<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

    X     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
 -------  Exchange Act of 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       or

          Transition Report Pursuant to Section 13 or 15(d) of the Securities
 -------  Exchange Act of 1934

                 For the Transition period from ______ to ______


                         COMMISSION FILE NUMBER: 0-11779


                         S/M REAL ESTATE FUND VII, LTD.
              ----------------------------------------------------
              Exact Name of Registrant as Specified in its Charter


            Texas                                              75-1845682
 -------------------------------                            ----------------
 (State or other jurisdiction of                            (I.R.S. Employer
  incorporation of organization)                           Identification No.)



5520 LBJ Freeway, Suite 500, Dallas, Texas                         75240
------------------------------------------                       ---------
 (Address of principal executive offices)                        (Zip code)


                                 (972) 404-7100
              ----------------------------------------------------
              (Registrant's telephone number, including area code)



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
                                     ---    ---




<PAGE>   2
S/M REAL ESTATE FUND VII, LTD.


<Table>
<Caption>
BALANCE SHEETS                                       AT JUNE 30,  AT DECEMBER 31,
                                                            2001             2000
                                                     (UNAUDITED)
                                                     -----------  ---------------
<S>                                                  <C>          <C>
ASSETS
Real estate, at cost:
   Land                                              $   962,216    $   962,216
   Building and improvements                           7,950,414      7,944,151
                                                     -----------    -----------
                                                       8,912,630      8,906,367
   Less accumulated depreciation                      (6,512,375)    (6,308,560)
                                                     -----------    -----------
                                                       2,400,255      2,597,807

Cash and cash equivalents                                175,576        136,606
Cash held in escrow                                      165,942         60,870
Restricted cash - replacement reserve                     80,995         55,621
Accounts receivable                                        4,017          5,451
Other assets                                              75,652         61,821
                                                     -----------    -----------
     TOTAL ASSETS                                    $ 2,902,437    $ 2,918,176
                                                     ===========    ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
   First mortgage note payable                       $ 6,250,040    $ 6,283,959
   Accounts payable:
     Trade                                                38,558          6,605
     Affiliates                                           40,665         40,960
   Accrued expenses and other liabilities                119,275         46,617
                                                     -----------    -----------
     Total Liabilities                                 6,448,538      6,378,141
                                                     -----------    -----------
Partners' Deficit:
   General Partners                                     (122,072)      (121,211)
   Limited Partners (11,080 units outstanding)        (3,424,029)    (3,338,754)
                                                     -----------    -----------
     Total Partners' Deficit                          (3,546,101)    (3,459,965)
                                                     -----------    -----------
     TOTAL LIABILITIES AND PARTNERS' DEFICIT         $ 2,902,437    $ 2,918,176
                                                     ===========    ===========
</Table>






STATEMENT OF PARTNERS' DEFICIT (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2001

<Table>
<Caption>
                                       GENERAL        LIMITED
                                       PARTNERS       PARTNERS         TOTAL
                                      -----------    -----------    -----------
<S>                                   <C>            <C>            <C>
BALANCE AT DECEMBER 31, 2000          $  (121,211)   $(3,338,754)   $(3,459,965)
Net loss                                     (861)       (85,275)       (86,136)
                                      -----------    -----------    -----------
BALANCE AT JUNE 30, 2001              $  (122,072)  $ (3,424,029)   $(3,546,101)
                                      ===========    ===========    ===========
</Table>


See accompanying notes to the financial statements.



                                                                               2
<PAGE>   3
S/M REAL ESTATE FUND VII, LTD.


STATEMENTS OF OPERATIONS (UNAUDITED)

<Table>
<Caption>
                                THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,
                                       2001           2000           2001           2000
                                -----------    -----------    -----------    -----------
<S>                             <C>            <C>            <C>            <C>
INCOME
Rental                          $   355,507    $   337,052    $   717,734    $   678,108
Interest and other                    4,230          4,709          7,566          8,689
                                -----------    -----------    -----------    -----------
     Total Income                   359,737        341,761        725,300        686,797
                                -----------    -----------    -----------    -----------
EXPENSES
Property operating                  162,974        190,382        330,743        345,969
Interest                            113,318        114,444        225,697        229,162
Depreciation and amortization       107,914        106,817        216,994        209,591
General and administrative           17,889         18,077         38,002         34,068
                                -----------    -----------    -----------    -----------
     Total Expenses                 402,095        429,720        811,436        818,790
                                -----------    -----------    -----------    -----------
NET LOSS                        $   (42,358)   $   (87,959)   $   (86,136)   $  (131,993)
                                ===========    ===========    ===========    ===========
NET LOSS ALLOCATED:
To the General Partners         $      (424)   $      (880)   $      (861)   $    (1,320)
To the Limited Partners             (41,934)       (87,079)       (85,275)      (130,673)
                                -----------    -----------    -----------    -----------
                                $   (42,358)   $   (87,959)   $   (86,136)   $  (131,993)
                                ===========    ===========    ===========    ===========
PER LIMITED PARTNERSHIP UNIT
(11,080 OUTSTANDING)            $     (3.78)   $     (7.86)   $     (7.70)   $    (11.79)
                                -----------    -----------    -----------    -----------
</Table>


See accompanying notes to the financial statements.


                                                                               3
<PAGE>   4
S/M REAL ESTATE FUND VII, LTD.


<Table>
<Caption>
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,                                     2001           2000
                                                               -----------    -----------
<S>                                                            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                       $   (86,136)   $  (131,993)
Adjustments to reconcile net loss to net cash
provided by operating activities:
   Depreciation and amortization                                   216,994        209,591
   Loss on retirement of asset                                          --         25,966
   Increase (decrease) in cash arising from changes in
   operating assets and liabilities:
     Cash held in escrow                                          (105,072)      (100,504)
     Accounts receivable                                             1,434         (1,777)
     Other assets                                                  (16,887)        11,775
     Accounts payable                                               31,658          3,873
     Accrued expenses and other liabilities                         72,658         64,730
                                                               -----------    -----------
Net cash provided by operating activities                          114,649         81,661
                                                               -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash - replacement reserve                  (25,374)        (6,938)
Additions to real estate                                           (16,386)      (105,629)
                                                               -----------    -----------
Net cash used in investing activities                              (41,760)      (112,567)
                                                               -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES - Payments of principal
   on first mortgage note payable                                  (33,919)       (30,454)
                                                               -----------    -----------
Net increase (decrease) in cash and cash equivalents                38,970        (61,360)
Cash and cash equivalents, beginning of period                     136,606        203,840
                                                               -----------    -----------
Cash and cash equivalents, end of period                       $   175,576    $   142,480
                                                               ===========    ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest                       $   225,697    $   229,162
                                                               -----------    -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of fully depreciated building improvements           $    10,123    $    18,567
                                                               -----------    -----------
</Table>




See accompanying notes to the financial statements.

                                                                               4
<PAGE>   5
S/M REAL ESTATE FUND VII, LTD.

NOTES TO THE FINANCIAL STATEMENTS

The quarterly unaudited financial statements for S/M Real Estate Fund VII, Ltd.
(the "Partnership") include all normal and recurring adjustments which are, in
the opinion of management, necessary to present a fair statement of financial
position as of June 30, 2001, the results of operations for the three and six
months ended June 30, 2001 and 2000, the cash flows for the six months ended
June 30, 2001 and 2000, and the change in partners' deficit for the six months
ended June 30, 2001. Results of operations for the period are not necessarily
indicative of the results to be expected for the full year.

No significant events have occurred subsequent to fiscal year 2000, and no
material contingencies exist which would require disclosure in this interim
report per Regulation S-X, Rule 10-01, Paragraph (a)(5).

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.

During the six months ended June 30, 2001 and 2000, the General Partners or
their affiliates were reimbursed for Partnership administrative and operating
expenses, excluding property and construction management fees, in the amounts of
$5,336 and $5,060, respectively. Property and construction management fees
earned by an affiliate of the Partnership's General Partners were $28,638 and
$31,585 for the six months ended June 30, 2001 and 2000, respectively.

The financial information included in this interim report as of June 30, 2001
and for the three and six months ended June 30, 2001 and 2000 has been prepared
by management without audit by independent public accountants. The Partnership's
2000 annual report contains audited financial statements including the notes to
the financial statements and should be read in conjunction with the financial
information contained in this interim report.




                                                                               5
<PAGE>   6


S/M REAL ESTATE FUND VII, LTD.

PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

Liquidity and Capital Resources

Under the terms of the Partnership's loan agreement with General Electric
Capital Corporation (the "Loan Agreement"), the Partnership is required to make
fixed monthly payments of principal and interest in the amount of $43,269 until
maturity on January 1, 2009, at which time the entire outstanding principal
balance and accrued interest is due. Under the terms of the Loan Agreement, the
Partnership is required to make monthly contributions of $3,905 which are held
by the lender pending application for the completion of certain required repairs
to the Fifth Avenue property. At June 30, 2001, the balance in this replacement
reserve account was $80,995.

Cash and cash equivalents totaled $175,576 at June 30, 2001, compared to
$136,606 at December 31, 2000. The $38,970 increase is primarily attributable to
cash provided by operations offset by debt service payments and payments made to
the replacement reserve account.

Cash held in escrow increased to $165,942 at June 30, 2001, from $60,870 at
December 31, 2000. The $105,072 increase is primarily attributable to
contributions to the insurance and real estate tax escrow as required by the
Loan Agreement.

Other assets increased to $75,652 at June 30, 2001, from $61,821 at December 31,
2000. The increase is primarily due to increases in prepaid insurance offset by
the amortization of loan costs.

Accounts receivable totaled $4,017 at June 30, 2001, compared to $5,451 at
December 31, 2000. Accounts payable totaled $38,558 at June 30, 2001, compared
to $6,605 at December 31, 2000. The increase in accounts payable is primarily
attributable to the timing of payments associated with repairs and maintenance
for apartment preparation and property insurance.

Accrued expenses and other liabilities totaled $119,275 at June 30, 2001,
compared to $46,617 at December 31, 2000. The change is primarily attributable
to the timing of payments for real estate taxes, accounting fees and
administrative costs.

The Partnership's General Partners currently expect funds from operations to be
sufficient to pay all obligations for 2001, including debt service. In the event
of any cash flow deficits, it is expected that such deficits will be funded by
the Partnership's existing cash balances. However, there can be no assurance
that the Partnership will have sufficient cash to fund such deficits.

Results of Operations

Operations resulted in net losses of $42,358 and $86,136 for the three and
six-month periods ended June 30, 2001, respectively, compared with net losses of
$87,959 and $131,993 for the three and six-month periods ended June 30, 2000,
respectively. The decreases for the three and six-months ended June 30, 2001
from the corresponding periods in 2000 are primarily attributable to increases
in rental income and decreases in property operating expenses.

Rental income totaled $355,507 and $717,734 for the three and six-month periods
ended June 30, 2001, respectively, compared to $337,052 and $678,108,
respectively, for the corresponding periods in 2000. Occupancy at Fifth Avenue
averaged approximately 95% for both the three and six-month periods ended June
30, 2001, respectively, compared to 93% for both the three and six-month periods
ended June 30, 2000, respectively. The average rental income per occupied square
foot at Fifth Avenue was $8.93 and $8.96 for the three and six months ended June
30, 2001, respectively, compared to $8.60 and $8.71, respectively, for the
corresponding periods in 2000. The increase in the average rental income per
occupied square foot in 2001 is primarily attributable to increases in rental
rates and a decrease in rental concessions.



                                                                               6
<PAGE>   7
S/M REAL ESTATE FUND VII, LTD.



Total expenses for the three and six-month periods ended June 30, 2001 were
$402,095 and $811,436, respectively, compared to $429,720 and $818,790,
respectively, for the three and six-month periods ended June 30, 2000. The
decreases for the three and six-months ended June 30, 2001 from the
corresponding periods in 2000 are primarily attributable to decreases in
property operating expenses.

Property operating expenses consist primarily of on-site personnel expenses,
utility costs, repair and maintenance costs, property management fees,
advertising costs, insurance and real estate taxes. Property operating expenses
for the three and six-month periods ended June 30, 2001 were $162,974 and
$330,743, respectively, compared to $190,382 and $345,969, respectively, for the
three and six-month periods ended June 30, 2000. The decreases for the 2001
periods primarily are attributable to lower repairs and maintenance costs for
apartment preparation and a decrease in retirement of assets of $25,966, offset
in part by increases in on-site personnel expenses, utility costs and real
estate taxes.

General and administrative expenses for the three and six-month periods ended
June 30, 2001 were $17,889 and $38,002, respectively, compared to $18,077 and
$34,068, respectively, for the three and six-month periods ended June 30, 2000.
The increase for the six-month period in 2001 is primarily related to higher
professional expenses.

General

Words or phrases when used in this Form 10-Q or other filings with the
Securities and Exchange Commission, such as "does not believe" and "believes",
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.


PART I, ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the information related to the market
risk of the Partnership since December 31, 2000.



                                                                               7
<PAGE>   8
S/M REAL ESTATE FUND VII, LTD.



PART II        OTHER INFORMATION

ITEMS 1-5      Not applicable.

ITEM 6         Exhibits and reports on Form 8-K.

               (a)  Exhibits -

               2a   Voluntary Petition of Shearson-Murray Real Estate Fund VII,
                    Ltd. to commence a case under Chapter 11 of the Federal
                    Bankruptcy Code in the United States Bankruptcy Court for
                    the Western District of Texas-Austin Division, as filed on
                    June 6, 1989. Reference is made to Exhibit 2a to the
                    Partnership's Annual Report on Form 10-K filed with the
                    Securities and Exchange Commission on June 14, 1989.

               2b   Modified First Amended Plan of Reorganization of
                    Shearson-Murray Real Estate Fund VII, Ltd. in the United
                    States Bankruptcy Court for the Western District of
                    Texas-Austin Division Case No. 89-11662-LC filed February
                    20, 1990. Reference is made to the Partnership's Annual
                    Report on Form 10-K filed with the Securities and Exchange
                    Commission on April 12, 1990.

               3    Agreement of Limited Partnership of Shearson-Murray Real
                    Estate Fund VII, Ltd., as amended as of September 30, 1983.
                    Reference is made to Partnership's Form 8-K filed with the
                    Securities and Exchange Commission on October 26, 1983.
                    Reference is made to Exhibit A to the Prospectus dated June
                    10, 1983 contained in Amendment No. 3 to Partnership's Form
                    S-11 Registration Statement filed with the Securities and
                    Exchange Commission June 10, 1983.

               10a  Assignment and Assumption Agreement between Murray
                    Management Corporation and Anterra Management Corporation
                    for property management and leasing services dated January
                    1, 1990. Reference is made to Exhibit 10u to the
                    Partnership's Annual Report on Form 10-K filed with the
                    Securities and Exchange Commission May 15, 1990.

               10b  Loan Agreement between S/M Real Estate Fund VII, Ltd. and
                    General Electric Capital Corporation, dated December 3,
                    1998. Reference is made to Exhibit 10.1 to Partnership's
                    Form 8-K filed with the Securities and Exchange Commission
                    on December 14, 1998.

               28a  Pages A-16 to A-18 of Exhibit A to the Prospectus dated June
                    10, 1983, contained in Amendment No. 3 to Partnership's Form
                    S-11 Registration Statement filed with the Securities and
                    Exchange Commission on June 10, 1983. Reference is made to
                    Exhibit 28a to the Partnership's Annual Report on Form 10-K
                    filed with the Securities and Exchange Commission on May 12,
                    1988.

               28b  Pages 10-18 of the Prospectus dated June 10, 1983, contained
                    in Amendment No. 3 to Partnership's Form S-11 Registration
                    Statement filed with the Securities and Exchange Commission
                    on June 10, 1983. Reference is made to Exhibit 28b to the
                    Partnership's Annual Report on Form 10-K filed with the
                    Securities and Exchange Commission on May 12, 1988.


                                                                               8
<PAGE>   9
S/M REAL ESTATE FUND VII, LTD.


               99a  Compromise Settlement Agreement between S/M Real Estate Fund
                    VII, Ltd. and Federal National Mortgage Association, dated
                    May 6, 1996. Reference is made to Exhibit 99.1 to the
                    Partnership's Quarterly Report on Form 10-Q for the quarter
                    ended June 30, 1996 filed with the Securities and Exchange
                    Commission.

               99b  $5,830,000 Multifamily Note and Addendum, dated May 30,
                    1996. Reference is made to Exhibit 99.2 to the Partnership's
                    Quarterly Report on Form 10-Q for the quarter ended June 30,
                    1996 filed with the Securities and Exchange Commission.

               99c  $681,142 Subordinate Multifamily Note and Addendum, dated
                    May 30, 1996. Reference is made to Exhibit 99.3 to the
                    Partnership's Quarterly Report on Form 10-Q for the quarter
                    ended June 30, 1996 filed with the Securities and Exchange
                    Commission.

               99d  $6,400,000 Promissory Note, dated December 3, 1998.
                    Reference is made to Exhibit 99.1 of the Partnership's Form
                    8-K filed with the Securities and Exchange Commission on
                    December 14, 1998.

               (b) Reports on Form 8-K - No reports on Form 8-K were filed
                   during the quarter ended June 30, 2001.




                                                                               9
<PAGE>   10
                                   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.



                                 S/M REAL ESTATE FUND VII, LTD.

                             BY: SM7 APARTMENT INVESTORS INC.
                                 A General Partner


Date: August 8, 2001             BY:    /s/ Richard E. Hoffmann
                                        ----------------------------------------
                                 Name:  Richard E. Hoffmann
                                 Title: Director, President and  Treasurer
                                        (Principal Financial Officer)


                             BY: MURRAY REALTY INVESTORS VII, INC.
                                 A General Partner


Date:  August 8, 2001            BY:    /s/ Charles W. Karlen
                                        ----------------------------------------
                                 Name:  Charles W. Karlen
                                 Title: Vice President



                                                                              10
<PAGE>   11
                                INDEX TO EXHIBITS

<Table>
<Caption>
Document
 Number      Description
--------     -----------
<S>          <C>
   2a        Voluntary Petition of Shearson-Murray Real Estate Fund VII, Ltd. to
             commence a case under Chapter 11 of the Federal Bankruptcy Code in
             the United States Bankruptcy Court for the Western District of
             Texas-Austin Division, as filed on June 6, 1989. Reference is made
             to Exhibit 2a to the Partnership's Annual Report on Form 10-K filed
             with the Securities and Exchange Commission on June 14, 1989.

   2b        Modified First Amended Plan of Reorganization of Shearson-Murray
             Real Estate Fund VII, Ltd. in the United States Bankruptcy Court
             for the Western District of Texas-Austin Division Case No.
             89-11662-LC filed February 20, 1990. Reference is made to the
             Partnership's Annual Report on Form 10-K filed with the Securities
             and Exchange Commission on April 12, 1990.

   3         Agreement of Limited Partnership of Shearson-Murray Real Estate
             Fund VII, Ltd., as amended as of September 30, 1983. Reference is
             made to Partnership's Form 8-K filed with the Securities and
             Exchange Commission on October 26, 1983. Reference is made to
             Exhibit A to the Prospectus dated June 10, 1983 contained in
             Amendment No. 3 to Partnership's Form S-11 Registration Statement
             filed with the Securities and Exchange Commission on June 10, 1983.

   10a       Assignment and Assumption Agreement between Murray Management
             Corporation and Anterra Management Corporation for property
             management and leasing services dated January 1, 1990. Reference is
             made to Exhibit 10u to the Partnership's Annual Report on Form 10-K
             filed with the Securities and Exchange Commission May 15, 1990.

   10b       Loan Agreement between S/M Real Estate Fund VII, Ltd. and General
             Electric Capital Corporation, dated December 3, 1998. Reference is
             made to Exhibit 10.1 to Partnership's Form 8-K filed with the
             Securities and Exchange Commission on December 14, 1998.

   28a       Pages A-16 to A-18 of Exhibit A to the Prospectus dated June 10,
             1983, contained in Amendment No. 3 to Partnership's Form S-11
             Registration Statement filed with the Securities and Exchange
             Commission on June 10, 1983. Reference is made to Exhibit 28a to
             the Partnership's Annual Report on Form 10-K filed with the
             Securities and Exchange Commission on May 12, 1988.

   28b       Pages 10-18 of the Prospectus dated June 10, 1983, contained in
             Amendment No. 3 to Partnership's Form S-11 Registration Statement
             filed with the Securities and Exchange Commission on June 10, 1983.
             Reference is made to Exhibit 28b to the Partnership's Form 10-K
             filed with the Securities and Exchange Commission on May 12, 1988.

   99a       Compromise Settlement Agreement between S/M Real Estate Fund VII,
             Ltd. and Federal National Mortgage Association, dated May 6, 1996.
             Reference is made to Exhibit 99.1 to the Partnership's Quarterly
             Report on Form 10-Q for the quarter ended June 30, 1996 filed with
             the Securities and Exchange Commission.

   99b       $5,830,000 Multifamily Note and Addendum, dated May 30, 1996.
             Reference is made to Exhibit 99.2 to the Partnership's Quarterly
             Report on Form 10-Q for the quarter ended June 30, 1996 filed with
             the Securities and Exchange Commission.

   99c       $681,142 Subordinate Multifamily Note and Addendum, dated May 30,
             1996. Reference is made to Exhibit 99.3 to the Partnership's
             Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
             filed with the Securities and Exchange Commission.

   99d       $6,400,000 Promissory Note, dated December 3, 1998. Reference is
             made to Exhibit 99.1 of the Registrant's Form 8-K filed with the
             Securities and Exchange Commission on December 14, 1998.
</Table>


                                                                              11