<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 MARCH 31, 2000

                                       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


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



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

                                 (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 MARCH 31,   AT DECEMBER 31,
                                                      2000              1999
                                                UNAUDITED)
                                                ----------    --------------
<S>                                            <C>            <C>
ASSETS
Real estate, at cost:
   Land                                         $   962,216     $   962,216
   Building and improvements                      7,893,022       7,863,701
                                                -----------     -----------
                                                  8,855,238       8,825,917
   Less accumulated depreciation                 (6,024,287)     (5,941,608)
                                                -----------     -----------
                                                  2,830,951       2,884,309

Cash and cash equivalents                           194,832         203,840
Cash held in escrow                                 105,308          54,365
Restricted cash - replacement reserve                34,094          39,414
Accounts receivable                                   2,217           5,097
Other assets                                         60,749          69,716
                                                -----------     -----------
     TOTAL ASSETS                               $ 3,228,151     $ 3,256,741
                                                ===========     ===========

LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
   First mortgage note payable                  $ 6,328,343     $ 6,343,433
   Accounts payable:
     Trade                                            6,802          19,022
     Affiliates                                      47,523          51,354
   Accrued expenses and other liabilities            93,445          46,860
                                                -----------     -----------
     Total Liabilities                            6,476,113       6,460,669
                                                -----------     -----------
Partners' Deficit:
   General Partners                                (119,091)       (118,651)
   Limited Partners (11,080 units outstanding)   (3,128,871)     (3,085,277)
                                                -----------     -----------
     Total Partners' Deficit                     (3,247,962)     (3,203,928)
                                                -----------     -----------
     TOTAL LIABILITIES AND PARTNERS' DEFICIT    $ 3,228,151     $ 3,256,741
                                                ===========     ===========
</TABLE>


================================================================================
STATEMENT OF PARTNERS' DEFICIT (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000

<TABLE>
<CAPTION>
                                   GENERAL         LIMITED
                                   PARTNERS        PARTNERS            TOTAL
                                  ---------       -----------       -----------
<S>                               <C>             <C>               <C>
BALANCE AT DECEMBER 31, 1999      $(118,651)      $(3,085,277)      $(3,203,928)
Net loss                               (440)          (43,594)          (44,034)
                                  ---------       -----------       -----------
BALANCE AT MARCH 31, 2000         $(119,091)      $(3,128,871)      $(3,247,962)
                                  =========       ===========       ===========
</TABLE>


See accompanying notes to the financial statements.                           2

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

<TABLE>
<CAPTION>
================================================================================
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,            2000            1999
                                             ---------       ---------
<S>                                          <C>             <C>
INCOME
Rental                                       $ 341,056       $ 326,448
Interest and other                               3,980           2,994
                                             ---------       ---------
     Total Income                              345,036         329,442
                                             ---------       ---------
EXPENSES
Property operating                             155,587         173,344
Interest                                       114,718         114,468
Depreciation and amortization                  102,774         100,005
General and administrative                      15,991          27,597
                                             ---------       ---------
     Total Expenses                            389,070         415,414
                                             ---------       ---------
     NET LOSS                                $ (44,034)      $ (85,972)
                                             =========       =========
NET LOSS ALLOCATED:
   To the General Partners                   $    (440)      $    (860)
   To the Limited Partners                     (43,594)        (85,112)
                                             ---------       ---------
                                             $ (44,034)      $ (85,972)
                                             =========       =========
PER LIMITED PARTNERSHIP UNIT
(11,080 OUTSTANDING)                         $   (3.93)      $   (7.68)
                                             ---------       ---------
</TABLE>


See accompanying notes to the financial statements.                           3

<PAGE>   4

<TABLE>
<CAPTION>
=================================================================================================================
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,                                 2000           1999
                                                                  ---------       ---------
<S>                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                          $ (44,034)      $ (85,972)
Adjustments to reconcile net loss to net cash
provided by operating activities:
   Depreciation and amortization                                    102,774         100,005
   Increase (decrease) in cash arising from changes in
   operating assets and liabilities:
     Cash held in escrow                                            (50,943)        (51,305)
     Accounts receivable                                              2,880           2,782
     Other assets                                                     7,439           6,683
     Accounts payable                                               (16,051)          6,187
     Accrued expenses and other liabilities                          46,585          21,769
                                                                  ---------       ---------
Net cash provided by operating activities                            48,650             149
                                                                  ---------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash - replacement reserve          5,320         (11,715)
Additions to real estate                                            (47,888)        (44,366)
                                                                  ---------       ---------
Net cash used in investing activities                               (42,568)        (56,081)
                                                                  ---------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES - Payments of principal
   on first mortgage note payable                                   (15,090)        (15,340)
                                                                  ---------       ---------
Net decrease in cash and cash equivalents                            (9,008)        (71,272)
Cash and cash equivalents, beginning of period                      203,840         274,735
                                                                  ---------       ---------
Cash and cash equivalents, end of period                          $ 194,832       $ 203,463
                                                                  =========       =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest                          $ 114,718       $ 114,468
                                                                  ---------       ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of fully depreciated building improvements              $  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 March 31, 2000 and the results of operations for the three months
ended March 31, 2000 and 1999, cash flows for the three months ended March 31,
2000 and 1999, and the statement of partners' deficit for the three months ended
March 31, 2000. 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 1999, 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 generally accepted
accounting principles 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 three months ended March 31, 2000 and 1999, the General Partners or
their affiliates were reimbursed for Partnership administrative and operating
expenses, excluding property and construction management fees, in the amounts of
$2,713 and $3,165, respectively. Property and construction management fees
earned by an affiliate of the General Partners were $15,216 and $13,169 for the
three months ended March 31, 2000 and 1999, respectively.

The financial information included in this interim report as of March 31, 2000
and for the three months ended March 31, 2000 and 1999 has been prepared by
management without audit by independent public accountants. The Partnership's
1999 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

In order to improve the financial condition of the Partnership and provide much
needed funds for exterior improvements on Fifth Avenue, on December 3, 1998, the
Partnership refinanced the mortgage note payable on Fifth Avenue (the
"Refinancing"). In accordance with the terms of the loan agreement, the
principal balance of the new mortgage totaling $6,400,000 is due January 1, 2009
and bears interest at a rate of 7.16%. The previous first and second mortgage
had a combined balance of $6,259,810 at an average interest rate of 8.97%. In
spite of having a slightly higher principal loan amount, the Partnership reduced
it's annual total debt service payments by approximately $170,000.

Under the terms of the loan agreement, the Partnership is required to make fixed
monthly payments of principal and interest in the amount of $43,269 commencing
on February 1, 1999 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 was required to deposit with the Lender
$114,375 and make monthly contributions of $3,905 which are held by the lender
pending application for the completion of certain required repairs to Fifth
Avenue. At March 31, 2000, the balance was $34,094.

Cash and cash equivalents totaled $194,832 at March 31, 2000, compared to
$203,840 at December 31, 1999. The $9,008 decrease is primarily attributable to
the increase in fixed asset additions offset by an increase in cash provided by
operations.

Cash held in escrow increased to $105,308 at March 31, 2000 from $54,365 at
December 31, 1999. The $50,943 increase is primarily attributable to
contributions to the insurance and real estate tax escrow, as required in the
Partnership's Loan Agreement.

Restricted cash - replacement reserve decreased to $34,094 at March 31, 2000,
from $39,414 at December 31, 1999. The $5,320 decrease is attributable to the
release of $17,598 for replacements and completed required lender repairs,
offset in part by monthly contributions to the replacements reserve in
accordance with the terms of the Loan Agreement.

Other assets decreased to $60,749 at March 31, 2000, from $69,716 at December
31, 1999. The decrease is primarily due to decreases in prepaid insurance and
other prepaid expenses.

Accounts receivable totaled $2,217 at March 31, 2000, compared to $5,097 at
December 31, 1999. The decrease is primarily attributable to the timing of
tenant rental receipts. Accounts payable totaled $54,325 at March 31, 2000,
compared to $70,376 at December 31, 1999. The decrease is primarily attributable
to the timing of payments associated with fixed asset expenditures.

Accrued expenses and other liabilities totaled $93,445 at March 31, 2000,
compared to $46,860 at December 31, 1999. The change is primarily attributable
to the timing of payments for real estate taxes and accounting fees.

As a result of the recent Refinancing and anticipated reductions in general and
administrative expenses, the General Partners currently expect funds from
operations to be sufficient to pay all obligations for 2000, 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

Results of operations resulted in net losses of $44,034 for the three-month
period ended March 31, 2000, compared to $85,972 for the three-month period
ended March 31, 1999. The decreased net loss from 1999 to 2000 is primarily
attributable to an increase in rental income and decreases in property operating
expenses and general and administrative expenses.



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


Rental income totaled $341,056 for the three-month period ended March 31, 2000,
compared with $326,448 for the three-month period ended March 31, 1999.
Occupancy at Fifth Avenue averaged approximately 92% for the three-month periods
ended March 31, 2000 and 1999, respectively. The average rental income per
occupied square foot at Fifth Avenue was $8.82 for the three-month period ended
March 31, 2000, compared to $8.45 for the corresponding period in 1999. The
increase in the average rental income per occupied square foot in 2000 is
primarily attributable to increases in rental rates.

Total expenses for the three-month period ended March 31, 2000 were $389,070
compared to $415,414 for the three-month period ended March 31, 1999. The
decrease is due to decreases in property operating expenses and general and
administrative 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-month period ended March 31, 2000 were $155,587 compared to
$173,344 for the three-month period ended March 31, 1999. The decrease is
primarily attributable to lower repair and maintenance costs for apartment
preparation.

General and administrative expenses for the three-month period ended March 31,
2000 were $15,991 compared to $27,597 for the three-month period ended March 31,
1999. The decrease is due primarily to lower legal fees.

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, 1999.



                                                                              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 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 on 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.

                           27         Financial Data Schedule.  Filed herewith.

                           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 March 31, 2000.



                                                                              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: April 26, 2000                        BY:      /s/ Richard E. Hoffmann
                                                     -----------------------
                                            Name:    Richard E. Hoffmann
                                            Title:   Director, President and
                                                     Treasurer



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


Date:  April 26, 2000                       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 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 on 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.

27                Financial Data Schedule.

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 Partnership's Form 8-K filed
                  with the Securities and Exchange Commission on December 14,
                  1998.
</TABLE>



                                                                             11