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


                                   FORM 10-Q

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


For Quarter Ended September 30, 1998             Commission File Number 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 Identification No.)
incorporation or organization)

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

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


-------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report


     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 twelve (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 [   ]
<PAGE>
 
                         COPLEY PENSION PROPERTIES VII;

                       A REAL ESTATE LIMITED PARTNERSHIP


                                   FORM 10-Q


                      FOR QUARTER ENDED SEPTEMBER 30, 1998


                                     PART I


                             FINANCIAL INFORMATION
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

BALANCE SHEETS
(Unaudited)
<TABLE> 
<CAPTION> 
                                     September 30, 1998  December 31, 1997
                                     ------------------  -----------------
<S>                                      <C>              <C>
ASSETS
 
REAL ESTATE INVESTMENTS:
  JOINT VENTURES                         $ 9,108,563        $12,693,813
  PROPERTY, NET                           10,832,048         10,957,147
                                         -----------        -----------
                                          19,940,611         23,650,960
                                         
                                         
CASH AND CASH EQUIVALENTS                  4,506,588          3,154,152
SHORT-TERM INVESTMENTS                             -          1,320,041
                                         -----------        -----------
                                         $24,447,199        $28,125,153
                                         ===========        ===========
                                         
                                         
LIABILITIES AND PARTNERS' CAPITAL        
                                         
ACCOUNTS PAYABLE                         $    75,097        $    82,215
ACCRUED MANAGEMENT FEE                        61,328             65,027
DEFERRED DISPOSITION FEES                    641,608            478,108
                                         -----------        -----------
TOTAL LIABILITIES                            778,033            625,350
                                         -----------        -----------
                                                      
                                                      
PARTNERS' CAPITAL (DEFICIT):                          
    LIMITED PARTNERS ($755 AND $844 PER               
        unit, respectively;160,000 units              
    authorized, 42,076 units issued                   
     and outstanding)                     23,692,545         27,539,153
    General partners                         (23,379)           (39,350)
                                         -----------        -----------
Total partners' capital                   23,669,166         27,499,803
                                         -----------        -----------
                                         $24,447,199        $28,125,153
                                         ===========        ===========
</TABLE>

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

STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)                                                                                       
                                 Three Months Ended     Nine Months Ended      Three Months Ended     Nine Months Ended
                                 September 30, 1998     September 30, 1998     September 30, 1997     September 30, 1997
                                 ------------------     ------------------     ------------------     ------------------
<S>                                  <C>                    <C>                    <C>                    <C>
Investment Activity                                                                               
                                                                                                  
Property rentals                     $  520,972             $1,492,123              $ 474,593             $1,390,832
Property operating expenses            (197,941)              (569,956)              (197,428)              (539,698)
Depreciation and amortization           (87,249)              (263,553)               (87,701)              (263,101)
                                     ----------             ----------              ---------             ----------
                                        235,782                658,614                189,464                588,033
                                                                                              
Joint venture earnings                  257,074                972,719                330,607                975,545
                                     ----------             ----------              ---------             ----------
                                                                                              
 Total real estate operations           492,856              1,631,333                520,071              1,563,578
Gain on sale of joint venture         2,076,945              2,076,945                      -                      -
                                     ----------             ----------              ---------             ----------
 Total real estate activity           2,569,801              3,708,278                520,071              1,563,578           
                                                                                              
Interest on cash equivalents                                                                  
 and short-term investments              73,779                189,484                 59,145                173,554
                                     ----------             ----------              ---------             ----------
                                                                                              
 Total investment activity            2,643,580              3,897,762                579,216              1,737,132
                                     ----------             ----------              ---------             ----------
Portfolio Expenses                                                                            
                                                                                              
Management fees                          61,328                191,381                 65,026                195,080
General and administrative               47,476                136,741                 40,593                140,918
                                     ----------             ----------              ---------             ----------
                                        108,804                328,122                105,619                335,998
                                     ----------             ----------              ---------             ----------
                                                                                                                    
Net Income                           $2,534,776             $3,569,640              $ 473,597             $1,401,134
                                     ==========             ==========              =========             ==========
                                                                                                                    
Net income per limited partnership                                                                                  
 unit                                $    59.64             $    83.99              $   11.14             $    32.97
                                     ==========             ==========              =========             ==========
                                                                                                        
Cash distributions per limited                                                                          
 partnership unit                    $   144.47             $   175.41              $   15.47             $    45.34
                                     ==========             ==========              =========             ==========
                                                                                                        
Number of limited partnership units                                                                     
 outstanding during the period           42,076                 42,076                 42,076                 42,076
                                     ==========             ==========              =========             ==========
 
</TABLE>
           (See accompanying notes to unaudited financial statements)
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
                        THREE MONTHS ENDED        NINE MONTHS ENDED       THREE MONTHS ENDED        NINE MONTHS ENDED
                        SEPTEMBER 30, 1998       SEPTEMBER 30, 1998       SEPTEMBER 30, 1997       SEPTEMBER 30, 1997
                      ----------------------   ----------------------   ----------------------   ---------------------- 
                      GENERAL      LIMITED     GENERAL      LIMITED     GENERAL      LIMITED     GENERAL      LIMITED
                      PARTNERS    PARTNERS     PARTNERS    PARTNERS     PARTNERS    PARTNERS     PARTNERS    PARTNERS
                      --------   -----------   --------   -----------   --------   -----------   --------   -----------
<S>                   <C>        <C>           <C>        <C>           <C>        <C>           <C>        <C>
BALANCE AT
  BEGINNING           $(42,151)  $27,261,836   $(39,350)  $27,539,153   $(36,347)  $27,836,473   $(32,927)  $28,175,021
  OF PERIOD
 
CASH DISTRIBUTIONS      (6,575)   (6,078,720)   (19,725)   (7,380,552)    (6,575)     (650,916)   (19,270)   (1,907,726)
 
NET INCOME              25,347     2,509,429     35,696     3,533,944      4,736       468,861     14,011     1,387,123
                      --------   -----------   --------   -----------   --------   -----------   --------   -----------
 
BALANCE AT END
  OF PERIOD           $(23,379)  $23,692,545   $(23,379)  $23,692,545   $(38,186)  $27,654,418   $(38,186)  $27,654,418
                      ========   ===========   ========   ===========   ========   ===========   ========   ===========
 
</TABLE>
           (SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS)
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
                                               Nine Months Ended September 30,
                                               -------------------------------
                                                    1998             1997
                                                    ----             ----      
<S>                                            <C>               <C>
Net cash provided by operating activities        $ 2,003,737      $ 1,897,662
                                                 -----------      -----------
 
Cash flows from investing activities:
  Net proceeds from sale of joint venture          5,282,750                -
  Deferred disposition fee                           163,500                -
  Decrease in short-term
   investments, net                                1,302,726          253,534
                                                 -----------      -----------
     Net cash provided by
      investing activities                         6,748,976          253,534
                                                 -----------      -----------
 
Cash flows from financing activity:
  Distributions to partners                       (7,400,277)      (1,926,996)
                                                 -----------      -----------
 
Net increase in cash
  and cash equivalents                             1,352,436          224,200
 
Cash and cash equivalents:
  Beginning of period                              3,154,152        3,030,587
                                                 -----------      -----------
 
  End of period                                  $ 4,506,588      $ 3,254,787
                                                 ===========      ===========
</TABLE>
           (See accompanying notes to unaudited financial statements)
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Partnership's financial
position as of September 30, 1998 and December 31, 1997 and the results of its
operations, its cash flows and partners' capital (deficit) for the three and
nine months ended September 30, 1998 and 1997.  These adjustments are of a
normal recurring nature.

See notes to financial statements included in the Partnership's 1997 Annual
Report on Form 10-K for additional information relating to the Partnership's
financial statements.

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

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.  It acquired
three of the four real estate investments it currently owns prior to 1991, and a
fourth property in 1995.  It intends to dispose of its investments within eight
to twelve years of their acquisition, and then liquidate.  The Partnership has
engaged AEW Real Estate Advisors, Inc. (the "Advisor") to provide asset
management services.

Note 2 - Real Estate Joint Ventures
-----------------------------------

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 (the "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, 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 the Advisor. 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.

The following summarized financial information is presented in the aggregate for
the Partnership's joint ventures:
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

<TABLE>
<CAPTION>
                             Assets and Liabilities
                             ----------------------

                                    September 30, 1998  December 31, 1997
                                    ------------------  -----------------
<S>                                 <C>                 <C>
Assets
  Real property, at cost less
     accumulated depreciation of
     $2,959,852 and $8,403,624
     respectively                      $ 9,297,151         $21,473,990
     Other                               1,035,539           1,615,524
                                       -----------         -----------
                                        10,332,690          23,089,514
Liabilities                                163,388             385,634
                                       -----------         -----------
                                       
Net assets                             $10,169,302         $22,703,880
                                       ===========         ===========

<CAPTION>
                             Results of Operations
                             ---------------------

                                       Nine Months Ended September 30,
                                          1998                1997
                                       ----------          ----------
<S>                                 <C>                 <C>
Revenue                                                    
                                                           
  Rental income                        $3,346,874          $3,704,717
  Other                                     5,714               4,890
                                       ----------          ----------
                                        3,352,588           3,709,607
                                        ----------         ----------
                                                      
Expenses                                              
                                                      
  Operating expenses                    1,039,807           1,225,093
  Depreciation and amortization           586,907             730,234
                                       ----------          ----------
                                        1,626,714           1,955,327
                                       ----------          ----------
                                                      
Net income                             $1,725,874          $1,754,280
                                       ==========          ==========
</TABLE>                          
                                 
Liabilities and expenses exclude amounts owed and attributable to the
Partnership and (with respect to two joint ventures) its affiliates on behalf of
their various financing arrangements with the joint ventures.
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP


Note 3  Property
----------------
The following is a summary of the Partnership's two wholly-owned properties:
<TABLE>
<CAPTION>
 
                                  September 30, 1998   December 31, 1997
                                  -------------------  ------------------
<S>                               <C>                  <C>
 
Land                                     $ 2,190,969         $ 2,190,969
Buildings and improvements                 9,865,883           9,865,883
Accumulated depreciation                  (1,346,852)         (1,090,317)
Other net assets (liabilities)               122,048              (9,388)
                                         -----------         -----------
                                         $10,832,048         $10,957,147
                                         ===========         ===========
</TABLE>


Note 4 - Subsequent Event
-------------------------

Distributions of cash from operations relating to the quarter ended September
30, 1998 were made on October 29, 1998 in the aggregate amount of $620,090
($14.59 per limited partnership unit).  In addition, a special capital
distribution was also made on October 29, 1998 in the amount of $541,939 
($12.88 per limited partnership unit). This special capital distribution was
funded from working capital reserves.
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------

Liquidity and Capital Resources

     The Partnership's offering of units of limited partnership interest was
completed as of September 30, 1990.  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, or retained as working capital reserves.
The Partnership made seven real estate investments, one of which was sold in
each of 1991, 1994 and another in 1998. Capital of $10,308,620 ($245 per limited
partnership unit) has been returned to the limited partners as a result of these
sales and the reduction of cash reserves.  On October 29, 1998, the Partnership
distributed capital of $541,939 ($12.88 per limited partnership unit) which
represented a reduction in working capital.  This capital distribution reduced
the adjusted capital contribution to $742.12 per unit.

     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 (the "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 Advisor. 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 September 30, 1998, the Partnership had $4,506,588 in cash and cash
equivalents, of which $620,090 was used for operating cash distributions and
$541,939 for capital distributions to partners on October 29, 1998.  The source
of future liquidity and cash distributions to partners will primarily be cash
flow generated by the Partnership's invested cash and cash equivalents and real
estate investments and proceeds from the sale of such investments.  The adjusted
capital contribution was reduced from $884 to $755 per limited partnership unit
during the third quarter of 1998, with a distribution of the sales proceeds from
Waterford Apartments. 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 quarter 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.   Distributions of cash from operations relating
to the first, second and third quarters of 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
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 
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

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 September 30, 1998, the appraised value of each
real estate investment exceeded its carrying value; the aggregate excess was
approximately $9,200,000.  The current appraised value of real estate
investments has been estimated by the managing general partner and is generally
based on a correlation of traditional appraisal approaches performed by the
Partnership's Advisor 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.

  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 December
     31, 1998.

     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.  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.
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

Results of Operations

     Form of Real Estate Investment

     The Drilex and Regency Court investments are wholly-owned properties. The
other two investments in the portfolio are structured as joint ventures.

     Operating Factors

     The Partnership's two industrial properties, Drilex and Prentiss Copystar,
were 100% leased, each by a single tenant, at September 30, 1998 and 
September 30, 1997.

     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 was 96% leased. At September 30, 1997 it was 93%
leased.

     The Partnership's multi-family residential property, Regency Court
Apartments, ended the third quarter of 1998 with an occupancy level of 98%
compared to 97% for the period ended September 30, 1997.

     Occupancy at Parkmoor Plaza was 100% at September 30, 1998 and 
September 30, 1997.

Investment Results

     For the three and nine months ended September 30, 1998, operating results
from real estate operations were $492,856 and $1,631,333, respectively, compared
to $520,071 and $1,563,578 for the comparable periods in 1997.  The decrease of
$27,215 for the comparative three month periods is primarily due to lower joint
venture earnings due to the sale of Waterford Apartments.  The increase of
$67,755 for the comparative nine month periods is primarily due to improved
operating results at Regency Court as a result of improved market conditions and
lower vacancy.

     Interest on cash equivalents and short-term investments for the three and
nine months ended September 30, 1998, was $73,779 and $189,484, respectively,
compared to $59,145 and $173,554 for the same periods in 1997. The increases of
approximately $14,600 or 25% and $16,000 or 9% for the three and nine month
periods respectively, are primarily due to higher average investment balances in
1998 as a result of the receipt of the Waterford Apartments sales proceeds.

     The increase in operating cash flow of approximately $106,000 between the
first nine months of 1997 and 1998 is primarily due to the increase in operating
results discussed above, increases in working capital and an increase in
distributions from joint ventures.

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.  General and administrative expenses
primarily consist of real estate appraisal, printing, legal, accounting and
investor servicing fees.
<PAGE>
 
COPLEY PENSION PROPERTIES VII;
A REAL ESTATE LIMITED PARTNERSHIP

     For the three and nine months ended September 30, 1998, management fees
were $61,328 and $191,381, respectively, compared to $65,026 and $195,080 for
the comparable periods in 1997.  The decrease of management fees for the
respective three and nine month periods is due to less operational cash
available for distributions as a result of the sale of Waterford Apartments on
August 7, 1998.

     General and administrative expenses for the three and nine months ended
September 30, 1998 were $47,476 and $136,741, respectively, compared to $40,593
and $140,918 for the same periods in 1997.  Expenses remained relatively
unchanged for both comparable periods.
 
<PAGE>
 
                         COPLEY PENSION PROPERTIES VII;

                       A REAL ESTATE LIMITED PARTNERSHIP


                                   FORM 10-Q


                      FOR QUARTER ENDED SEPTEMBER 30, 1998


                                    PART II


                               OTHER INFORMATION



Items 1-5.    Not applicable

Item 6.       Exhibits and Reports on Form 8-K

              a.  Exhibits:   (27)  Financial Data Schedule

              b.  Reports on Form 8-K: During the quarter ended September 30,
                  1998, one Current Report on Form 8-K was filed on August 20,
                  1998 reporting on Item No. 2 (Acquisition or Disposition of
                  Assets) and Item No. 7 (Financial statements and Exhibits),
                  relating in both cases to the August 7, 1998 sale of Waterford
                  Apartments.
<PAGE>
 
                                   SIGNATURES
                                   ----------



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                             COPLEY PENSION PROPERTIES VII;
                             A REAL ESTATE LIMITED PARTNERSHIP
                             (Registrant)



November 13, 1998
                              /s/ J. Christopher Meyer III
                              -------------------------------
                                J. Christopher Meyer III
                                President, Chief Executive Officer
                                And Director of Managing General
                                Partner, Seventh Copley Corp.



November 13, 1998
                              /s/ Karin J. Lagerlund
                              --------------------------------
                                Karin J. Lagerlund
                                Principal Financial and Accounting
                                Officer of Managing General Partner,
                                Seventh Copley Corp.