited partnership organized for the purpose
of investing primarily in newly constructed and existing income-producing real
properties.  It primarily serves as an investment for qualified pension and
profit sharing plans and other entities intended to be exempt from federal
income tax.  The Partnership commenced operations in March 1989, acquired three
of the four real estate investments it currently owns prior to the end of 1991,
and acquired the fourth property in 1995. The Partnership intends to dispose of
its investments within eight to twelve years of their acquisition, and then
liquidate.

     The Managing General Partner of the Partnership is Seventh Copley Corp., a
wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly
known as Copley Real Estate Advisors, Inc. ("Copley").  The associate general
partner is ICOP Associates Limited Partnership, a Massachusetts limited
partnership.  Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by AEW pursuant to an advisory contract.

     On December 10, 1996, Copley's parent, New England Investment Companies,
Limited Partnership ("NEIC"), a publicly traded master limited partnership,
acquired certain assets subject to then existing liabilities from Aldrich
Eastman & Waltch, Inc. and its affiliates and principals (collectively, "the AEW
operations").  Simultaneously, a new entity, AEW Capital Management, L.P., was
formed into which NEIC contributed its interest in Copley and its affiliates.
As a result, the AEW operations were combined with Copley to form the business
operations of AEW Capital Management, L.P.  At the end of 1997, NEIC completed a
restructuring plan under which it contributed all of its operations to a newly
formed private partnership, NEIC Operating Partnership, L.P., in exchange for a
general partnership interest in the newly formed entity.  Accordingly, at
December 31, 1997, AEW Capital Management, L.P. was wholly owned by NEIC
Operating Partnership, L.P..  AEW is a subsidiary of AEW Capital Management,
L.P.. Effective April 1, 1998, NEIC changed its name to Nvest, L.P. and NEIC
Operating Partnership, L.P. changed its name to Nvest Companies, L.P.

     Prior to August 30, 1996, New England Mutual Life Insurance Company ("The
New England") was NEIC's principal unit holder and owner of all of the
outstanding stock of NEIC's general partner.  On August 30, 1996, The New
England merged with and into Metropolitan Life Insurance Company ("Met Life").
Met Life is the surviving entity and, therefore, through a wholly-owned
subsidiary, became the owner of the units of partnership interest previously
owned by The New England and of the stock of NEIC's general partner.

     Management
     ----------

     AEW, as advisor, is entitled to receive stipulated fees from the
Partnership in consideration of services performed in connection with the
management of the Partnership and the acquisition and disposition of Partnership
investments in real property.  Partnership management fees are 9% of
distributable cash from operations, as defined, before deducting such 
<PAGE>
 
fees. Payment of a portion of the management fees incurred through 1991 had been
deferred in accordance with the advisory agreement; however, during 1995, these
deferred fees totaling $203,452 were paid to AEW in connection with the
distribution of sale proceeds (See Note 3). AEW is also reimbursed for expenses
incurred in connection with administering the Partnership ($12,000, $12,000 and
$12,000 in 1998, 1997, and 1996, respectively). Acquisition fees were paid at
the time commitments were initially funded in an amount equal to 2% of the gross
proceeds from the offering. Disposition fees are limited to the lesser of 3% of
the selling price of the property, or 50% of the standard real estate commission
customarily charged by an independent real estate broker. Payments of
disposition fees are subject to the prior receipt by the limited partners of
their capital contributions plus a stipulated return thereon.

     New England Securities Corporation ("NESC"), an indirect subsidiary of Met
Life, is engaged by the Partnership to act as its unitholder servicing agent.
Fees and out-of-pocket expenses for such services totaled $8,911 in 1998, $8,371
in 1997, and $8,000 in 1996.  Fees to Back Bay Advisors, L.P., a wholly-owned
subsidiary of Nvest Companies, L.P., for short-term investment advisory services
totaled, $0, $4,412, and $4,424 for the same annual periods.

Note 2 - Summary of Significant Accounting Policies
---------------------------------------------------

     Accounting Estimates
     --------------------

     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Managing General Partner to make
estimates affecting the reported amounts of assets and liabilities, and of
revenues and expenses.  In the Partnership's business, certain estimates require
an assessment of factors not within management's control, such as the ability of
tenants to perform under long-term leases and the ability of the properties to
sustain their occupancies in changing markets.  Actual results, therefore, could
differ from those estimates.

     Real Estate Joint Ventures
     --------------------------

     Investments in joint ventures are stated at cost plus (minus) equity in
undistributed joint venture income (losses).  Allocations of joint venture
income (losses) were made to the Partnership's venture partners as long as they
had substantial economic equity in the project.  Currently, the Partnership
records an amount equal to 100% of the operating results of each joint venture,
after the elimination of all inter-entity transactions, except for the two
ventures which include an affiliate of the Partnership, which has substantial
economic equity in the respective projects.  Joint ventures are consolidated
with the accounts of the Partnership if, and when, the venture partner no longer
shares in the control of the business.

     Property
     --------

     Property includes land and buildings, which are stated at cost less
accumulated depreciation, plus other operating net assets (liabilities).  The
Partnership's initial carrying value of a property previously owned by a joint
venture equals the Partnership's carrying value of the prior investment on the
conversion date.

     Capitalized Costs, Depreciation and Amortization
     ------------------------------------------------

     Maintenance and repair costs are expensed as incurred.  Significant
improvements and renewals are capitalized.  Depreciation is computed using the
straight-line method based on estimated useful lives of the buildings and
improvements.  Leasing costs are also capitalized and amortized over the related
lease term.
<PAGE>
 
     Acquisition fees have been capitalized as part of the cost of real estate
investments.  Amounts not related to land are amortized using the straight-line
method over the estimated useful lives of the underlying property.

     Certain tenant leases provide for rental increases over the respective
lease terms.  Rental revenue is being recognized on a straight-line basis over
the lease terms.

     Realizability of Real Estate Investments
     ----------------------------------------

     The Partnership considers a real estate investment to be impaired when it
determines the carrying value of the investment is not recoverable through
undiscounted cash flows generated from the operations and disposition of the
property.  The impairment loss is based on the excess of the investment's
carrying value over its estimated fair market value.  For investments held for
disposition, the impairment loss also includes estimated costs of sale.
Property held for disposition is not depreciated during the holding period.

     Carrying value may be greater or less than current appraised value.  The
appraised values of all of the Partnership's investments exceeded their carrying
values by a total of approximately $9,000,000 and $8,100,000 at December 31,
1998 and 1997, respectively.  The current appraised value of real estate
investments has been estimated by the Managing General Partner and is generally
based on a combination of traditional appraisal approaches performed by AEW and
independent appraisers.  Because of the subjectivity inherent in the valuation
process, the estimated current appraised value may differ significantly from
that which could be realized if the real estate were actually offered for sale
in the marketplace.

     Cash Equivalents and Short-Term Investments
     -------------------------------------------

     Cash equivalents are stated at cost, plus accrued interest.  The
Partnership considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be cash equivalents; otherwise, they are
classified as short-term investments.

     The Partnership has the positive intent and ability to hold all short-term
investments to maturity; therefore, short-term investments are carried at cost,
plus accrued interest, which approximates market value.  At December 31, 1997,
all investments were in commercial paper with less than three months remaining
to maturity.

     Deferred Disposition Fees
     -------------------------

     Disposition fees due to AEW related to sales of investments are included in
the determination of gains or losses resulting from such transactions.
According to the terms of the advisory contract, payment of such fees has been
deferred until the limited partners first receive their capital contributions,
plus stipulated returns thereon.

     Income Taxes
     ------------

     A partnership is not liable for income taxes and, therefore, no provision
for income taxes is made in the financial statements of the Partnership.  A
proportionate share of the Partnership's income is reportable on each partner's
tax return.

     Per Unit Computations
     ---------------------

     Per unit computations are based on the number of units of limited
partnership interest outstanding during the year.  The actual per unit amount
will vary by partner depending on the date of admission to, or withdrawal from,
the Partnership.
<PAGE>
 
     Segment Data
     ------------

     Effective January 1, 1998, the Partnership adopted Financial Accounting
Standards Board Statement No. 131, "Disclosure about Segments on an Enterprise
and Related Information" (FAS 131).  Based on the criteria established in FAS
131, the Managing General Partner has determined that the Partnership operates
in one operating segment which is investing in real estate properties which are
domiciled in the United States of America.

Note 3 - Real Estate Joint Ventures
-----------------------------------

     The Partnership invested in six real estate joint ventures, organized as
general partnerships with different real estate management/development firms,
and in two cases, with an affiliate of the Partnership.  One investment was sold
in each of 1991, 1994 and 1998.  The Drilex investment was converted to a
wholly-owned property in 1993.  The Partnership has committed to make capital
contributions to the ventures, which are subject to preferential cash
distributions at a specified rate and to priority distributions with respect to
sale or refinancing proceeds.  The joint venture agreements provide for the
funding of cash flow deficits by the venture partners in proportion to ownership
interests, and for the dilution of ownership share in the event a venture
partner does not contribute proportionately.

     The respective real estate management/development firm is responsible for
day-to-day development and operating activities, although overall authority and
responsibility for the business is shared by the venturers.  The real estate
management/development firm, or its affiliates, also provides various services
to the respective joint ventures for a fee.

     The following is a summary of cash invested in joint ventures, net of
returns of capital and acquisition fees:

<TABLE>
<CAPTION>
                          Preferential
  Investment/                Rate of     Ownership        December 31,
  Location                   Return       Interest      1998        1997
  -----------                ------       --------   ----------------------
<S>                       <C>            <C>         <C>         <C>
Waterford Apartments
  Frederick, Maryland        10.09%        16.25%    $        0  $4,699,993
 
Parkmoor Plaza
  San Jose, California          10%           75%    $9,786,330  $9,786,330
 
Prentiss Copystar
  Itasca, Illinois              11%        23.25%    $1,027,386  $1,027,386
</TABLE>

     Waterford Apartments
     --------------------

     On March 20, 1989, the Partnership entered into a joint venture with an
affiliate of Bozzuto and Associates, and with an affiliate of the Partnership,
to develop and operate a garden-style apartment complex.  The Partnership and
its affiliate collectively had a 65% ownership interest in the joint venture.
The Partnership committed to contribute up to $4,700,000 to the capital of the
joint venture.  The preferential return related to $1,175,000 was payable
currently only to the extent of available cash flow.  In the event of a sale or
refinancing prior to the tenth anniversary of the joint venture agreement, 25%
of the Partnership's contribution would first be repaid at par.  The remaining
75% would be repaid subject to a premium designed to preserve the stipulated
rate of return through the ninth anniversary of the joint venture agreement.
<PAGE>
 
     On August 7, 1998, the joint venture sold the Waterford Apartments was sold
to an institutional buyer which is unaffiliated with the Partnership. The total
sales price was $21,800,000.  The Partnership received its share of the net
proceeds totaling $5,446,250.00, after closing costs and recognized a gain of
$2,076,945 ($48.87 per limited partnership unit).  A disposition fee of $163,500
was accrued but not paid to AEW.  On August 26, 1998, the Partnership made a
capital distribution of $5,427,804 ($129 per limited partnership unit) from the
proceeds of the sale.
 
     Parkmoor Plaza
     --------------

     On September 20, 1989, the Partnership entered into a joint venture with
South Bay Construction and Development Company, Inc. to acquire a leasehold
interest in three industrial/service center buildings and to renovate and
operate these buildings.  The Partnership  committed to make a maximum capital
contribution of $10,000,000.  The payment of up to 1% per annum of the
preferential return is deferrable during the first ten years if sufficient
operating cash flow is not available.  The joint venture is required to return
all cash contributions made by the Partnership by the tenth anniversary of its
initial funding.  The non-cancelable ground lease has an initial expiration date
of November 12, 2014  and requires annual ground rental payments by the venture
of $73,230.  The joint venture also has an option to extend the term of the
ground lease for an additional 25 years.  Future minimum rental payments due to
the venture under non-cancelable operating  leases are: $1,362,780 in 1999;
$1,295,373 in 2000; $1,223,162 in 2001; $1,218,115 in 2002; $1,272,872 in 2003;
and $6,319,012 thereafter.
<PAGE>
 
     Prentiss Copystar
     -----------------

     On May 23, 1991, the Partnership entered into a joint venture with an
affiliate of Prentiss Properties, Ltd., and an affiliate of the Partnership, to
develop and operate an industrial facility.  The Partnership and its affiliate
collectively have a 75% interest in the joint venture.  The Partnership
committed to make a maximum capital contribution of $1,029,084.  The
preferential return related to $308,725 of the Partnership's capital
contribution is payable currently only to the extent of available cash flow.  If
$720,359, or any portion thereof, is returned to the Partnership between the
second and tenth anniversary of the joint venture agreement, the return will be
increased by an amount sufficient to preserve the stipulated rate of return
through the tenth anniversary.  The minimum future rental payments due to the
venture under a non-cancelable operating lease are $281,000 in 1999.

     Summarized Financial Information

     The following summarized financial information is presented in the
aggregate for the joint ventures:

                             Assets and Liabilities
                             ----------------------

<TABLE>
<CAPTION>
                                                   December 31,       
                                             ------------------------ 
                                                1998         1997     
                                             -----------  ----------- 
<S>                                          <C>          <C>         
Assets                                                                
 Real property, at cost less                                          
  accumulated depreciation                                            
  of $3,043,811 and $8,403,624,                                       
  respectively                               $ 9,213,192  $21,473,990 
 Other                                         1,011,628    1,615,524 
                                             -----------  ----------- 
                                              10,224,820   23,089,514 
                                                                      
Liabilities                                      142,195      385,634 
                                             -----------  ----------- 
                                                                      
Net assets                                   $10,082,625  $22,703,880 
                                             ===========  ===========  
</TABLE> 


                             Results of Operations
                             ---------------------

<TABLE>
<CAPTION>
                                             Year ended December 31,       
                                        ---------------------------------- 
                                           1998        1997        1996    
                                        ----------  ----------  ---------- 
<S>                                     <C>         <C>         <C>        
Revenue                                                                    
 Rental income                          $3,875,878  $4,965,963  $4,747,319 
 Other                                       6,399       5,824       7,243 
                                        ----------  ----------  ---------- 
                                         3,882,277   4,971,787   4,754,562 
                                        ----------  ----------  ---------- 
                                                                           
Expenses                                                                   
 Operating expenses                      1,214,405   1,632,169   1,557,688 
 Depreciation and amortization             679,314     974,446   1,083,033 
                                        ----------  ----------  ---------- 
                                         1,893,719   2,606,615   2,640,721 
                                        ----------  ----------  ---------- 
                                                                           
Net income                              $1,988,558  $2,365,172  $2,113,841 
                                        ==========  ==========  ==========  
</TABLE>

     Liabilities and expenses exclude amounts owed and attributable to the
Partnership on behalf of their various financing arrangements with the joint
ventures.
<PAGE>
 
Note 4 - Property
-----------------

     Regency Court Apartments
     ------------------------

     On April 14, 1995, the Partnership acquired, through a limited partnership
it controls, a 174-unit apartment complex in Sherman Oaks, California, known as
Regency Court Apartments, for a total price of $9,605,021.  The purchase and
sale agreement required the seller to supplement the monthly rental income
generated from the property to the extent such income was less than $125,000 per
month during the one-year period ended April 13, 1996, with such supplement not
to exceed $300,000 in total.  The supplemental rental was $115,323, which has
been applied to reduce the purchase price in 1995 and 1996.

     The buildings and improvements are being depreciated over 30 years using
the straight-line method.

     On March 25, 1999, the Partnership sold the Regency Court Apartments to an
unaffiliated buyer for a gross purchase price of $13,050,000.  The Partnership
received net proceeds of $12,367,919.

     Drilex
     ------

     On December 18, 1990, the Partnership entered into a joint venture with an
affiliate of The Trammell Crow Company to develop and own a build-to-suit
industrial building for the Drilex Corporation, Inc.  The Partnership
contributed $2,294,713 to the capital of the venture.  The Partnership acquired
the venture partner's interest for a payment of $70,000, and the investment
became a wholly-owned property as of September 30, 1993.

   The building and improvements are being depreciated over 25 years.  The
building is leased to a single tenant under an agreement which continues through
July 2001.  The lease provides for annual rents of $264,960 for the first five
years and $305,016 thereafter.

   The following is a summary of the Partnership's property investments:

<TABLE>
<CAPTION>
 
                                            December 31,
                                     --------------------------
                                         1998          1997
                                     ------------  ------------
   <S>                               <C>           <C>
 
   Land                              $   244,346   $ 2,190,969
   Buildings and improvements          1,976,977     9,865,883
   Accumulated depreciation             (415,836)   (1,090,317)
   Other net assets (liabilities)         66,111        (9,388)
   Property held for disposition       8,825,905             -
                                     -----------   -----------
                                     $10,697,503   $10,957,147
                                     ===========   ===========
</TABLE>
<PAGE>
 
Note 5 - Income Taxes
---------------------

     The Partnership's income for federal income tax purposes differs from that
reported in the accompanying statement of operations as follows:

<TABLE>
<CAPTION>
                                        Year ended December 31,      
                                    1998         1997         1996   
                                 -----------  -----------  -----------
<S>                              <C>          <C>          <C>       
Net income per financial                                             
  statements                     $3,960,679   $1,942,196   $1,751,136
  Property operations                46,411      (19,111)     (43,545)
  Joint venture earnings            (69,577)    (158,706)    (103,944)
  Gain on sale                    1,075,138            -            -
  Expenses                            8,753       10,565       11,827
  Depreciation                       22,454        8,941            -
                                 ----------   ----------   ----------
                                                                     
Taxable income                   $5,043,858   $1,783,885   $1,615,474
                                 ==========   ==========   ========== 
</TABLE>

Note 6 - Partners' Capital
--------------------------

     Allocation of net income (losses) from operations and distributions of
distributable cash from operations, as defined, are in the ratio of 99% to the
limited partners and 1% to the general partners.  Cash distributions are made
quarterly.

     Net sale proceeds and refinancing proceeds are allocated first to limited
partners to the extent of their contributed capital plus a stipulated return
thereon, as defined, second to pay disposition fees, and then 85% to the limited
partners and 15% to the general partners.  The adjusted capital contribution per
limited partnership unit was reduced from $1,000 to $996 during 1991, and from
$996 to $892 in 1995, as a result of capital returned from sale transactions.
The adjusted capital contribution was further reduced to $884 in 1996, as a
result of capital returned from a discretionary reduction of cash reserves. In
1998 the adjusted capital contribution was reduced from$884 to $755 as a result
of capital returned from the sale of Waterford Apartments and further reduced to
$742.12 as a result of capital returned from a discretionary reduction of
original working capital.  No capital distributions have been made to the
general partners.  Income from a sale is allocated in proportion to the
distribution of related proceeds, provided that the general partners are
allocated at least 1%.  Income or losses from a sale, if there are no residual
proceeds after the repayment of the related debt, will be allocated 99% to the
limited partners and 1% to the general partners.

Note 7 - Subsequent Event
-------------------------

     Distributions of cash from operations relating to the quarter ended
December 31, 1998 were made on January 28, 1999 in the aggregate amount of
$555,063 ($13.06 per limited partnership unit).  See Note 4 for discussion of
investment sale on March 25, 1999.
<PAGE>
 
                        COPLEY PENSION PROPERTIES VII;
                       A REAL ESTATE LIMITED PARTNERSHIP
 
                   REAL ESTATE AND ACCUMULATED DEPRECIATION
 
                               DECEMBER 31, 1998
                                 SCHEDULE III

<TABLE> 
<CAPTION>  
                                                                Initial Cost to                            Costs Capitalized      
                                                                the Partnership                        Subsequent to Acquisitions 
                                                --------------------------------------------------   ------------------------------
                                                                                                                                  
                                                                                                                        Change in 
                                                             Buildings &          Other Net                               Other   
Description                                       Land       Improvements    Assets/(Liabilities)      Improvements      Net Assets
------------------------------------------      --------   ---------------- ----------------------   ---------------  ------------- 
<S>                                             <C>        <C>              <C>                      <C>              <C>         
Houston, TX                                       244,346       1,976,977                 23,788                   0        42,323
- Drilex Office/Warehouse (see Note A)                                                                                            
                                                                                                                                  
Sherman Oaks, CA                                1,946,623       7,786,490                      0             119,791        18,089
- Regency Court Apartments (see Note A)                                                                                           
                                                                                                                                  
                                                                                                                                  
Total wholly-owned property                     2,190,969       9,763,467                 23,788             119,791        60,412
                                                =========      ==========              =========           ==========     ========
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
16.25% interest in                                                                                                                
Waterford Apartments.                                                                                                             
Owner of a 314-unit                                                                                                               
apartment complex in                                                             See Note B                                       
                                                --------------------------------            --------------------------------------
Frederick, Maryland.                                                                                                              
                                                                                                                                  
                                                                                                                                  
75% interest in Parkmoor                                                                                                          
Plaza.  Leasehold interest                                                                                                        
in land & fee interest in                                                        See Note B                                       
                                                --------------------------------            --------------------------------------
3 retail buildings                                                                                                                
in San Jose, California.                                                                                                          
                                                                                                                                  
                                                                                                                                  
23.25% interest in Prentiss Copystar.                                                                                             
Owner of land and an industrial                                                  See Note B                                       
                                                --------------------------------            --------------------------------------
facility in Itasca, Illinois.                                                                                                     
                                                                                                                                   
                                                                                                                                   
                                                ---------------------------------------------------------------------------------- 
                Total joint venture investments                                                                                    
                                                ---------------------------------------------------------------------------------- 

<CAPTION> 
                                                  Gross amount at which                  
                                                Carried at Close of Period               
                                                ---------------------------              
                                                                                                  
                                                          Buildings &        Other                    Accumulated      Status of
Description                                      Land    Improvements      Net Assets      Total      Depreciation    Construction
------------------------------------------      -------  ---------------  ------------  -----------  -------------- --------------
<S>                                             <C>      <C>              <C>           <C>          <C>            <C> 
Houston, TX                                       244,346  1,976,977          66,111      2,287,434       (415,836)    Completed  
- Drilex Office/Warehouse (see Note A)                                                                                            
                                                                                                                                  
Sherman Oaks, CA                                1,946,623  7,906,281          18,089     9,870,993      (1,045,089)    Completed  
- Regency Court Apartments (see Note A)                                                                                           
                                                                                                                                 
                                                                                                                               
Total wholly-owned property                     2,190,929  9,883,258          84,200    12,158,427      (1,460,925)            
                                                =========  =========         =======   ===========     ===========             
                                                                                                                               
                                                                                                                               
                                                                                                                               
16.25% interest in                                                                                                             
Waterford Apartments.                                                                                                          
Owner of a 314-unit                                                                                                            
apartment complex in                                                                                                           
                                                ------------------------------------   $         0         NA          Completed
Frederick, Maryland.                                                            
                                                                                       
                                                                                       
75% interest in Parkmoor                                                               
Plaza.  Leasehold interest                                                             
in land & fee interest in                                                              
                                                ------------------------------------   $ 8,156,265         NA          Completed
3 retail buildings                                                             
in San Jose, California.                                                               
                                                                                       
                                                                                       
                                                                                       
23.25% interest in Prentiss Copystar.                                                  
Owner of land and an industrial                                                                                                 
                                                ------------------------------------   $   846,743         NA          Completed
facility in Itasca, Illinois.                                                   
                                                                                                                                    

                                                                   
                                                                                                   
                                                -------------------------------------------------- 
                Total joint venture investments                                        $ 9,003,008 
                                                -------------------------------------------------- 

<CAPTION> 
                                                      Date        Depreciable
Description                                         Acquired          Life                                
------------------------------------------        ------------  ---------------
<S>                                               <C>           <C> 
Houston, TX                                                                         
- Drilex Office/Warehouse (see Note A)              09/30/93        25 Years                                                       
                                                                                                         
Sherman Oaks, CA                                                                                         
- Regency Court Apartments (see Note A)              4/14/95        30 Years
                                                       
                                                                                                          
Total wholly-owned property                                                                              
                                                                                                         
                                                                                                          
                                                                                                          
16.25% interest in                                                                                        
Waterford Apartments.                                                                                     
Owner of a 314-unit                                                                                       
apartment complex in                                                                                      
                                                    03/20/89      27.5 Years           
Frederick, Maryland.                                                                                      
                                                                                                          
                                                                                                          
75% interest in Parkmoor                                                                                  
Plaza.  Leasehold interest                                                                                
in land & fee interest in                                                                                 
                                                    09/20/89        40 Years             
3 retail buildings                                                                                        
in San Jose, California.                                                                                  
                                                                                                         
                                                                                                         
                                                                                                         
23.25% interest in Prentiss Copystar.                                                                    
Owner of land and an industrial                                                                           
                                                                                                          
facility in Itasca, Illinois.                       05/23/91        35 Years  
                                             
                                             
                                             
                                             
                Total joint venture investments 
</TABLE> 
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION - WHOLLY OWNED PROPERTY
SCHEDULE III NOTE A
AT DECEMBER 31, 1998

<TABLE> 
<CAPTION>  
                                   Balance    Conversion to  Additions to                                Change in        Balance 
                                    as of     Wholly-Owned      Lease      Additions to  Write Down   Property Working    as of   
Description                        1/1/96       Property     Commissions     Property    of Property      Capital        12/31/96 
----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>            <C>           <C>           <C>          <C>              <C>  
Drilex                             2,252,832            0             0             0            0            29,277    2,282,109 
                                                                                                                                  
Regency Court                      9,629,521            0             0        48,215            0            (7,926)   9,669,810 
                                ------------------------------------------------------------------------------------------------- 
Total Wholly-Owned Property       11,882,353            0             0        48,215            0            21,351   11,951,919 
                                ==================================================================================================
 
                                   Balance    Conversion to  Additions to                                Change in        Balance 
                                    as of     Wholly-Owned      Lease      Additions to  Write Down   Property Working     as of  
Description                        1/1/97       Property     Commissions     Property    of Property      Capital        12/31/97 
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                  
Drilex                             2,282,109            0             0             0            0           (10,606)   2,271,503 
                                                                                                                                  
Regency Court                      9,669,810            0             0        54,201            0            51,950    9,775,961 
                                ------------------------------------------------------------------------------------------------- 
Total Wholly-Owned Property       11,951,919            0             0        54,201            0            41,344   12,047,464 
                                ==================================================================================================
                                                                                                                         
                                   Balance    Conversion to  Additions to                                Change in        Balance
                                    as of     Wholly-Owned      Lease      Additions to  Write Down   Property Working     as of 
Description                        1/1/98       Property     Commissions     Property    of Property      Capital        12/31/98
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                  
Drilex                             2,271,503            0             0             0            0            15,931    2,287,434  
                                                                                                                                  
Regency Court                      9,775,961            0             0        17,375            0            77,657    9,870,993  
                                ------------------------------------------------------------------------------------------------- 
Total Wholly-Owned Property       12,047,464            0             0        17,375            0            93,588   12,158,427  
                                =================================================================================================

<CAPTION> 
                                    12/31/95        1996         12/31/96     1996                
                                  Accumulated   Depreciation    Accumulated   Sales    Balance per   
Description                      Depreciation     Expense      Depreciation           G/L @ 12/31/96  
-----------------------------------------------------------------------------------------------------
<S>                             <C>             <C>           <C>             <C>     <C> 
Drilex                               178,596      (79,080)      257,676           0      2,024,433   
                                                                                                     
Regency Court                        192,510     (277,542)      470,052           0      9,199,758  

                                ---------------------------------------------------------------------
Total Wholly-Owned Property          371,106     (356,622)      727,728           0     11,224,191  
                                ===================================================================== 
                                
                                   12/31/96        1997          12/31/97     1997                 
                                 Accumulated    Depreciation   Accumulated    Sales    Balance per   
Description                      Depreciation    Expense       Depreciation           G/L @ 12/31/97   
----------------------------------------------------------------------------------------------------- 
                                                                                                      
Drilex                               257,676      (79,080)      336,756           0      1,934,747 
                                                                                                      
Regency Court                        470,052     (283,509)      753,561           0      9,022,400 
                                --------------------------------------------------------------------- 
Total Wholly-Owned Property          727,728     (362,589)    1,090,317                 10,957,147 
                                =====================================================================
 
                                     12/31/97        1998          12/31/98     1998              
                                   Accumulated    Depreciation   Accumulated    Sales    Balance per 
Description                       Depreciation     Expense       Depreciation          G/L @ 12/31/98
-----------------------------------------------------------------------------------------------------
                                                                                                       
Drilex                               336,756      (79,080)      415,836           0      1,871,598
                                                                                                       
Regency Court                        753,560     (291,528)    1,045,088           0      8,825,905
                                ---------------------------------------------------------------------  
Total Wholly-Owned Property        1,090,317     (370,608)    1,460,924                 10,697,503
                                =====================================================================   
</TABLE> 
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP
SCHEDULE III  NOTE B
REAL ESTATE AND ACCUMULATED DEPRECIATION-JOINT VENTURES
AT DECEMBER 31, 1998

<TABLE> 
<CAPTION> 
                                   PERCENT       BALANCE      INVESTMENT    EQUITY IN      1996 AMORTIZATION     DISTRIBUTION   
                                     OF           AS OF        IN JOINT      INCOME/          OF DEFERRED            FROM       
    DESCRIPTION                   OWNERSHIP      12/31/95      VENTURES       (LOSS)       ACQUISITION FEES      JOINT VENTURE  
----------------------            ---------    ------------   ----------   ------------    ------------------   ---------------  
<S>                               <C>           <C>           <C>          <C>             <C>                  <C> 
Waterford Apartments                16.25%        3,709,838          $0        237,079               (3,624)         (418,108) 
                                                                                                                               
Parkmore Plaza                         75%        8,835,601           0        940,867               (4,200)       (1,127,770) 
                                                                                                                               
Prentiss Copystar                   23.25%          943,589           0         72,681               (2,741)         (109,886) 
                                                -----------   -----------   ----------            ---------      ------------
                                                                                                                               
                                                $13,489,028          $0     $1,250,627             ($10,565)      ($1,655,764) 
                                                ===========   ===========   ==========            =========      ============  

                                                                                                                     CASH
                                   PERCENT       BALANCE      INVESTMENT    EQUITY IN      1997 AMORTIZATION     DISTRIBUTION   
                                     OF           AS OF        IN JOINT      INCOME/          OF DEFERRED            FROM       
    DESCRIPTION                   OWNERSHIP      12/31/96      VENTURES       (LOSS)       ACQUISITION FEES      JOINT VENTURE  
----------------------            ---------    ------------   ----------   ------------    ------------------   ---------------  

Waterford Apartments                16.25%        3,525,185           0        288,129               (3,624)         (420,671) 
                                                                                                                               
Parkmore Plaza                         75%        8,644,498           0        945,345               (4,200)       (1,157,770) 
                                                                                                                               
Prentiss Copystar                   23.25%          903,643           0         85,903               (2,741)         (109,884) 
                                                -----------   -----------   ----------            ---------      ------------
                                                                                       
                                                $13,073,326          $0     $1,319,377             ($10,565)      ($1,688,325) 
                                                ===========   ===========   ==========            =========      ============   
 
                                                                                                                     CASH
                                   PERCENT       BALANCE      INVESTMENT    EQUITY IN      1998 AMORTIZATION     DISTRIBUTION   
                                     OF           AS OF        IN JOINT      INCOME/          OF DEFERRED            FROM       
    DESCRIPTION                   OWNERSHIP      12/31/97      VENTURES       (LOSS)       ACQUISITION FEES      JOINT VENTURE  
----------------------            ---------    ------------   ----------   ------------    ------------------   ---------------  
                                                                                                                               
Waterford Apartments                16.25%        3,389,019           0        172,345               (1,812)         (353,746) 
                                                                                                                               
Parkmore Plaza                         75%        8,427,873           0        943,648               (4,200)       (1,211,056) 
                                                                                                                               
Prentiss Copystar                   23.25%          876,921           0         82,447               (2,741)         (109,884) 
                                                -----------   -----------   ----------            ---------      ------------
                                                                                                                               
                                                $12,693,813          $0     $1,198,440              ($8,753)      ($1,674,686) 
                                                ===========   ===========   ==========            =========      ============   

<CAPTION>                                 
 
                              CONVERSION TO                        BALANCE   
                               WHOLLY-OWNED           1996          AS OF    
    DESCRIPTION                  PROPERTY          DISPOSALS       12/31/96 
-----------------------       ---------------    -------------   ------------
<S>                           <C>                 <C>            <C> 
                                                                               
Waterford Apartments            $          0         $       0     $ 3,525,185 
                                                                               
Parkmore Plaza                             0                 0       8,644,498 
                                                                               
Prentiss Copystar                          0                 0     $   903,643 
                                ------------      ------------     -----------
                                $          0      $          0     $13,073,326 
                                ============      ============     =========== 


                               CONVERSION TO                        BALANCE   
                               WHOLLY-OWNED           1997           AS OF
    DESCRIPTION                  PROPERTY          DISPOSALS       12/31/97
-----------------------       ---------------    -------------   ------------
                                                                               
Waterford Apartments                       0                 0       3,389,019 
                                                                               
Parkmore Plaza                             0                 0       8,427,873 
                                                                               
Prentiss Copystar                          0                 0         876,921 
                                ------------      ------------     -----------
                                $          0      $          0     $12,693,813 
                                ============      ============     ===========
                                                                               

                               CONVERSION TO                        BALANCE   
                               WHOLLY-OWNED           1998           AS OF
    DESCRIPTION                  PROPERTY          DISPOSALS       12/31/98
-----------------------       ---------------    -------------   ------------
                                                                               
Waterford Apartments                       0          -3205806               0 
                                                                            
Parkmore Plaza                             0                 0       8,156,265 
                                                                               
Prentiss Copystar                          0                 0         846,743 
                                  ----------      ------------     -----------
                                  $        0       ($3,205,806)    $ 9,003,008 
                                  ==========      ============     ===========  
</TABLE> 

Information from grouping sheets and loan schedules 
Tie to Investment in JV on grouping sheet 
<PAGE>
 
                             FINANCIAL STATEMENTS
                                  INDEX NO. 2

                   AUDITOR'S REPORT AND FINANCIAL STATEMENTS

                            OF  SOUTHBAY ASSOCIATES
                                        
 

     Report of Independent Auditors from Soren McAdam Bartells

     Balance Sheets - December 31, 1998 and 1997
 
     Statements of Operations - 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 December31, 1998, 1997 and
     1996

     Notes to Finacial Statements
<PAGE>
 
                                        SOUTH BAY/COPLEY VII ASSOCIATES
                                        (A CALIFORNIA GENERAL PARTNERSHIP)
                                                                                

                                              FINANCIAL STATEMENTS

                                                      WITH

                                           INDEPENDENT AUDITORS' REPORT
                                                                                

                                                 FOR THE YEARS ENDED
                                              DECEMBER 31, 1998 AND 1997
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
                                                                      PAGE
<S>                                                                   <C> 
INDEPENDENT AUDITORS' REPORT                                            1

BALANCE SHEETS                                                          2
                               
STATEMENTS OF OPERATIONS                                                3
                                
STATEMENTS OF PARTNERS' EQUITY                                          4
                                
STATEMENTS OF CASH FLOWS                                                5
                                
NOTES TO FINANCIAL STATEMENTS                                           6
</TABLE> 
                       
<PAGE>
 
                         [LETTERHEAD SMB APPEARS HERE]



                          INDEPENDENT AUDITORS' REPORT



To the Partners
South Bay/Copley VII Associates

We have audited the accompanying balance sheets of South Bay/Copley VII
Associates (a California General Partnership) as of December 31, 1998 and 1997
and the related statements of operations, partners' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of South Bay/Copley VII
Associates (a California General Partnership) as of December 31, 1998, and the
results of its operations cash flows for each of the three years in the period
ended December 31, 1998, in conformity with in conformity with generally
accepted accounting principles.

                                              SOREN . McADAM . BARTELLS
                                              Certified Public Accountants, Inc.


                                               
Redlands, California                          /s/ Douglas R. McAdam
January 14, 1999                           By:    Douglas R. McAdam, CPA

                                      -i-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                      (A CALIFORNIA GENERAL PARTNERSHIP)

                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                      DECEMBER 31,      1998       1997
------------------------------------------------------------------------------------------
<S>                                                                <C>         <C>    
ASSETS
Income-producing property                                           $6,759,590  $7,024,842
Cash                                                                    12,685         964
Rents receivable, net of allowance for doubtful accounts                                  
 of $1,768 and $1,035                                                  724,300     757,113
Other assets                                                           243,752     260,166
                                                                    ----------  ----------
                                                                                          
Total assets                                                        $7,740,327  $8,043,085
                                                                    ==========  ==========
                                                                                          
LIABILITIES AND PARTNERS' EQUITY                                                          
LIABILITIES                                                                               
Accounts payable                                                    $   11,529  $   10,381
Accrued Priority Return                                                 81,553     199,754
Security deposits                                                       34,540      34,540
Unearned revenue                                                        14,607      14,105
                                                                    ----------  ----------
                                                                                          
Total liabilities                                                      142,229     258,780
                                                                                          
PARTNERS' EQUITY                                                     7,598,098   7,784,305
                                                                    ----------  ----------
                                                                                          
Total liabilities and partners' equity                              $7,740,327  $8,043,085
                                                                    ==========  ========== 
</TABLE>

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

                                      -2-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                      (A CALIFORNIA GENERAL PARTNERSHIP)

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,       1998         1997         1996
------------------------------------------------------------------------
<S>                                 <C>          <C>          <C>
REVENUE
Building rentals                    $1,406,426   $1,387,335   $1,370,411
Other rental reimbursements            179,450      203,283      158,819
Interest                                   389           28           90
                                    ----------   ----------   ----------
 
Total revenue                        1,586,265    1,590,646    1,529,320
                                    ----------   ----------   ----------
 
EXPENSES
Interest                               981,855    1,001,621    1,012,404
Depreciation                           265,252      265,252      263,085
Land rent                               73,230       73,230       73,230
Property taxes                          88,404       85,856       84,702
Property operations                    196,345      204,712      156,755
General and administrative              19,386       16,251       10,681
                                    ----------   ----------   ----------
 
Total expenses                       1,624,472    1,646,922    1,600,857
                                    ----------   ----------   ----------
 
Net loss                            $  (38,207)  $  (56,276)  $  (71,537)
                                    ==========   ==========   ==========
</TABLE>

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

                                      -3-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                      (A CALIFORNIA GENERAL PARTNERSHIP)

                        STATEMENTS OF PARTNERS' EQUITY

<TABLE>
<CAPTION>
                                     COPLEY PENSION     SBC&D                 
                                     PROPERTIES VII   CO., INC.      TOTAL    
                                     --------------------------------------   
<S>                                  <C>            <C>        <C>         
                                                                            
Balance, December 31, 1995             $7,912,117    $      1   $7,912,118  
Net loss                                  (71,537)                 (71,537) 
                                       -----------------------------------  
                                                                            
Balance, December 31, 1996              7,840,580           1    7,840,581  
Net loss                                  (56,276)                 (56,276) 
                                       -----------------------------------  
                                                                            
Balance, December 31, 1997              7,784,304           1    7,784,305  
                                                                            
Distributions                            (111,000)    (37,000)    (148,000) 
Net loss                                  (75,206)     36,999      (38,207) 
                                       -----------------------------------  
                                                                            
Balance, December 31, 1998             $7,598,098    $      -   $7,598,098  
                                       ===================================   
</TABLE>

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

                                      -4-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                       (A CALIFORNIA GENERAL PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                   FOR THE YEARS ENDED DECEMBER 31,       1998         1997         1996
--------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                               $  (38,207)  $  (56,276)  $  (71,537)
Adjustments to reconcile net loss to net cash
 provided by (used in) operating activities
  Depreciation and amortization                           290,849      290,479      287,775
  (Increase) decrease in:
   Rents receivable                                        32,813      (94,569)    (105,445)
   Other assets                                            (9,183)      (3,502)      (3,369)
  Increase (decrease) in:
   Accounts payable                                         1,148        2,004        1,915
   Accrued Priority Return                               (118,201)    (156,148)    (100,366)
   Security deposits                                                     2,000          733
   Unearned revenue                                           502       13,064        1,041
                                                       ------------------------------------
 
Net cash provided by (used in) operating activities       159,721       (2,948)      10,747
                                                       ------------------------------------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties                                                             (13,000)
                                                       ------------------------------------
 
Net cash used in investing activities                           -            -      (13,000)
                                                       ------------------------------------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners                                (148,000)
                                                       ------------------------------------
Net cash used in financing activities                    (148,000)           -            -
                                                       ------------------------------------
 
Net increase (decrease) in cash                            11,721       (2,948)      (2,253)
 
CASH
Balance, beginning of year                                    964        3,912        6,165
                                                       ------------------------------------
Balance, end of year                                   $   12,685   $      964   $    3,912
                                                       ====================================
 
CASH PAID FOR INTEREST                                 $1,100,056   $1,157,770   $1,112,770
                                                       ====================================
</TABLE>

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

                                      -5-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                       (A CALIFORNIA GENERAL PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Partnership was formed for the purpose of developing and leasing
approximately 13.8 acres in the City of San Jose, California. The project
includes the developing, leasing and management of the buildings. The
Partnership has concentrations of credit risk for rents receivable, as all of
the balances are due from businesses located within the same geographic region.
The partners are: Copley Pension Properties VII (a Massachusetts Limited
Partnership) and SBC&D Co., Inc. (a California corporation).

The preparation of these financial statements requires management to make
estimates and assumptions. Those estimates and assumptions affect the reported
amounts of assets, liabilities, revenue, and expenses, as well as the disclosure
of contingent assets and liabilities. Actual results could differ from those
estimates. Management also determines the accounting principles to be used in
the preparation of financial statements. A description of the significant
accounting policies employed in the preparation of these financial statements
follows:

RENTAL REVENUE

Revenue from leases is recognized on a straight-line basis over the lease term,
irrespective of when payments are due under the terms of the leases.

PROPERTIES

Properties consisting of buildings and site improvements are reported at cost
less accumulated depreciation and include improvements that significantly add to
utility or extend useful lives.  Maintenance and repairs are charged to expense
as incurred.  When items of property are sold or retired, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in the results of operations.

Depreciation is provided using the straight-line method over the estimated
useful lives of the buildings and improvements, 40 years and 20 years,
respectively.  These useful lives do not exceed the term of the land lease,
including the option period.  Certain building improvements related to specific
tenants are depreciated over the respective lease term, which is generally 15
years.

INCOME TAXES

Income or loss of the Partnership is allocated to the partners in accordance
with the Partnership Agreement.  No income tax provision has been included in
the financial statements since all taxable items of the Partnership are required
to be reported by the respective partners on their income tax returns.

                                      -6-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                       (A CALIFORNIA GENERAL PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Additionally, the tax returns and the amount of distributable Partnership income
or loss are subject to examination by federal and state taxing authorities.  If
the Partnership's taxable income or loss is ultimately changed by the taxing
authorities, the tax liability of the partners could be changed accordingly.

The income or loss reported for tax purposes may differ from the amount of the
income or loss on these financial statements due to differences in rental income
recognition for federal income tax reporting purposes and financial accounting
purposes.  In addition, in accordance with federal tax requirements and certain
provisions of the Partnership Agreement, the allocation of income or loss for
tax purposes may differ from these financial statements.

2.   INCOME-PRODUCING PROPERTIES

Income-producing properties consisted of the following:

<TABLE>
<CAPTION>
                                        December 31,
                                     1998          1997
                                 --------------------------
<S>                              <C>           <C>
Buildings                        $ 7,281,939   $ 7,281,939
Building improvements                899,407       899,407
Site improvements                    781,437       781,437
                                 -----------   -----------
                                   8,962,783     8,962,783
Less accumulated depreciation     (2,203,193)   (1,937,941)
                                 -------------------------
 
                                 $ 6,759,590   $ 7,024,842
                                 =========================
</TABLE>

Depreciation charged to operations during the years ended December 31, 1998,
1997,and 1996 was $265,252, $265,252, and $263,085, respectively.

The Partnership evaluates its properties for impairment of value under standards
established under Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of."  Under these standards, an impairment occurs if the estimated
undiscounted cash flows from the properties were less than the carrying amount
of the asset.  At December 31, 1998, the Partnership does not hold any assets
that meet the impairment criteria of SFAS No. 121.

                                      -7-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                       (A CALIFORNIA GENERAL PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS


3.   RENTS RECEIVABLE

Rents receivable include building rental revenue recognized in excess of amounts
due under the terms of the leases in addition to amounts due for reimbursable
charges.  Included in rents receivable at December 31, 1998 and 1997 is $723,947
and $735,793, respectively, of rents in excess of amounts due currently under
the leases.  During the year ended December 31, 1998, building rental revenue
recognized is $11,845 less than the amounts due under the terms of the leases.
For the years ended December 31, 1997 and 1996, building rental revenue
recognized exceeds the amounts due under the terms of the leases in the amounts
of $73,742 and $104,952, respectively.

4.   OTHER ASSETS
 
Other assets consisted of the following:

<TABLE> 
<CAPTION> 
                                                      December 31,
                                                    1998        1997
                                               ------------------------
<S>                                            <C>         
Capitalized leasing costs                      $ 359,857     $ 361,827
Less accumulated amortization                   (127,995)     (104,367)
                                               -----------------------
                                                 231,862       257,460
Prepaid insurance                                 11,890         2,706
                                               -----------------------
 
                                               $ 243,752     $ 260,166
                                               =======================
</TABLE>

Capitalized leasing costs represent initial direct costs incurred to acquire
leases and are amortized over the life of the related lease.  Amortization of
capitalized leasing costs charged to property operations for the years ended
December 31, 1998, 1997 and 1996 was $25,597, $25,227, $24,690, respectively.

5.   RELATED PARTY TRANSACTIONS

Copley Pension Properties VII

Copley Pension Properties VII is entitled to receive a monthly Priority Return
at the rate of ten percent per annum on the balance of its Invested Capital.
The Partnership is permitted to defer payment of the Priority Return equal to
one percent per annum for the first 120 months from the date of the Partnership
Agreement.  Any amounts deferred also bear interest at ten percent.  Copley
Pension Properties VII has committed to a maximum Invested Capital of
$10,000,000 which, at December 31, 1998, was $9,786,330.  All unpaid Invested
Capital and accrued Priority Return are required to be paid in full no later
than September 30, 1999.  The following is a summary of information relative to
the Priority Return:

<TABLE>
<CAPTION>
                                 For the Years Ended December 31,
                                   1998        1997        1996
                                ----------------------------------
<S>                             <C>         <C>         <C>
Amount charged to operations    $  981,855  $1,001,621  $1,012,404
                                ==================================
Cash payments                   $1,100,056  $1,157,770  $1,112,770
                                ==================================
</TABLE>

                                      -8-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                       (A CALIFORNIA GENERAL PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS


5. RELATED PARTY TRANSACTIONS (Continued)

<TABLE>
<CAPTION>
                                      December 31,
                                     1998      1997
                                   ------------------
<S>                                <C>       <C>
 
Accrued amount currently payable    $81,553  $ 73,397
Cumulative deferred payments            --    126,357
                                    -----------------
 
Total                               $81,553  $199,754
                                    =================
</TABLE>

SBC&D Co., Inc. and SBCC Co., Inc.

The Partnership has entered into a Property Management Agreement with SBC&D Co.,
Inc. for management of the property, in which SBC&D Co., Inc. is to receive
three percent of gross rents plus lease commissions equal to one-third of the
then prevailing market rate for each new lease, lease renewal, or lease
extension.  SBCC Co., Inc. is the general contractor for improvements and
repairs to the Partnership properties.  SBC&D Co., Inc. and SBCC Co., Inc. have
common shareholders, although only SBC&D Co., Inc. is a partner in the
Partnership.

Charges related to these transactions were as follows:

<TABLE>
<CAPTION>
                           For the Years Ended December 31,
                              1998       1997       1996
                           --------------------------------
<S>                        <C>           <C>        <C>
Repairs and maintenance       $ 6,354    $11,755    $14,407
Management fees                42,564     39,779     37,945
Lease commissions                          1,885      3,353
                              -----------------------------
 
                              $48,918    $53,419    $55,705
                              =============================
</TABLE>

At December 31, 1998 and 1997, the Partnership had accounts payable to SBC&D
Co., Inc. of $3,591 and $3,408, respectively.  There were no outstanding
balances due to SBCC Co., Inc.

                                      -9-
<PAGE>
 
                        SOUTH BAY/COPLEY VII ASSOCIATES
                       (A CALIFORNIA GENERAL PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS


6. RENTAL REVENUE

Portions of the project's buildings are rented under noncancellable leases with
initial lease terms of up to twenty years.  The following is a schedule by years
of minimum future rentals on these leases as of December 31, 1998:

<TABLE>
<CAPTION>
 
     Year ending December 31,
          <S>                                <C> 
             1999                            $ 1,362,780
             2000                              1,295,373
             2001                              1,223,162
             2002                              1,218,115
             2003                              1,272,872
          Thereafter                           6,319,012
                                             -----------
 
            Total                            $12,691,314
                                             ===========
</TABLE>

The above schedule includes minimum future rentals of three significant tenants
that represent greater than 90 percent of the minimum future rentals.

Certain lease agreements provide that rental amounts can be increased in
accordance with the Consumer Price Index for all wage earners and clerical
workers, San Francisco/Oakland metropolitan area, published by the United States
Department of Labor, Bureau of Labor Statistics.  In addition, one lease
agreement is subject to a yearly fixed rate increase over its term.  Under
certain of the lease agreements, the lessees are required to pay their
proportionate shares of property taxes, insurance, and common area maintenance
charges.

7.   LAND LEASE

The Partnership leases the land used in its operations under a noncancellable
operating lease which has an initial expiration date of November 12, 2014 and an
option to extend the lease for an additional 25 years.

The following is a schedule by years of minimum future rentals as of December
31, 1998:

<TABLE>
<CAPTION>
 
     Year ending December 31,
          <S>                                 <C>
             1999                             $   73,230
             2000                                 73,230
             2001                                 73,230
             2002                                 73,230
             2003                                 73,230
          Thereafter                             799,672
                                              ----------
 
            Total                             $1,165,822
                                              ==========
</TABLE>

The total rental expense under this operating lease was $73,230 for each of the
years ended December 31, 1998, 1997 and 1996.

                                     -10-
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

EXHIBIT                                                          PAGE
NUMBER                                                           NUMBER
------                                                           ------

10A.           Frederick Partners General Partnership              *
               Agreement dated as of March 20, 1989
               between Frederick Bozzuto Limited
               Partnership, Copley Pension Properties
               VI; A Real Estate Limited Partnership and
               the Registrant.
 
10B.           General Partnership Agreement of South Bay/         *
               Copley VII Associates dated as of September 20,
               1989 between SBC & D Co., Inc. and
               Copley Pension Properties VII, A Real Estate
               Limited Partnership.
 
10C.           Purchase Agreement and Escrow Instructions          *
               dated March 7, 1989, as amended, between
               Scottsdale Unified School District No. 48 of
               Maricopa County, Arizona and Evans Withycombe
               Construction, Inc.
 
10D.           Letter Agreement dated November 30, 1989,           *
               between the Registrant and EW Kachina
               Limited Partnership for the formation of
               Kachina Associates.
 
10E.           Loan Agreement dated as of November 30, 1989        *
               between the Registrant and EW Funding Corp., Inc.
 
10F.           Multiple Advance Note dated November 30,            *
               1989, in the Principal amount of $2,600,000
               from EW Funding Corp., Inc., to the Registrant.
 
10G.           Deed of Trust and Assignment of Rents dated         *
               as of November 30, 1989 between EW Funding
               Corp., Inc., as Trustor, Ticor Title
               Insurance Company of California, as Trustee,
               and the Registrant, as Beneficiary.
 
10H.           Ground Lease dated as of October 14, 1976,          *
               between Park West Associates, as Landlord
               and Carl N. Swenson Co., Inc., as Tenant.
 
10I.           Assignment of Ground Lease and Grant of Real        *
               Property dated as of September 20, 1989 by          
               and between Property Resources Fund III, as
               Assignor and the Registrant as Assignee.
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

EXHIBIT                                                              PAGE
NUMBER                                                               NUMBER
------                                                               ------
10J.           General Partnership Agreement of Kachina Associates,    *
               an Arizona general partnership dated as of              
               May 25, 1990 between EW Kachina Limited                 
               Partnership, an Arizona Limited Partnership             
               and the Registrant.                                     
                                                                       
10K.           First Amendment to General Partnership Agreement        *
               of Kachina Associates dated as of May 25, 1990           
               by and among EW Kachina Limited Partnership              
               and the Registrant.                                      
                                                                        
10L.           Frederick Partners Amended and Restated                 *
               General Partnership Agreement dated as of                
               October 23, 1990 between Frederick Bozzuto               
               Limited Partnership, Copley Pension Properties           
               VI; a Real Estate Limited Partnership and the            
               Registrant.                                              
                                                                        
10M.           Barrett Associates Joint Venture General Partnership    *
               Agreement dated as of December 1, 1990                   
               between Barrett A & S Partners, L.P. and the             
               Registrant.                                              
                                                                        
10N.           Crow Copley Houston Associates General                  *
               Partnership Agreement dated as of December 18,           
               1990 between CH 1990 IACT Limited Partnership            
               and the Registrant.                                      
                                                                        
10O.           Agreement for Purchase and Sale by and between          *
               Barrett Associates Joint Venture, a Georgia              
               general partnership, composed of Barrett                 
               A & S Partners, L.P., a Georgia limited                  
               partnership, and the Registrant, and Germania            
               of America, Inc. dated February 7, 1991.                 
                                                                        
10P.           First Amendment to Agreement for Purchase               *
               and Sale dated as of April 15, 1991 by and                
               between Barrett Associates Joint Venture
               and Germania of America, Inc.

10Q.           Second Amendment to Agreement for Purchase              *   
               and Sale dated as of April 15, 1991 by          
               and between Barrett Associates Joint Venture    
               and Germania of America, Inc.                    
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

EXHIBIT                                                              PAGE
NUMBER                                                               NUMBER
------                                                               ------
10R.           Third Amendment to Agreement for Purchase               *
               and Sale dated as of August 27, 1991 by
               and between Barrett Associates Joint Venture
               and Germania of America, Inc.
 
10S.           Prentiss/Copley Itasca Associates General               *
               Partnership Agreement dated as of May 20,                
               1991 between Prentiss Properties Itasca                  
               L.P., a Texas limited partnership, and Copley            
               Pension Properties VI; A Real Estate Limited             
               Partnership and Registrant.                              
                                                                        
10T.           Assignment Agreement made as of January 1, 1994         *
               by and between Registrant and CH 1990 IACT              
               Limited Partnership and Eighth Copley Corp.             
                                                                       
10U.           Asset Contribution Agreement by and among Evans         *       
               Withycombe Residential, Inc., a Maryland Corporation,
               and Evans Withycombe Residential, L.P., a Delaware
               Limited Partnership, as Purchasers and Kachina
               Associates, as Seller dated as of June 9, 1994.

27.            Financial Data Schedule


_______________________________________________

*    Previously filed and incorporated herein by reference.