---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

Form 10-KSB



---



|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|- | -------------------------------------------------------------------------------------

For the year ended December 31, 2005



| ̈ | 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 000-24175



---

ATEL Cash Distribution Fund VII,
L.P.

(Exact name of small business registrant as specified in its charter)



---



|                                                               |  |                                       
|-------------------------------------------------------------- |  | --------------------------------------
|California                                                     |  | 94-3248318                            
|(State or other jurisdiction of incorporation or organization) |  | (I. R. S. Employer Identification No.)

600 California Street, 6th Floor, San Francisco, California 94108-2733

(Address of principal executive offices)

Registrants telephone number, including area code: (415) 989-8800



---

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

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



---

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act of
1934.    Yes ̈No  x

Check whether the issuer (1) 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 ̈No  x

Check if
there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer   x



Indicate by check mark whether the registrant is a shell Partnership (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

State the aggregate market value
of voting stock held by non-affiliates of the registrant: Not applicable

State the issuers revenues for the most recent fiscal year: $16,165,855

The number of Limited Partnership Units outstanding as of December 31, 2005 was 14,995,550

DOCUMENTS INCORPORATED BY REFERENCE

None

Transitional Small Business disclosure Format (check one):    Yes ̈No  x



---



---

PART I



|Item 1. | BUSINESS
|------- | --------

General Development of Business

ATEL Capital Equipment Fund VII, L.P. (the Partnership) was formed under the laws of the State of California in May 1996. The Partnership was formed for
the purpose of acquiring equipment to engage in equipment leasing and sales activities. The General Partner of the Partnership is ATEL Financial Services, LLC (AFS). Prior to converting to a limited liability partnership structure, AFS
was formerly known as ATEL Financial Corporation. The Partnership may continue until December 31, 2017.

The Partnership conducted a public offering
of 15,000,000 Units of Limited Partnership Interest (Units) at a price of $10 per Unit. On January 7, 1997, the Partnership commenced operations in its primary business (leasing activities). As of November 27, 1998, the
Partnership had received subscriptions for 15,000,000 ($150,000,000) Limited Partnership Units and the offering was terminated. As of December 31, 2005, 14,995,550 Units were issued and outstanding.

The Partnerships principal objectives are to invest in a diversified portfolio of equipment that will (i) preserve, protect and return the Partnerships
invested capital; (ii) generate regular distributions to the partners of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during
the reinvestment period (Reinvestment Period), which ended December 31, 2004; and (iii) provide additional distributions following the Reinvestment Period and until all equipment has been sold. The Partnership is governed by
its Limited Partnership Agreement (Partnership Agreement).

The Partnership has the ability to incur debt to finance the purchase of a portion
of its equipment portfolio. The amount of borrowings in connection with any equipment acquisition transaction will be determined by, among other things, the credit of the leases, the terms of the lease, the nature of the equipment and the condition
of the money market. There is no limit on the amount of debt that may be incurred in connection with any single acquisition of equipment. However the Partnership may not incur aggregate outstanding indebtedness in excess of 50% of the total cost of
all equipment as of the date of the final commitment of the offering proceeds and, thereafter, as of the date of any subsequent indebtedness is incurred. The Partnership intends to borrow amounts equal to such maximum debt level in order to fund a
portion of its equipment acquisitions, although there can be no assurance that such financing will continue to be available to the Partnership in the future.

As of December 31, 2005, the amounts of such equipment acquisition debt was $6,500,000 as discussed above and further discussed in both Managements Discussion and Analysis of Financial Condition and Results of Operations, Capital
Resources and Liquidity, Item 6, and footnote 9 to the financial statements as set forth in Part II, Item 7a.

The Partnership may also incur
long-term recourse debt in the form of asset securitization transactions in order to obtain lower interest rates or other more desirable terms than may be available for individual non-recourse debt transactions. In an asset
securitization, the lender would receive a security interest in a specified pool of securitized Partnership assets or a general lien against all of the otherwise unencumbered assets of the Partnership. It is the intention of AFS to
use asset securitization primarily to finance assets leased to those credits which, in the opinion of AFS, have a relatively lower potential risk of lease default than those lessees with equipment financed with non-recourse debt. AFS expects that an
asset securitization financing would involve borrowing at a variable interest rate based on an established reference rate. AFS would seek to limit the Partnerships exposure to increases in the interest rate by engaging in hedging transactions
that would effectively fix the interest rate obligation.

As of December 31, 2005, the amount of such securitized borrowings was $3,580,000 as
discussed above and further discussed in footnote 10 to the financial statements as set forth in Part II, Item 7a.

Narrative Description of
Business

The Partnership has acquired various types of equipment to lease pursuant to Operating leases and High Payout
leases, whereby Operating leases are defined as being leases in which the minimum lease payments during the initial lease term do not recover the full cost of the equipment and High Payout leases recover at least 90% of such
cost. It is the intention of AFS that a majority of the aggregate purchase price of equipment represent equipment leased under High Payout leases upon final investment of the Net Proceeds of the Offering and that no more than 20% of the
aggregate purchase price of equipment is invested in equipment acquired from a single manufacturer.

The Partnerships intent is to only purchase
equipment for which a lease exists or for which a lease will be entered into at the time of the purchase.

From inception through December 31, 2005,
the Partnership had purchased equipment with a total acquisition price of $303,471,413.



Page 2 of 47



---

The Partnerships objective is to lease a minimum of 75% of the equipment acquired with the net proceeds of the
offering to lessees that (i) have an aggregate credit rating by Moodys Investor service, Inc. of Baa or better, or the credit equivalent as determined by AFS, with the aggregate rating weighted to account for the original equipment cost
for each item leased or (ii) are established hospitals with histories of profitability or municipalities. The balance of the original equipment portfolio may include equipment leased to lessees which, although deemed creditworthy by AFS, would
not satisfy the general credit rating criteria for the portfolio. In excess of 75% of the equipment acquired with the net proceeds of the offering (based on original purchase cost) has been leased to lessees with an aggregate credit rating of Baa or
better or to such hospitals or municipalities, as described in (ii) above.

During 2005 and 2004 certain lessees generated significant portions of the
Partnerships total lease revenues as follows:



|                                   |  |                   |  |      |   |  |      |  
|---------------------------------- |  | ----------------- |  | ---- | - |  | ---- | -
|Lessee                             |  | Type of Equipment |  | 2005 |   |  | 2004 |  
|Sea Mar Management, LLC            |  | Marine Vessels    |  | 22   | % |  | *    |  
|TAL International Container        |  | Containers        |  | 14   | % |  | *    |  
|Transamerica Leasing International |  | Transportation    |  | *    |   |  | 17   | %
|*  less than 10%                   |  |                   |  |      |   |  |      |  

These percentages are not expected to be comparable in future periods.

The equipment leasing industry is highly competitive. Equipment manufacturers, corporations, partnerships and others offer users an alternative to the purchase of most
types of equipment with payment terms that vary widely depending on the lease term and type of equipment. The ability of the Partnership to keep the equipment leased and/or operating and the terms of the acquisitions, leases and dispositions of
equipment depends on various factors (many of which are not in the control of AFS or the Partnership), such as raw material costs to manufacture equipment as well as general economic conditions, including the effects of inflation or recession, and
fluctuations in supply and demand for various types of equipment resulting from, among other things, technological and economic obsolescence.

AFS will
seek to limit the amount invested in equipment to any single lessee to not more than 20% of the aggregate purchase price of equipment owned at any time during the Reinvestment Period.

The business of the Partnership is not seasonal.

The Partnership has no full time employees. AFS employees provide the
services the Partnership requires to effectively operate. The cost of these services is reimbursed by the Partnership to AFS per the Partnership Agreement.

Equipment Leasing Activities

The Partnership has acquired a diversified portfolio of equipment. The equipment has been leased to
lessees in various industries. The following tables set forth the types of equipment acquired by the Partnership through December 31, 2005 and the industries to which the assets have been leased. The Partnership has purchased certain assets
subject to existing non-recourse debt. For financial statement purposes, non-recourse debt has been offset against the investment in certain direct finance leases where the right of offset exists.



|                   |  |                                         |             |                                 |        |  
|------------------ |  | --------------------------------------- | ----------- | ------------------------------- | ------ | -
|Asset Types        |  | Purchase PriceExcludingAcquisition Fees |             | Percentage of TotalAcquisitions |       
|Transportation     |  | $                                       | 135,842,930 |                                 | 44.76  | %
|Manufacturings     |  |                                         | 45,709,520  |                                 | 15.06  | %
|Mining             |  |                                         | 30,756,101  |                                 | 10.14  | %
|Marine Vessels     |  |                                         | 23,055,617  |                                 | 7.60   | %
|Materials Handling |  |                                         | 16,318,944  |                                 | 5.38   | %
|Office Automation  |  |                                         | 11,449,934  |                                 | 3.77   | %
|Medical            |  |                                         | 9,133,951   |                                 | 3.01   | %
|Aircraft           |  |                                         | 6,310,979   |                                 | 2.08   | %
|Other              |  |                                         | 24,893,437  |                                 | 8.20   | %
|                   |  |                                         |             |                                 |        |  
|                   |  | $                                       | 303,471,413 |                                 | 100.00 | %
|                   |  |                                         |             |                                 |        |  



Page 3 of 47



---

|                      |  |                                         |             |                                 |        |  
|--------------------- |  | --------------------------------------- | ----------- | ------------------------------- | ------ | -
|Industry of Lessee    |  | Purchase PriceExcludingAcquisition Fees |             | Percentage of TotalAcquisitions |       
|Transportation, Rail  |  | $                                       | 73,779,368  |                                 | 24.31  | %
|Municipalities        |  |                                         | 45,050,058  |                                 | 14.84  | %
|Transportation, Other |  |                                         | 43,799,728  |                                 | 14.43  | %
|Manufacturing, Other  |  |                                         | 41,295,886  |                                 | 13.61  | %
|Electronics           |  |                                         | 26,062,302  |                                 | 8.59   | %
|Mining                |  |                                         | 17,670,967  |                                 | 5.82   | %
|Business Services     |  |                                         | 15,093,493  |                                 | 4.97   | %
|Primary Metals        |  |                                         | 13,251,254  |                                 | 4.37   | %
|Other                 |  |                                         | 27,468,357  |                                 | 9.06   | %
|                      |  |                                         |             |                                 |        |  
|                      |  | $                                       | 303,471,413 |                                 | 100.00 | %
|                      |  |                                         |             |                                 |        |  

Through December 31, 2005, the Partnership has disposed of certain leased assets as set forth below:



|                   |  |                                                 |             |            |   |                               |  |   |            
|------------------ |  | ----------------------------------------------- | ----------- | ---------- | - | ----------------------------- |  | - | -----------
|Asset Types        |  | OriginalEquipment CostExcludingAcquisition Fees |             | Sale Price |   | Excess of Rents OverExpenses*
|Mining             |  | $                                               | 47,498,564  |            | $ | 12,063,208                    |  | $ | 44,949,792 
|Transportation     |  |                                                 | 39,310,218  |            |   | 12,336,903                    |  |   | 30,399,665 
|Marine vessels     |  |                                                 | 16,844,247  |            |   | 3,126,897                     |  |   | 17,711,104 
|Office automation  |  |                                                 | 15,961,279  |            |   | 1,512,934                     |  |   | 17,122,811 
|Medical            |  |                                                 | 12,869,327  |            |   | 8,416,609                     |  |   | 6,844,622  
|Aircraft           |  |                                                 | 10,982,354  |            |   | 3,757,240                     |  |   | 10,798,091 
|Manufacturing      |  |                                                 | 8,629,633   |            |   | 2,857,872                     |  |   | 8,613,587  
|Materials handling |  |                                                 | 5,523,443   |            |   | 5,054,459                     |  |   | 3,608,351  
|Other              |  |                                                 | 5,554,602   |            |   | 832,816                       |  |   | 4,867,424  
|                   |  |                                                 |             |            |   |                               |  |   |            
|                   |  | $                                               | 163,173,667 |            | $ | 49,958,938                    |  | $ | 144,915,447
|                   |  |                                                 |             |            |   |                               |  |   |            

---

|* | Includes only those expenses directly related to the production of the related rents.
|- | -------------------------------------------------------------------------------------

Proceeds from sales of lease assets are not expected to be consistent from one period to another. The Partnership is a finite life equipment leasing fund, which will acquire leasing transactions during the period
ending six years after completion of its public offering. On the termination of leases, assets may be re-leased or sold. Sales of assets are not scheduled and are created by opportunities within the marketplace. The Partnership will seek to acquire
and lease a wide variety of assets and to enter into leases on a variety of terms. Some assets will be expected to have little or no value for re-lease or sale upon termination of the initial leases, and the anticipated residual values are a key
factor in pricing and terms structured for each lease. The Partnerships goal is to seek maximum return on its leased assets and will determine when and under what terms to dispose of such assets during the course of its term.

For further information regarding the Partnerships equipment lease portfolio as of December 31, 2005, see footnote 6 to the financial statements, Investments
in equipment and leases, as set forth in Part II, Item 7a, Financial Statements and Supplementary Data.

The Partnership adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 131 Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes annual and interim standards for operating segments of a
Partnership. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. Certain of the Partnerships lessee
customers have international operations. In these instances, the Partnership is aware that certain equipment, primarily rail and transportation, may periodically exit the country. However, these lessee customers are US-based, and it is impractical
for the Partnership to track, on an asset-by-asset day-by-day basis, where these assets are deployed. For further information regarding the Partnership geographic revenues and assets and major customers, see footnote 2 to the financial statements,
Summary of significant accounting policies, as set forth in Part II, Item 7a, Financial Statements and Supplementary Data.



Page 4 of 47



---

|Item 2. | PROPERTIES
|------- | ----------

The Partnership does not own or lease any real
property, plant or material physical properties other than the equipment held for lease as set forth in Item 1.



|Item 3. | LEGAL PROCEEDINGS
|------- | -----------------

In the ordinary course of conducting business,
there may be certain claims, suits, and complaints filed against the Partnership. In the opinion of management, the outcome of such matters, if any, will not have a material impact on the Partnerships consolidated financial position or results
of operations. No material legal proceedings are currently pending against the Partnership or against any of its assets.



|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

None.



Page 5 of 47



---

PART II



|Item 5. | MARKET FOR REGISTRANTS LIMITED PARTNERSHIP UNITS AND RELATED MATTERS
|------- | ---------------------------------------------------------------------

Market Information

There are certain material conditions and restrictions on the transfer of Units imposed by the terms of the
Limited Partnership Agreement. Consequently, there is no public market for Units and it is not anticipated that a public market for Units will develop. In the absence of a public market for the Units, there is no currently ascertainable fair market
value for the Units.

Holders

As of
December 31, 2005, a total of 5,494 investors were holders of record of Units in the Partnership.

ERISA Valuation

In order to permit ERISA fiduciaries who hold Units to satisfy their annual reporting requirements, AFS estimated the value per Unit of the Partnerships assets as
of December 31, 2005. AFS calculated the estimated liquidation proceeds that would be realized by the Partnership, assuming an orderly disposition of all of the Partnerships assets as of January 1, 2006. The estimates were based on
the amount of remaining lease payments on existing Partnership leases, and the estimated residual values of the equipment held by the Partnership upon the termination of those leases. This valuation was based solely on AFSs perception of
market conditions and the types and amounts of the Partnerships assets. No independent valuation was sought.

After calculating the aggregate
estimated disposition proceeds, AFS then calculated the portion of the aggregate estimated value of the Partnership assets that would be distributed to Unit holders on liquidation of the Partnership, and divided the total so distributable by the
number of outstanding Units. As of December 31, 2005 the value of the Partnerships assets, calculated on this basis, was approximately $3.35 per Unit. The foregoing valuation was performed solely for the ERISA purposes described above.
There is no market for the Units, and, accordingly, this value does not represent an estimate of the amount a Unit holder would receive if he were to seek to sell his Units. Furthermore, there can be no assurance as to the amount the Partnership may
actually receive if and when it seeks to liquidate its assets, or the amount of lease payments and equipment disposition proceeds it will actually receive over the remaining term of the Partnership.

Distributions

The record holders of Units are entitled to
certain distributions as provided under the Limited Partnership Agreement.

No distributions were made from 2005 operations.

The rate for monthly distributions from 2004 operations was $0.0416 per unit for January through December. The distributions were paid in February through December 2004
and in January 2005. The rate for 2004 distribution made in January 2005 was $0.05 per unit from cash generated from 2004 operations. The rate for quarterly distribution paid in April, July and October 2004 was $0.125 per unit. Distributions were
from 2004 cash flows from operations.



|Item 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Statements contained in this Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and elsewhere in this Form 10-KSB, which are not
historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In particular, economic recession and changes in general economic
conditions, including, fluctuations in demand for equipment, lease rates, and interest rates, may result in delays in investment and reinvestment, delays in leasing, re-leasing, and disposition of equipment, and reduced returns on invested capital.
The Partnerships performance is subject to risks relating to lessee defaults and the creditworthiness of its lessees. The Funds performance is also subject to risks relating to the value of its equipment at the end of its leases, which
may be affected by the condition of the equipment, technological obsolescence and the markets for new and used equipment at the end of lease terms. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which
speak only as of the date of this Form 10-KSB. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-KSB or to reflect the occurrence of
unanticipated events, other than as required by law.



Page 6 of 47



---

Capital Resources and Liquidity

The Partnership has and is expected to continue having contractual obligations with a diversified group of lessees for fixed lease terms at fixed rental amounts. As initial lease terms expire, the Partnership
re-leases or sells the equipment. The future liquidity beyond the contractual minimum rentals will depend on the Partnerships success in re-leasing or selling the equipment as it comes off lease.

During the Reinvestment Period that ended December 31, 2004, the Partnership reinvested a portion of lease payments from assets owned in new leasing transactions.
Such reinvestment occurred only after the payment of all current obligations, including debt service (both principal and interest), the payment of management fees to AFS and providing for cash distributions to the Limited Partners.

The Partnership participates with AFS and certain of its affiliates, as defined in the Partnership Agreement, in a financing arrangement (the Master Terms
Agreement). The Master Terms Agreement is comprised of: (1) a working capital term loan facility to AFS, (2) an acquisition facility, (3) a warehouse facility to AFS, and (4) a venture facility available to an affiliate.
The Master Terms Agreement is with a group of financial institutions and includes certain financial and non-financial covenants. The Master Terms Agreement totals $75,000,000 and expires in June 2007. The availability of borrowings to the
Partnership under the Master Terms Agreement is reduced by the amount outstanding on any of the above mentioned facilities. As of December 31, 2005, the Partnership had borrowed $6,500,000 under the acquisition facility.

As of December 31, 2005 borrowings under the Master Terms Agreement were as follows:



|                                                                                                           |  |   |            |  
|---------------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|Total available under the financing facility                                                               |  | $ | 75,000,000 |  
|Amount borrowed by the Partnership under the acquisition facility                                          |  |   | (6,500,000 | )
|Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility |  |   | (6,000,000 | )
|                                                                                                           |  |   |            |  
|Total remaining available under the acquisition and warehouse facilities                                   |  | $ | 62,500,000 |  
|                                                                                                           |  |   |            |  

The Partnership is contingently liable for principal payments under the warehouse facility component of the Master
Terms Agreement. The Partnership is contingently liable because borrowings are recourse, jointly and severally, to the extent of the pro-rata share of the Partnerships net worth as compared to the aggregate net worth of certain of:
(1) the affiliated partnerships and limited liability companies of the Partnership, and (2) AFS and ATEL Leasing Corporation (ALC) who are 100% liable. As of December 31, 2005, there were no borrowings under the warehouse
facility, the working capital term loan or the venture facility. However, the Partnership and its affiliates pay an annual commitment fee to have access to all facilities under the Master Terms Agreement.

The interest rate on the Master Terms Agreement is based on either the LIBOR/Eurocurrency rate of one, two, three, or six month maturities plus a lender designated
spread, or the banks prime rate (i.e., reference rate), which re-prices daily. Principal amounts of loans made under the Master Terms Agreement that are repaid may be re-borrowed on the terms and subject to the conditions set forth under the
Master Terms Agreement. The effective interest rate on borrowings at December 31, 2005 is 5.93%.

Draws on the acquisition facility by any affiliated
partnership and/or limited liability Partnership borrower are secured by a blanket lien on that borrowers assets, including but not limited to equipment and related leases.

To manage the warehousing facility for the holding of assets prior to allocation to specific investor programs, a Warehousing Trust Agreement has been entered into by the Partnership, AFS, ALC, and certain of the
affiliated partnerships and limited liability companies. The warehousing facility is used to acquire and hold, on a short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing
programs sponsored by AFS and ALC currently in its acquisition stage is a pro rata participant in the Warehousing Trust Agreement, as described below. When a program no longer has a need for short term financing provided by the warehousing facility,
it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their acquisition stages, these new entities will be added. As of December 31, 2005, the



Page 7 of 47



---

warehousing facility participants were the Partnership, ATEL Capital Equipment Fund VIII, LLC, ATEL Capital Equipment Fund IX, LLC, ATEL Capital Equipment
Fund X, LLC and ATEL Capital Equipment Fund XI, LLC. Pursuant to the Warehousing Trust Agreement, the benefit of the lease transaction assets, and the corresponding liabilities under the warehousing facility, inure to each of such entities based
upon each entitys pro-rata share in the warehousing trust estate. The pro-rata share is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the warehouse trust estate,
excepting that the trustees, AFS and ALC, are both liable for their pro-rata shares of the obligations based on their respective net worth, and jointly liable for the pro rata portion of the obligations of each of the affiliated partnerships and
limited liability companies participating under the warehousing facility. Transactions are financed through this warehousing facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and
ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of the acquisition facility, the asset is removed
from the warehouse facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.

The Master Terms Agreement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Partnership and affiliates were not in compliance with non-financial covenants as of December 31, 2005.
The General Partner, on behalf of all borrowers, requested and received a waiver of this covenant from the financial institutions. As of January 31, 2007, the Partnership is no longer a participant in the borrowing facility and all amounts have
been paid.

AFS or an affiliate may purchase equipment in its own name, the name of an affiliate or the name of a nominee, a trust or otherwise and hold
title thereto on a temporary or interim basis for the purpose of facilitating the acquisition of such equipment or the completion of manufacture of the equipment or for any other purpose related to the business of the Partnership, provided, however
that: (i) the transaction is in the best interest of the Partnership; (ii) such equipment is purchased by the Partnership for a purchase price no greater than the cost of such equipment to AFS or affiliate (including any out-of-pocket
carrying costs), except for compensation permitted by the Partnership Agreement; (iii) there is no difference in interest terms of the loans secured by the equipment at the time acquired by AFS or affiliate and the time acquired by the
Partnership; (iv) there is no benefit arising out of such transaction to AFS or its affiliate apart from the compensation otherwise permitted by the Partnership Agreement; and (v) all income generated by, and all expenses associated with,
equipment so acquired will be treated as belonging to the Partnership.

The Partnership currently has available adequate reserves to meet its immediate
cash requirements and those of the next twelve months, but in the event those reserves were found to be inadequate, the Partnership would likely be in a position to borrow against its current portfolio to meet such requirements. AFS envisions no
such requirements for operating purposes.

If inflation in the general economy becomes significant, it may affect the Partnership in as much as the
residual (resale) values and rates on re-leases of the Partnerships leased assets may increase as the costs of similar assets increase. However, the Partnerships revenues from existing leases would not increase; as such rates are
generally fixed for the terms of the leases without adjustment for inflation.

If interest rates increase significantly, the lease rates that the
Partnership can obtain on future leases will be expected to increase as the cost of capital is a significant factor in the pricing of lease financing. Leases already in place, for the most part, would not be affected by changes in interest rates.
For detailed information on the Partnerships debt obligations, see footnotes 8, 9 and 10 to the financial statements in Item 7a.

Additionally,
in 1998, the Partnership established a $65 million receivables funding program with a receivables financing company that issues commercial paper rated A1 from Standard and Poors and P1 from Moodys Investor Services. In this receivables
funding program, the lenders received a general lien against all of the otherwise unencumbered assets of the Partnership. The program provided for borrowing at a variable interest rate and requires the Partnership to enter into interest rate swap
agreements with certain counterparties (also rated A1/P1) to mitigate the interest rate risk associated with a variable rate note. AFS believes that this program allowed the Partnership to avail itself of lower cost debt than that available for
individual non-recourse debt transactions. The program expired as to new borrowings in April 2002. The receivables funding program terminated in January 2007.

In order to maintain the availability of the receivables funding program, the Partnership is required to make standby payments. These fees totaled $30,862 and $64,320 in 2005 and 2004, respectively, and are included in interest expense in
the Partnerships statement of operations.

Finally, the Partnership has access to certain sources of non-recourse debt financing, which the
Partnership uses on a transaction basis as a means of mitigating credit risk. The non-recourse debt financing consists of notes payable to financial institutions. The notes are due in monthly payments. Interest on the notes is at fixed rate which is
a nominal annual rate of 7.0%. The notes are secured by assignments of lease payments and pledges of assets. The amount of pledged assets is $1,518,977.

The Partnership Agreement limits such borrowings to 50% of the total cost of equipment, in the aggregate.



Page 8 of 47



---

The Partnership commenced regular distributions, based on cash flows from operations, beginning with the month of January
1997. See Items 5 for additional information regarding distributions.

At December 31, 2005, the Partnership had no commitments to purchase leased
assets

Cash Flows

In 2005 and 2004, the
Partnerships primary source of cash from operations was the rents from operating leases and other revenue. Operating leases and other revenue increased by $1,274,655 to $16,396,220 in 2005 from $15,121,571 in 2004. During the same period, cash
flows from operations increased by $305,125 from $10,402,285 in 2004 to $10,707,410 in 2005. The increase in operating lease and other revenue was augmented by decreases in certain operating expenses including interest expense, equipment and
incentive management fees to General Partner and railcar maintenance. In the aggregate, these operating expenses decreased by $739,076 to $1,956,838 in 2005 from $2,695,914 in 2004. An increase in marine vessel maintenance offset these aggregate
reductions in the aforementioned expenses. Marine vessel maintenance and other operating costs increased by $1,393,187 to $1,860,982 in 2005 from $467,795 in 2004. Operating cash flows were also affected by accounts receivable and accounts payable,
General Partner. During 2005, accounts receivable generated $194,237 in operating cash compared to generating $548,855 in operating cash during 2004, a decrease of $354,618. Accounts payable, General Partner generated $167,177 in operating cash
during 2005 compared to using $23,358 in operating cash during 2004, an increase in cash generated in operating activities of $190,535.

In 2005 and 2004,
the primary source of cash from investing activities consisted of proceeds from sales of lease assets. Cash flows from investing activities decreased by $2,930,627 to $3,878,173 in 2005 from $6,808,800 in 2004. Cash flows from investing activities
decreased primarily as a result of a decrease in proceeds from sales of assets and a decrease in the reduction of direct financing leases. Proceeds from sales of assets declined $2,040,539 from $5,503,961 in 2004 to $3,463,422 in 2005. A significant
portion of the assets sold in 2004 were still on lease and had higher average values than those sold in 2005. As a result, sales proceeds were higher in 2004 when compared to 2005. Cash from direct financing leases decreased from $1,878,178 in 2004
to $1,135,118 in 2005, a decrease of $743,060 as a result of sale of assets in 2004 and 2005.

Cash used in financings activities decreased by $3,331,862
to $13,492,228 in 2005 from $16,824,090 in 2004. Cash used in financing activities decreased as a result of a decrease in the repayment of debt and payments to partners that was offset by decreased borrowing. During 2005, cash used to repay portions
of non-recourse debt, the acquisition facility and the receivables funding program decreased by $15,212,108 to $14,168,586 in 2005 from $29,380,694 in 2004. Additionally, cash used to make distributions to the General Partner and Limited Partners
decreased by $8,119,754 to cash distributions of $823,642 in 2005 from cash distributions of $8,943,396 in 2004. Offsetting the decreased financing activity uses was decreased borrowing. In both 2005 and 2004, the only source of cash from financing
activities was borrowings under acquisition facility which decreased by $20,000,000 from $21,500,000 in 2004 to $1,500,000 in 2005.

Results of
Operations

Cost reimbursements to General Partner are based on costs incurred by AFS in performing administrative services for the Partnership that
are allocated to each Partnership that AFS manages based on certain criteria such as existing or new leases, number of investors or equity depending on the type of cost incurred.

As of December 31, 2005, there were concentrations (defined as greater than 10%) of equipment leased to lessees in certain industries (as a percentage of total equipment cost) as follows:



|                      |  |    |  
|--------------------- |  | -- | -
|Transportation, rail  |  | 42 | %
|Containers            |  | 20 | %
|Transportation, other |  | 17 | %

Operating results increased by $2,311,746 to a net income of $556,193 in 2005 compared to a net loss of $1,755,553
in 2004. Operating results increased as a result of an increase in revenues coupled with decrease in expenses. Total revenues increased by $1,041,118 to $16,165,855 in 2005 from $15,124,737 in 2004. Total revenue increased primarily as a result of
increases in other revenue, operating lease revenue and fewer losses on sales of assets. Other revenue increased by $990,653 to $1,405,306 in 2005 from $414,653 in 2004 as a result of settling past due lease amounts with a certain lessee which were
previously written off. Operating leases aided the overall revenue increase by contributing a $284,002 increase to $14,990,920 in 2005 from $14,706,918 in 2004. During 2005, losses on sales of assets decreased by $166,270 to a loss of $454,434 in
2005 from a loss of $620,704 in 2004. A decrease in direct financing lease revenue offset these increases. During 2005, direct financing lease revenue decreased by $438,003 to $180,820 in 2005 from $618,823.



Page 9 of 47



---

Total expenses decreased by $1,043,072 to $15,837,218 in 2005 from $16,880,290 in 2004. Total expenses decreased
primarily as a result of a decrease in depreciation expense coupled with decreases in certain other operating expenses including interest expense, railcar maintenance and equipment and incentive management fees to General Partner. These improvements
were offset by increases in certain other operating expenses including impairment losses, marine maintenance and other operating. During 2005, depreciation expense decreased by $1,717,059 to $8,699,042 from $10,416,101 in 2004 due to the sale of
assets. Additionally, interest expense, railcar and equipment maintenance and equipment and incentive management fees to General Partner decreased by $739,076 to $1,956,838 in 2005 from $2,695,914 in 2004 due primarily to reductions in debt and
railcars taken out of service in 2005.

Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. As a
result of that review, management determined that the values of certain barges in 2005 and refuse vehicles in 2004 had declined in value to the extent that the carrying values had become impaired. This decline is the result of decreased long-term
demand for these types of assets and a corresponding reduction in the amounts of rental payments that these assets currently command. The resulting losses increased by $527,194 to $982,560 in 2005 from $455,366 in 2004. See additional discussion of
the impairment losses in footnote 5 in the Financial Statements included in Part II, Item 7a of this report.

During 2005, the provision for doubtful
accounts decreased by $324,686 to a negative $10,794 in 2005 from $313,892 in 2004 as the Partnership decreased the allowance for doubtful accounts offsetting the provision for doubtful accounts. Finally, marine vessel maintenance and other
operating expenses increased by $1,393,187 to $1,860,982 in 2005 from $467,795 in 2004 due to the cost of operating the marine vessels for a full year in 2005 compared to a partial year in 2004.

Derivative Financial Instruments

In June 1998, the FASB
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which established new accounting and reporting standards for derivative instruments. SFAS No. 133 has been amended by SFAS No. 137, issued
in June 1999, by SFAS No. 138, issued in June 2000 and by SFAS No. 149, issued in June 2003.

SFAS No. 133, as amended, requires the
Partnership to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow, or foreign
currency hedges, and establishes accounting standards for reporting changes in the fair value of the derivative instruments. If derivative financial instruments are utilized, the Partnership will be required to record derivative instruments at fair
value in the balance sheet and recognize the offsetting gains or losses as adjustments to net income or other comprehensive income, as appropriate.

The
Partnership adopted SFAS No. 133, as amended, on January 1, 2001. Upon adoption, the Partnership recorded interest rate swap hedging instruments at fair value in the balance sheet and recognized the offsetting gains or losses in net income
or other comprehensive income, as appropriate. See footnote 10 to the financial statements in Item 8, Receivables Funding Program, for additional information.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement, which is consistent with the Boards long-term measurement objectives for accounting for financial instruments. SFAS 159 is effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007 (January 1, 2008). The standard is not applicable to direct financing and operating leases. The Partnership does not presently anticipate any significant impact on its consolidated financial position,
results of operations or cash flows, as a result of the adoption of SFAS 159.

In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement on Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring
fair value and requires additional disclosures about the use of fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As
of December 31, 2005, the Fund does not believe the adoption of SFAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair
value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.



In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB No. 108), Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current year
financial statements. SAB No. 108 requires an entity to quantify misstatements using a



Page 10 of 47



---

balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant
quantitative and qualitative factors. SAB 108 is effective for fiscal years beginning after November 15, 2006. The Partnership will adopt SAB 108 as of January 1, 2007, as required. The Partnership has not determined the effect, if any,
the adoption of SAB 108 will have on the Partnerships financial position and results of operations.

In June 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies
the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on deregulation, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Partnership will adopt FIN 48 as of January 1, 2007, as required. The cumulative
effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Partnership has not determined the effect, if any, the adoption of FIN 48 will have on the Partnerships financial position and results of
operations.

Critical Accounting Policies

The
policies discussed below are considered by management of the Partnership to be critical to an understanding of the Partnerships financial statements because their application requires significant complex or subjective judgments, decisions, or
assessments, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. The Partnership also
states these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best
estimates routinely require adjustment.

Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate
to the determination of residual values at the end of the lease term and expected future cash flows used for impairment analysis purposes and determination of provisions for doubtful accounts.

Equipment on operating leases and related revenue recognition:

Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipments estimated residual values at the end of the leases.

Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment
subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally be from 24 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating
lease income on the balance sheet.

Direct financing leases and related revenue recognition:

Income from direct financing lease transactions is reported using the financing method of accounting, in which the Partnerships investment in the leased property is
reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.

Allowances for losses on direct financing leases are typically established based on historical charge offs and collections experience and are usually determined by
specifically identified lessees and billed and unbilled receivables. Direct financing leases are written-off on a case by case basis.

Direct financing
leases are automatically placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of all direct finance lessees with payments
outstanding less than 90 days. Based upon managements judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status on a case by case basis.

Initial direct costs:

In prior years, the Partnership capitalized
initial direct costs (IDC) associated with the acquisition of lease assets and funding of investments in notes receivable (as defined in SFAS No. 91 Accounting for Nonrefundable Fees and Costs Associated with



Page 11 of 47



---

Originating or Acquiring Loans and Initial Direct Costs of Leases). Capitalized IDC included both internal costs (e.g., labor and overhead) and
external broker fees incurred with the acquisition. Remaining IDC is being amortized on a lease by lease basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for direct finance
leases. The Partnership has no notes receivable. Upon disposal of the underlying lease assets, both the initial direct costs and the associated accumulated amortization are relieved. Costs related to leases that were not consummated were not
eligible for capitalization as initial direct costs. Such amounts were expensed as acquisition expense.

Asset valuation:

Recorded values of the Partnerships asset portfolio are periodically reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. An impairment loss is measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are
the sum of the estimated residual value of the asset at the end of the assets expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open,
unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of
the asset quickly. Impairment is measured as the difference between the fair value (as determined by the discounted estimated future cash flows) of the assets and its carrying value on the measurement date.

Restatement and Adjustment of Prior Periods Presented

After
receipt of an SEC comment letter by an affiliate of the Partnership in April 2005, the Partnerships General Partner determined a restatement of previous SEC filings was required. This Form 10-KSB reflects the restatement, in accordance with
the provisions of Accounting Principles Board Opinion No. 20, Accounting Changes of ATEL Capital Equipment Fund VII, LLC previously filed financial statements as discussed below.

In preparing the 2005 financial statements, the Partnerships General Partner determined that an error had occurred in the accounting for a certain direct finance
lease portfolio acquired during 1997. The magnitude of the error was material in the aggregate for years prior to 2004. Accordingly, the Partnership recorded a prior period adjustment to increase Partners capital as of January 1, 2004 by
$1,089,577. Amounts related to the perpetuation of the error in 2004 were nominal and therefore no further adjustment was recorded in 2004. Related to this error, two adjustments were required to restate the investment in equipment and leases, net,
for periods prior to January 1, 2004. First, an increase of $1,031,955 was recorded to investment in equipment and leases, net, to adjust for the inappropriate amortization of unearned direct financing lease income for the periods subsequent to
the acquisition of the lease portfolio in 1997 through December 31, 2003. The second adjustment was recorded to increase the investment in equipment and leases, net, by $57,622 as certain leased asset were inappropriately depreciated after
being renewed and reclassified to operating lease assets from direct financing leases beginning in 2001 through December 31, 2003.

As a result of the
aforementioned factors, the financial statements for the following periods have been adjusted from those previously filed:



| |  |  | March 31, 2005 and for the three months ended March 31, 2005
| | - |  | ------------------------------------------------------------



| |  |  | June 30, 2005 and for the three and six months ended June 30, 2005
| | - |  | ------------------------------------------------------------------

The following summarizes the nature of the adjustments:

Revenue

The Partnerships General Partner determined that the accounting methodology relating to certain utilization leases must be modified to comply with Statement of
Financial Accounting Standards No. 13, Accounting for Leases. As a result, the General Partner concluded that revenue was inappropriately recognized on a straight-line basis over the term of the lease for utilization-based leases
versus on a per diem basis. As a result, the Partnership restated operating lease revenue, accounts receivable and partners capital.

In addition,
the Partnerships General Partner determined that unearned direct finance lease income had been inappropriately amortized over periods differing from the underlying lease period for a certain direct finance lease portfolio acquired in 1997. As
a result, the Partnership adjusted earned direct finance lease revenue, investments in equipment and leases, net and Partners capital.

Finally, the
Partnerships General Partner determined that certain payments from a lessee that represented a settlement of past due rental payments that were previously written off were inappropriately classified as operating lease revenue. As a result, the
Partnership reclassified these payments from operating lease revenue to other revenue.



Page 12 of 47



---

Accrued liabilities

The Partnerships General Partner determined that certain liabilities had not been recorded in the correct periods through a detailed review of cash disbursements. As a result of this review, the Partnership restated several of its
asset, liability, partners capital and expense accounts.

Amortization of Initial Direct Costs to Originate or Acquire Loans and Leases
Capitalized in Prior years

The Partnerships General Partner determined that the accounting methodology relating to the amortization of
incremental initial direct cost (IDC) and fees capitalized in prior years must be modified to comply with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial
Direct Cost of Leases. As a result, the General Partner concluded that they were not appropriately amortizing IDC capitalized in prior years. As a result of this restatement, IDC is amortized over the underlying lease term.

Depreciation of operating lease assets

In 2005, in connection
with the incorrect accounting for the direct finance lease portfolio previously discussed, the Partnerships General Partner determined that they were incorrectly depreciating certain leased assets as they were renewed and reclassified to
operating lease assets from direct finance leases. As a result, the Partnership adjusted depreciation of operating lease assets, investments in equipment and leases, net and Partners capital.

See footnote 3 to the financial statements for further disclosure related to the adjustment to beginning Partners capital as well as the restatement of prior
quarterly financial statements for 2005.



|Item 7. | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The
Partnership, like most other companies, is exposed to certain market risks, including primarily changes in interest rates. The Partnership believes its exposure to other market risks, including foreign currency exchange rate risk, commodity risk and
equity price risk, are insignificant to both its financial position and results of operations.

In general, the Partnership expects to manage its exposure
to interest rate risk by obtaining fixed rate debt. The fixed rate debt is structured so as to match the cash flows required to service the debt to the payment streams under fixed rate lease receivables. The payments under the leases are assigned to
the lenders in satisfaction of the debt. Furthermore, the Partnership has historically been able to maintain a stable spread between its cost of funds and lease yields in both periods of rising and falling interest rates. Nevertheless, the
Partnership expects to frequently fund leases with its floating interest rate line of credit and will, therefore, be exposed to interest rate risk until fixed rate financing is arranged, or the floating interest rate acquisition facility is repaid.
As of December 31, 2005, there was an outstanding balance of $6,500,000 on the floating rate acquisition facility. The effective interest on borrowings at December 31, 2005 is 5.93%.

Also, as described in the caption Capital Resources and Liquidity, the Partnership entered into a receivables funding program facility in 1998. Since
interest on the outstanding balances under the facility will vary, the Partnership will be exposed to market risks associated with changing interest rates. To reduce its interest rate risk, the Partnership is required by the terms of the receivable
funding program to enter into interest rate swap agreements, which effectively convert the underlying interest characteristic on the facility from floating to fixed. Under the swap agreements, the Partnership makes or receives variable interest
payments to or from the counterparty based on a notional principal amount. The net differential paid or received by the Partnership is recognized as an adjustment to other income related to the facility balances. The amount paid or received will
represent the difference between the payments required under the variable interest rate facility and the amounts due under the facility at the fixed interest rate. At December 31, 2005, there was $3,580,000 in borrowings under this accounts
receivable program.

In general, these swap agreements are designed to reduce the Partnerships interest rate risk associated with variable rate
borrowings. However, the Partnership is exposed to and manages the credit risk associated with the counterparty by dealing only with institutions it considers financially sound.



|Item 7a. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|-------- | -------------------------------------------

See the Report of
Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements attached hereto at pages 14 through 42.



Page 13 of 47



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Partners

ATEL Capital Equipment Fund VII, L.P.

We have audited the accompanying balance sheet of ATEL Capital Equipment Fund VII, L.P. (Partnership) as of December 31, 2005, and the related statements of
operations, changes in partners capital, and cash flows for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Partnerships management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit
of the Partnerships internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Partnerships internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ATEL
Capital Equipment Fund VII, L.P. at December 31, 2005, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 of the financial statements, the Partnership has restated Partners Capital as of December 31, 2003.

/s/ Ernst & Young LLP

San Francisco,
California

August 6, 2007



Page 14 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

BALANCE SHEET

DECEMBER 31, 2005



|                                                                                                     |  |   |            |  
|---------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|ASSETS                                                                                               |  |   |            |  
|Cash and cash equivalents                                                                            |  | $ | 2,315,978  |  
|Accounts receivable, net of allowance for doubtful accounts of $513,637                              |  |   | 980,050    |  
|Investments in equipment and leases, net of accumulated depreciation and amortization of $83,058,100 |  |   | 40,503,174 |  
|Other assets                                                                                         |  |   | 233,223    |  
|                                                                                                     |  |   |            |  
|Total assets                                                                                         |  | $ | 44,032,425 |  
|                                                                                                     |  |   |            |  
|LIABILITIES AND PARTNERS CAPITAL                                                                    |  |   |            |  
|Accounts payable and accrued liabilities:                                                            |  |   |            |  
|General Partner                                                                                      |  | $ | 625,637    |  
|Other                                                                                                |  |   | 383,657    |  
|Accrued interest payable                                                                             |  |   | 40,421     |  
|Non-recourse debt                                                                                    |  |   | 216,123    |  
|Acquisition facility obligation                                                                      |  |   | 6,500,000  |  
|Receivables funding program obligation                                                               |  |   | 3,580,000  |  
|Interest rate swap contracts                                                                         |  |   | 65,330     |  
|Unearned operating lease income                                                                      |  |   | 381,029    |  
|                                                                                                     |  |   |            |  
|Total liabilities                                                                                    |  |   | 11,792,197 |  
|                                                                                                     | 
|Partners capital:                                                                                   |  |   |            |  
|General Partner                                                                                      |  |   |           |  
|Limited partners                                                                                    |  |   | 32,330,158 |  
|Accumulated other comprehensive loss                                                                 |  |   | (89,930    | )
|                                                                                                     |  |   |            |  
|Total partners capital                                                                              |  |   | 32,240,228 |  
|                                                                                                     |  |   |            |  
|Total liabilities and partners capital                                                              |  | $ | 44,032,425 |  
|                                                                                                     |  |   |            |  

See accompanying notes.



Page 15 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2005 AND 2004



|                                                           |  |      |            |   |      |   |            |  
|---------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                           |  | 2005 |            |   | 2004 |  
|Revenues:                                                  |  |      |            |   |      |   |            |  
|Leasing activities:                                        |  |      |            |   |      |   |            |  
|Operating leases                                           |  | $    | 14,990,920 |   |      | $ | 14,706,918 |  
|Direct financing leases                                    |  |      | 180,820    |   |      |   | 618,823    |  
|Gain (loss) on sales of assets                             |  |      | (454,434   | ) |      |   | (620,704   | )
|Interest income                                            |  |      | 43,243     |   |      |   | 5,047      |  
|Other                                                      |  |      | 1,405,306  |   |      |   | 414,653    |  
|                                                           |  |      |            |   |      |   |            |  
|Total revenue                                              |  |      | 16,165,855 |   |      |   | 15,124,737 |  
|                                                           |  |     
|Expenses:                                                  |  |      |            |   |      |   |            |  
|Depreciation of operating lease assets                     |  |      | 8,699,042  |   |      |   | 10,416,101 |  
|Marine vessel maintenance and other operating costs        |  |      | 1,860,982  |   |      |   | 467,795    |  
|Interest expense                                           |  |      | 1,201,906  |   |      |   | 1,371,978  |  
|Cost reimbursements to General Partner                     |  |      | 797,988    |   |      |   | 801,634    |  
|Provision for impairment loss                              |  |      | 982,560    |   |      |   | 455,366    |  
|Equipment and incentive management fees to General Partner |  |      | 406,688    |   |      |   | 634,486    |  
|Railcar and equipment maintenance                          |  |      | 348,244    |   |      |   | 689,450    |  
|Professional fees                                          |  |      | 343,001    |   |      |   | 346,085    |  
|Insurance                                                  |  |      | 205,754    |   |      |   | 210,607    |  
|Equipment storage                                          |  |      | 50,922     |   |      |   | 150,705    |  
|Franchise fees and state taxes                             |  |      | 67,000     |   |      |   | 94,267     |  
|Amortization of initial direct costs                       |  |      | 42,559     |   |      |   | 75,910     |  
|Provision for (recovery of) doubtful accounts              |  |      | (10,794    | ) |      |   | 313,892    |  
|Other                                                      |  |      | 841,366    |   |      |   | 852,014    |  
|                                                           |  |      |            |   |      |   |            |  
|                                                           |  |      | 15,837,218 |   |      |   | 16,880,290 |  
|                                                           |  |      |            |   |      |   |            |  
|Income (loss) from operations                              |  |      | 328,637    |   |      |   | (1,755,553 | )
|Other income, net                                          |  |      | 227,556    |   |      |   |           |  
|                                                           |  |      |            |   |      |   |            |  
|Net income (loss)                                          |  | $    | 556,193    |   |      | $ | (1,755,553 | )
|                                                           |  |      |            |   |      |   |            |  
|                                                           |  |     
|Net income (loss):                                         |  |      |            |   |      |   |            |  
|General Partner                                            |  | $    | 61,205     |   |      | $ | 681,964    |  
|Limited Partners                                           |  |      | 494,988    |   |      |   | (2,437,517 | )
|                                                           |  |      |            |   |      |   |            |  
|                                                           |  | $    | 556,193    |   |      | $ | (1,755,553 | )
|                                                           |  |      |            |   |      |   |            |  
|Net income (loss) per Limited Partnership unit             |  | $    | 0.03       |   |      | $ | (0.16      | )
|Weighted average number of units outstanding               |  |      | 14,995,550 |   |      |   | 14,995,550 |  

See accompanying notes.



Page 16 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

STATEMENTS OF CHANGES IN PARTNERS CAPITAL

YEARS ENDED DECEMBER 31,
2005 AND 2004



|                                                                     |       |                  |        |   |                |   |  |                                   |          |   |       |   |          |   |  |   |            |  
|-------------------------------------------------------------------- | ----- | ---------------- | ------ | - | -------------- | - |  | --------------------------------- | -------- | - | ----- | - | -------- | - |  | - | ---------- | -
|                                                                     |       | Limited Partners |        |   | GeneralPartner |   |  | AccumulatedOtherComprehensiveLoss |          |   | Total |  
|                                                                     | Units |                  | Amount |   |                |   |  |                                   |          |   |       |   |         
|Balance December 31, 2003, as previously reported                    |       | 14,995,550       |        | $ | 42,206,979     |   |  | $                                 |         |   |       | $ | (886,207 | ) |  | $ | 41,320,772 |  
|Cumulative effect of prior period adjustments (see footnote 3)       |       |                 |        |   | 1,089,577      |   |  |                                   |         |   |       |   |         |   |  |   | 1,089,577  |  
|                                                                     |       |                  |        |   |                |   |  |                                   |          |   |       |   |          |   |  |   |            |  
|Balance December 31, 2003, as restated                               |       | 14,995,550       |        |   | 43,296,556     |   |  |                                   |         |   |       |   | (886,207 | ) |  |   | 42,410,349 |  
|Distributions to Limited Partners ($0.55 per Unit)                   |       |                 |        |   | (8,261,432     | ) |  |                                   |         |   |       |   |         |   |  |   | (8,261,432 | )
|Distributions to General Partner                                     |       |                 |        |   |               |   |  |                                   | (681,964 | ) |       |   |         |   |  |   | (681,964   | )
|Unrealized decrease in interest rate swap liability                  |       |                 |        |   |               |   |  |                                   |         |   |       |   | 593,321  |   |  |   | 593,321    |  
|Adjustment for portion of swap liability charged to interest expense |       |                 |        |   |               |   |  |                                   |         |   |       |   | 5,120    |   |  |   | 5,120      |  
|Net income (loss)                                                    |       |                 |        |   | (2,437,517     | ) |  |                                   | 681,964  |   |       |   |         |   |  |   | (1,755,553 | )
|                                                                     |       |                  |        |   |                |   |  |                                   |          |   |       |   |          |   |  |   |            |  
|Balance December 31, 2004                                            |       | 14,995,550       |        |   | 32,597,607     |   |  |                                   |         |   |       |   | (287,766 | ) |  |   | 32,309,841 |  
|Distributions to Limited Partners ($0.05 per Unit)                   |       |                 |        |   | (762,437       | ) |  |                                   |         |   |       |   |         |   |  |   | (762,437   | )
|Distributions to General Partner                                     |       |                 |        |   |               |   |  |                                   | (61,205  | ) |       |   |         |   |  |   | (61,205    | )
|Adjustment for portion of swap liability charged to interest expense |       |                 |        |   |               |   |  |                                   |         |   |       |   | 197,836  |   |  |   | 197,836    |  
|Net income                                                           |       |                 |        |   | 494,988        |   |  |                                   | 61,205   |   |       |   |         |   |  |   | 556,193    |  
|                                                                     |       |                  |        |   |                |   |  |                                   |          |   |       |   |          |   |  |   |            |  
|Balance December 31, 2005                                            |       | 14,995,550       |        | $ | 32,330,158     |   |  | $                                 |         |   |       | $ | (89,930  | ) |  | $ | 32,240,228 |  
|                                                                     |       |                  |        |   |                |   |  |                                   |          |   |       |   |          |   |  |   |            |  

See accompanying notes.



Page 17 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005 AND 2004



|                                                                                         |  |      |             |   |      |   |             |  
|---------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                         |  | 2005 |             |   | 2004 |  
|Operating activities:                                                                    |  |      |             |   |      |   |             |  
|Net income (loss)                                                                        |  | $    | 556,193     |   |      | $ | (1,755,553  | )
|                                                                                         |  |     
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Loss on sales of assets                                                                  |  |      | 454,434     |   |      |   | 620,704     |  
|Depreciation of operating lease assets                                                   |  |      | 8,699,042   |   |      |   | 10,416,101  |  
|Amortization of initial direct costs                                                     |  |      | 42,559      |   |      |   | 75,910      |  
|Interest rate swap contracts                                                             |  |      | 197,836     |   |      |   | 5,120       |  
|Realized decrease in interest rate swap liability                                        |  |      | (227,556    | ) |      |   |            |  
|Provision for (recovery of) doubtful accounts                                            |  |      | (10,794     | ) |      |   | 313,892     |  
|Provision for impairment loss                                                            |  |      | 982,560     |   |      |   | 455,366     |  
|Changes in operating assets and liabilities:                                             |  |      |             |   |      |   |             |  
|Accounts receivable                                                                      |  |      | 194,237     |   |      |   | 548,855     |  
|Other assets                                                                             |  |      | (56,929     | ) |      |   | (53,445     | )
|Accounts payable:                                                                        |  |      |             |   |      |   |             |  
|General Partner                                                                          |  |      | 167,177     |   |      |   | (23,358     | )
|Other                                                                                    |  |      | (252,380    | ) |      |   | (119,536    | )
|Accrued interest payable                                                                 |  |      | (21,302     | ) |      |   | 24,794      |  
|Unearned lease income                                                                    |  |      | (17,667     | ) |      |   | (106,565    | )
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                                |  |      | 10,707,410  |   |      |   | 10,402,285  |  
|                                                                                         |  |     
|Investing activities:                                                                    |  |      |             |   |      |   |             |  
|Proceeds from sales of lease assets                                                      |  |      | 3,463,422   |   |      |   | 5,503,961   |  
|Reduction of net investment in direct financing leases                                   |  |      | 1,135,118   |   |      |   | 1,878,178   |  
|Improvements to operating leases                                                         |  |      | (720,367    | ) |      |   | (573,339    | )
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash provided by investing activities                                                |  |      | 3,878,173   |   |      |   | 6,808,800   |  
|                                                                                         |  |     
|Financing activities:                                                                    |  |      |             |   |      |   |             |  
|Repayments of:                                                                           |  |      |             |   |      |   |             |  
|Receivables funding program obligation                                                   |  |      | (5,417,000  | ) |      |   | (6,762,000  | )
|Acquisition facility                                                                     |  |      | (8,500,000  | ) |      |   | (21,500,000 | )
|Non-recourse debt                                                                        |  |      | (251,586    | ) |      |   | (1,118,694  | )
|Borrowings under acquisition facility                                                    |  |      | 1,500,000   |   |      |   | 21,500,000  |  
|Distributions:                                                                           |  |      |             |   |      |   |             |  
|General Partner                                                                          |  |      | (61,205     | ) |      |   | (681,964    | )
|Limited Partners                                                                         |  |      | (762,437    | ) |      |   | (8,261,432  | )
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash used in financing activities                                                    |  |      | (13,492,228 | ) |      |   | (16,824,090 | )
|                                                                                         |  |     
|Net increase in cash and cash equivalents                                                |  |      | 1,093,355   |   |      |   | 386,995     |  
|Cash and cash equivalents at beginning of year                                           |  |      | 1,222,623   |   |      |   | 835,628     |  
|                                                                                         |  |      |             |   |      |   |             |  
|Cash and cash equivalents at end of year                                                 |  | $    | 2,315,978   |   |      | $ | 1,222,623   |  
|                                                                                         |  |      |             |   |      |   |             |  
|Supplemental disclosures of cash flow information:                                       |  |      |             |   |      |   |             |  
|Cash paid during the period for taxes                                                    |  | $    | 100,755     |   |      | $ | 95,521      |  
|                                                                                         |  |      |             |   |      |   |             |  
|Cash paid during the year for interest                                                   |  | $    | 1,223,208   |   |      | $ | 1,347,184   |  
|                                                                                         |  |      |             |   |      |   |             |  
|Schedule of non-cash transactions:                                                       |  |      |             |   |      |   |             |  
|Change in fair value of interest rate swaps contracts                                    |  | $    | 227,556     |   |      | $ | 593,321     |  
|                                                                                         |  |      |             |   |      |   |             |  

See accompanying notes.



Page 18 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|1. | Organization and Limited Partnership matters:
|-- | ---------------------------------------------

ATEL Capital
Equipment Fund VII, L.P. (the Partnership) was formed under the laws of the State of California on May 17, 1996 for the purpose of acquiring equipment to engage in equipment leasing and sales activities, primarily in the United
States. The Partnership may continue until December 31, 2017. The General Partner of the Partnership is ATEL Financial Services, LLC (AFS), a California limited liability company. Prior to converting to a limited liability company
structure, AFS was formerly known as ATEL Financial Corporation.

The Partnership conducted a public offering of 15,000,000 Units of Limited Liability
Partnership Interest (Units), at a price of $10 per Unit. On January 7, 1997, subscriptions for the minimum number of Units (120,000, $1,200,000) had been received (excluding subscriptions from Pennsylvania investors) and AFS
requested that the subscriptions be released to the Partnership. On that date, the Partnership commenced operations in its primary business (leasing activities). Total gross contributions in the amount of $150,000,000 (15,000,000 units) were
received as of November 27, 1998, $500 of which represented the Initial Partners capital investment, $100 of which represented AFS capital investment. The offering was terminated on November 27, 1998.

The Partnerships principal objectives are to invest in a diversified portfolio of equipment that will (i) preserve, protect and return the Partnerships
invested capital; (ii) generate regular distributions to the partners of cash from operations and cash from sales or refinancing, with any balance remaining after certain minimum distributions to be used to purchase additional equipment during
the reinvestment period (Reinvestment Period), ending December 31, 2004 and (iii) provide additional distributions following the Reinvestment Period and until all equipment has been sold. The Partnership is governed by its
Limited Partnership Agreement (Partnership Agreement).

Pursuant to the Limited Partnership Agreement, AFS receives compensation and
reimbursements for services rendered on behalf of the Partnership (footnote 7). AFS is required to maintain in the Partnership reasonable cash reserves for working capital, the repurchase of Units and contingencies.



|2. | Summary of significant accounting policies:
|-- | -------------------------------------------

Basis of
presentation:

The accompanying balance sheet as of December 31, 2005 and the related statements of operations, changes in partners capital,
and cash flows for each of the two years ended December 31, 2005 have been prepared in accordance with accounting principles generally accepted in the United States, (GAAP). Certain prior year amounts have been reclassified to
conform to the current year presentation.

Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates primarily relate
to the determination of residual values at the end of the lease term, expected future cash flows used for impairment analysis purposes, and determination of provisions for doubtful accounts.

Cash and cash equivalents:

Cash and cash equivalents include cash in
banks and cash equivalent investments with original maturities of ninety days or less.



Page 19 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|2. | Summary of significant accounting policies (continued):
|-- | -------------------------------------------------------



Credit risk:

Financial instruments that potentially subject the Partnership to concentrations of credit risk include cash and cash equivalents, direct finance lease receivables and accounts receivable. The Partnership places its cash deposits and
temporary cash investments with creditworthy, high quality financial institutions. The concentration of such deposits and temporary cash investments is not deemed to create a significant risk to the Partnership. Accounts receivable represent amounts
due from lessees in various industries, related to equipment on operating leases and direct financing leases. See footnote 6 for a description of lessees and financial borrowers by industry as of December 31, 2005 and 2004.

Accounts receivable:

Accounts receivable represent the amounts
billed under operating and direct finance lease contracts and currently due to the Partnership. Allowances for doubtful accounts are typically established based on historical charge offs and collection experience and are usually determined by
specifically identified lessees and invoiced amounts. Accounts receivable are charged off to expense on specific identification basis. Amounts recovered that were previously written-off are recorded as other income in the period received.

Direct financing leases and related revenue recognition:

Income from direct financing lease transactions is reported using the financing method of accounting, in which the Partnerships investment in the leased property is reported as a receivable from the lessee to be recovered through
future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding.

Allowances for losses on direct financing leases are typically established based on historical charge offs and collections experience and are usually determined by specifically identified lessees and billed and unbilled receivables. Direct
financing leases are charged off to expense on a specific identification basis.

Direct financing leases are automatically placed in a non-accrual status
(i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, management periodically reviews the credit worthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon
managements judgment, direct finance lessees may be placed in a non-accrual status. Leases placed on non-accrual status are only returned to an accrual status on a case by case basis.

Equipment on operating leases and related revenue recognition:

Equipment subject to operating leases is stated at cost. Depreciation is being recognized on a straight-line method over the terms of the related leases to the equipments estimated residual values at the end of the leases.

Operating lease revenue is recognized on a straight-line basis over the term of the underlying leases. The initial lease terms will vary as to the type of equipment
subject to the leases, the needs of the lessees and the terms to be negotiated, but initial leases are generally from 36 to 120 months. The difference between rent received and rental revenue recognized is recorded as unearned operating lease income
on the balance sheet.

Initial direct costs:

In prior
years, the Partnership capitalized initial direct costs (IDC) associated with the acquisition of lease assets (as defined in Statement of Financial Accounting Standards (SFAS) No. 91 Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases). Capitalized IDC included both internal costs (e.g., labor and overhead) and external broker fees incurred with the acquisition. Remaining IDC is
being amortized on a lease by lease basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for direct finance leases. Upon disposal of the underlying lease assets, both the initial
direct costs and the associated accumulated amortization are relieved. Costs related to leases that were not consummated were not eligible for capitalization as initial direct costs. Such amounts were expensed as acquisition expense.



Page 20 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|2. | Summary of significant accounting policies (continued):
|-- | -------------------------------------------------------



Asset valuation:

Recorded values of the Partnerships asset portfolio are periodically reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss is
measured and recognized only if the estimated undiscounted future cash flows of the asset are less than their net book value. The estimated undiscounted future cash flows are the sum of the estimated residual value of the asset at the end of the
assets expected holding period and estimates of undiscounted future rents. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market
place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity simultaneously, or to dispose of the asset quickly. Impairment is measured as the difference between the
fair value (as determined by the discounted estimated future cash flows) of the asset and its carrying value on the measurement date. See footnotes 5 and 6.

Segment reporting:

The Partnership adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 establishes annual and interim standards for operating segments of a Partnership. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in
which it holds assets and reports revenue, and its major customers. The Partnership is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly the Partnership operates in one
reportable operating segment in the United States.

The Partnerships chief operating decision makers are the General Partners Chief Operating
Officer and its Chief Executive Officer. The Partnership believes that its equipment leasing business operates as one reportable segment because: a) the Partnership measures profit and loss at the equipment portfolio level as a whole; b) the chief
operating decision makers do not review information based on any operating segment other than the equipment leasing transaction portfolio; c) the Partnership does not maintain discrete financial information on any specific segment other than its
equipment financing operations; d) the Partnership has not chosen to organize its business around different products and services other than equipment lease financing; and e) the Partnership has not chosen to organize its business around geographic
areas.

The primary geographic regions in which the Partnership seeks leasing opportunities are North America and Europe. The table below summarizes
geographic relating to the sources, by nation, of the Partnerships operating revenues for the year ended December 31, 2005:



|               |  |     
|-------------- |  | ----
|               |  | 2005
|United States  |  | 98% 
|United Kingdom |  | 2%  

Certain of the Partnerships lessee customers have international operations. In these instances, the
Partnership is aware that certain equipment, primarily rail and transportation, may periodically exit the country. However, these lessee customers are US-based, and it is impractical for the Partnership to track, on an asset-by-asset day-by-day
basis, where these assets are deployed.

Derivative financial instruments:

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which established new accounting and
reporting standards for derivative instruments. SFAS No. 133 has been amended by SFAS No. 137, issued in June 1999, by SFAS No. 138, issued in June 2000 and by SFAS No. 149, issued in June 2003.



Page 21 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|2. | Summary of significant accounting policies (continued):
|-- | -------------------------------------------------------



SFAS No. 133, as amended, requires the Partnership to recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow, or foreign currency hedges, and establishes accounting standards for reporting
changes in the fair value of the derivative instruments. Upon adoption on January 1, 2001, the Partnership recorded its interest rate swap hedging instruments at fair value in the balance sheet, designated the interest rate swaps as cash flow
hedges, and recognized the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in
current earnings during the period of change. Such interest rate swaps are linked to and adjust effectively the interest rate sensitivity of specific long-term debt.

The effective portion of the change in fair value of the interest rate swaps is recorded in Accumulated Other Comprehensive Income (AOCI) and the ineffective portion (if any) directly in earnings.
Amounts in AOCI are reclassified into earnings in a manner consistent with the earnings pattern of the underlying hedged item (generally reflected in interest expense). If a hedged item is de-designated prior to maturity, previous
adjustments to AOCI are recognized in earnings to match the earnings recognition pattern of the hedged item (e.g., level yield amortization if hedging an interest bearing instruments). Interest income or expense on most hedging derivatives used to
manage interest rate exposure is recorded on an accrual basis as an adjustment to the yield of the link exposures over the periods covered by the contracts. This matches the income recognition treatment of the exposure (i.e., the liabilities, which
are carried at historical cost, with interest recorded on an accrual basis).

Credit exposure from derivative financial instruments, which are assets,
arises from the risk of a counterparty default on the derivative contract. The amount of the loss created by the default is the replacement cost or current positive fair value of the defaulted contract.

Unearned operating lease income:

The Partnership records prepayments
on operating leases as a liability, unearned operating lease income. The liability is recorded when the prepayments are received and recognized as operating lease revenue ratably over the period to which the prepayments relate.

Income taxes:

Pursuant to the provisions of Section 701 of the
Internal Revenue Code, a partnership is not subject to federal income taxes. Accordingly, the Partnership has provided current income and franchise taxes for only those states which levy taxes on partnerships. For the years ended December 31,
2005 and 2004, the current provision for state income taxes and franchise fees was approximately $67,000 and $94,267, respectively.

The tax basis of the
Partnerships net assets and liabilities varies from the amounts presented in these financial statements at December 31:



|                                        |  |      |           
|--------------------------------------- |  | ---- | ----------
|                                        |  | 2005
|Financial statement basis of net assets |  | $    | 32,240,228
|Tax basis of net assets (unaudited)     |  |      | 22,218,269
|                                        |  |      |           
|Difference                              |  | $    | 10,021,959
|                                        |  |      |           

The primary differences between the tax basis of the net assets and the amounts recorded in the financial
statements are the result of differences in accounting for syndication costs and differences in depreciation methods used in the financial statements and the Partnerships tax returns.



Page 22 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|2. | Summary of significant accounting policies (continued):
|-- | -------------------------------------------------------



The following reconciles the net income (loss) reported in these financial statements to the loss reported on the
Partnerships federal tax return (unaudited) for each of the years ended December 31:



|                                                        |  |      |            |   |      |   |            |  
|------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                        |  | 2005 |            |   | 2004 |  
|Net income (loss) per financial statements              |  | $    | 556,193    |   |      | $ | (1,755,553 | )
|Reconciling item  impact due to prior year restatement |  |      |           |   |      |   | 77,018     |  
|Tax adjustments (unaudited):                            |  |      |            |   |      |   |            |  
|Adjustment to depreciation expense                      |  |      | 6,322,487  |   |      |   | 5,592,580  |  
|Provision for doubtful accounts                         |  |      | (27,243    | ) |      |   | (731,865   | )
|Provision for losses                                    |  |      | 982,560    |   |      |   | 300,455    |  
|Adjustments to lease revenues                           |  |      | 1,078,431  |   |      |   | 5,810,609  |  
|Adjustments to gain on sales of assets                  |  |      | 3,190,213  |   |      |   |           |  
|Other                                                   |  |      | (116,416   | ) |      |   |           |  
|                                                        |  |      |            |   |      |   |            |  
|Net income per federal tax return (unaudited)           |  | $    | 11,986,225 |   |      | $ | 9,293,244  |  
|                                                        |  |      |            |   |      |   |            |  

Per unit data:

Net income (loss) and distributions per unit are based upon the weighted average number of Limited Partnership units outstanding during the period.

Other income, net:

Other income (loss) consists of gains and losses on interest rate swap contracts. For the year ended December 31,
2005, other income, net consisted of favorable fair value adjustments on interest rate swap contracts of $227,556. For the year ended December 31, 2004, the Partnership generated nominal other income.

Recent accounting pronouncements:

In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Boards long-term measurement objectives for accounting for financial instruments. SFAS 159 is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007 (January 1, 2008). The standard is not applicable to direct financing and operating leases. The Partnership does not presently anticipate
any significant impact on its consolidated financial position, results of operations or cash flows, as a result of the adoption of SFAS 159.

In September
2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). This standard clarifies the definition of fair value for financial
reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. As of December 31, 2005, the Fund does not believe the adoption of SFAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the
inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB No. 108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current year financial
statements. SAB No. 108 requires an entity to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative
and qualitative factors. SAB 108 is effective for fiscal years beginning after November 15, 2006.



Page 23 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|2. | Summary of significant accounting policies (continued):
|-- | -------------------------------------------------------



The Partnership will adopt SAB 108 as of January 1, 2007, as required. The Partnership has not determined the
effect, if any, the adoption of SAB 108 will have on the Partnerships financial position and results of operations.

In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN
48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on deregulation, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Partnership will adopt FIN 48 as of January 1, 2007, as required.
The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Partnership has not determined the effect, if any, the adoption of FIN 48 will have on the Partnerships financial position and
results of operations.



|3. | Restated financial results:
|-- | ---------------------------

In preparing the 2005 financial
statements, the Partnerships General Partner determined that an error had occurred in the accounting for a certain direct finance lease portfolio acquired during 1997. The magnitude of the error was material in the aggregate for years prior to
2004. Accordingly, the Partnership recorded a prior period adjustment to increase Partners capital as of January 1, 2004 by $1,089,577. Related to this error, two adjustments were required to restate the investment in equipment and
leases, net, for periods before January 1, 2004. First, an increase of $1,031,955 was recorded to investment in equipment and leases, net, to adjust for the inappropriate amortization of unearned direct financing lease income for the periods
subsequent to the acquisition of the lease portfolio in 1997 through December 31, 2003. The second adjustment was recorded to increase investment in equipment and leases, net, by $57,622 as certain leased assets were inappropriately depreciated
after begin renewed and reclassified to operating lease assets from direct financing leases beginning in 2001 through December 31, 2003. Amounts related to the perpetuation of the error in 2004 were nominal and therefore no further adjustment
was recorded in 2004.



|4. | Selected quarterly data (unaudited):
|-- | ------------------------------------

The Partnerships 2004
and 2005 unaudited selected quarterly financial information is as follows:



|                                               |  |                        |            |   |                        |   |                   |  |   |                  |   |  |   |            |  
|---------------------------------------------- |  | ---------------------- | ---------- | - | ---------------------- | - | ----------------- |  | - | ---------------- | - |  | - | ---------- | -
|Quarter ended                                  |  | March 31,2004          |            |   | June 30, 2004          |   | September 30,2004 |  |   | December 31,2004 |  
|Total revenues                                 |  | $                      | 4,225,576  |   |                        | $ | 4,661,072         |  | $ | 2,959,653        |   |  | $ | 3,278,436  |  
|Net income (loss)                              |  | $                      | (1,483,083 | ) |                        | $ | 710,616           |  | $ | (258,987         | ) |  | $ | (724,099   | )
|General Partner                                |  | $                      | 213,941    |   |                        | $ | 199,910           |  | $ | 115,352          |   |  | $ | 152,761    |  
|Limited Partners                               |  | $                      | (1,697,024 | ) |                        | $ | 510,703           |  | $ | (374,339         | ) |  | $ | (876,857   | )
|Net income (loss) per Limited Partnership Unit |  | $                      | (0.11      | ) |                        | $ | 0.03              |  | $ | (0.02            | ) |  | $ | (0.06      | )
|Weighted average number of Units outstanding   |  |                        | 14,995,550 |   |                        |   | 14,995,550        |  |   | 14,995,550       |   |  |   | 14,995,550 |  
|Quarter ended                                  |  | March 31,2005 Restated |            |   | June 30, 2005 Restated |   | September 30,2005 |  |   | December 31,2005 |  
|Total revenues                                 |  | $                      | 3,736,769  |   |                        | $ | 4,603,640         |  | $ | 3,455,037        |   |  | $ | 4,370,409  |  
|Net income (loss)                              |  | $                      | (517,614   | ) |                        | $ | 840,340           |  | $ | (112,055         | ) |  | $ | 345,522    |  
|General Partner                                |  | $                      | 61,205     |   |                        | $ |                  |  | $ |                 |   |  | $ |           |  
|Limited Partners                               |  | $                      | (578,819   | ) |                        | $ | 840,340           |  | $ | (112,055         | ) |  | $ | 345,522    |  
|Net income (loss) per Limited Partnership Unit |  | $                      | (0.04      | ) |                        | $ | 0.06              |  | $ | (0.01            | ) |  | $ | 0.02       |  
|Weighted average number of Units outstanding   |  |                        | 14,995,550 |   |                        |   | 14,995,550        |  |   | 14,995,550       |   |  |   | 14,995,550 |  

After receipt of an SEC comment letter by an affiliate of the Partnership in April 2005, the Partnerships
General Partner determined a restatement of previous SEC filings was required. This Form 10-KSB reflects the restatement, in accordance with the provisions of Accounting Principles Board Opinion No. 20, Accounting Changes of ATEL
Capital Equipment Fund VII, LLC previously filed financial statements as discussed below.



Page 24 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



As a result of the aforementioned factors, the financial statements for the following periods have been adjusted from
those previously filed:



| |  |  | March 31, 2005 and for the three months ended March 31, 2005
| | - |  | ------------------------------------------------------------



| |  |  | June 30, 2005 and for the three and six months ended June 30, 2005
| | - |  | ------------------------------------------------------------------

The following summarizes the nature of the adjustments:

Revenue

The Partnerships General Partner determined that the accounting methodology relating to certain utilization leases must be modified to comply with Statement of
Financial Accounting Standards No. 13, Accounting for Leases. As a result, the General Partner concluded that revenue was inappropriately recognized on a straight-line basis over the term of the lease for utilization-based leases
versus on a per diem basis. As a result, the Partnership restated operating lease revenue, accounts receivable and partners capital.

In addition, as
described in footnote 3, the Partnerships General Partner determined that they were inappropriately amortizing unearned direct finance lease income over periods differing from the underlying lease period for a certain direct finance lease
portfolio acquired in 1997. As a result, the Partnership adjusted earned direct finance lease revenue, investments in equipment and leases, net and Partners capital.

Finally, the Partnerships General Partner determined that certain payments from a lessee that represented a settlement of past due rental payments that were previously written off were in appropriately
classified as operating lease revenue. As a result, the Partnership reclassified these payments from operating lease revenue to other revenue.

Accrued liabilities

The Partnerships General Partner determined that certain liabilities had not been recorded in the correct
periods through a detailed review of cash disbursements. As a result of this review, the Partnership restated several of its asset, liability, partners capital and expense accounts.

Amortization of Initial Direct Costs to Originate or Acquire Loans and Leases Capitalized in Prior years

The Partnerships General Partner determined that the accounting methodology relating to the amortization of incremental initial direct cost (IDC) and
fees capitalized in prior years must be modified to comply with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases. As a result, the General
Partner concluded that they were not appropriately amortizing IDC capitalized in prior years. As a result of this restatement, IDC is amortized over the underlying lease term.

Depreciation of operating lease assets

In 2005, in connection with the incorrect accounting for the direct
finance lease portfolio previously discussed in footnote 3, the Partnerships General Partner determined that they were incorrectly depreciating certain leased assets as they were renewed and reclassified to operating lease assets from direct
finance leases. As a result, the Partnership adjusted depreciation of operating lease assets, investments in equipment and leases, net and Partners capital.



Page 25 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



Summary of restatement adjustments for the three months ended March 31, 2005 and the three and six months
ended June 30, 2005:



|                                                             |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  
|------------------------------------------------------------ |  | ---------------------------------------------------------------------------------- | -------- | - | -------------------------------------------------------------------------------- | - | -------- | ----------------------------------------------------------------------------- |  | - | -------- | -
|                                                             |  | Adjustment to net incomeincrease(decrease) for the Three MonthsEndedMarch 31, 2005 |          |   | Adjustment tonet
incomeincrease(decrease) for the Three MonthsEndedJune 30, 2005 |   |          | Adjustment tonet
incomeincrease(decrease) for theSix MonthsEndedJune 30, 2005 | 
|Revenue:                                                     |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  
|Operating leases                                             |  | $                                                                                  | (189,743 | ) |                                                                                  | $ | (755,636 | )                                                                             |  | $ | (945,379 | )
|Direct finance leases                                        |  |                                                                                    | (69,507  | ) |                                                                                  |   | (94,097  | )                                                                             |  |   | (163,604 | )
|Gain on sale of assets                                       |  |                                                                                    | (53,550  | ) |                                                                                  |   |         |                                                                               |  |   | (53,550  | )
|Other                                                        |  |                                                                                    |         |   |                                                                                  |   | 625,000  |                                                                               |  |   | 625,000  |  
|Expenses:                                                    |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  
|Depreciation of operating lease assets                       |  |                                                                                    | 34,481   |   |                                                                                  |   | 32,103   |                                                                               |  |   | 66,584   |  
|Marine vessel maintenance and other operating costs          |  |                                                                                    | (128,453 | ) |                                                                                  |   | (20,762  | )                                                                             |  |   | (149,215 | )
|Interest expense                                             |  |                                                                                    | (26,641  | ) |                                                                                  |   | (14,691  | )                                                                             |  |   | (41,332  | )
|Cost reimbursements to General Partner                       |  |                                                                                    | 1,045    |   |                                                                                  |   | 4,322    |                                                                               |  |   | 5,367    |  
|Equipment and incentive management fees to General Partner   |  |                                                                                    | 38,088   |   |                                                                                  |   | 179,702  |                                                                               |  |   | 217,790  |  
|Railcar and equipment maintenance                            |  |                                                                                    |         |   |                                                                                  |   | 116,467  |                                                                               |  |   | 116,467  |  
|Professional fees                                            |  |                                                                                    | (32,511  | ) |                                                                                  |   | 14,534   |                                                                               |  |   | (17,977  | )
|Amortization of initial direct costs                         |  |                                                                                    | (3,090   | ) |                                                                                  |   | (4,188   | )                                                                             |  |   | (7,278   | )
|Fair value adjustment on interest rate swap contracts        |  |                                                                                    | (83,961  | ) |                                                                                  |   | (7,598   | )                                                                             |  |   | (91,559  | )
|Other                                                        |  |                                                                                    | (69,446  | ) |                                                                                  |   | (154,458 | )                                                                             |  |   | (223,904 | )
|Other income, net                                            |  |                                                                                    | 108,537  |   |                                                                                  |   | 32,174   |                                                                               |  |   | 140,711  |  
|                                                             |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  
|Net change in net income and in net loss                     |  |                                                                                    | (474,751 | ) |                                                                                  |   | (47,128  | )                                                                             |  |   | (521,879 | )
|                                                             |  |                                                                                    |         
|Net change in Partners Capital:                             |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  
|Limited Partners                                             |  |                                                                                    | (474,751 | ) |                                                                                  |   | (47,128  | )                                                                             |  |   | (521,879 | )
|                                                             |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  
|Total Partners capital                                      |  | $                                                                                  | (474,751 | ) |                                                                                  | $ | (47,128  | )                                                                             |  | $ | (521,879 | )
|                                                             |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  
|Net change in Limited Partners capital per Partnership Unit |  | $                                                                                  | (0.03    | ) |                                                                                  | $ |         |                                                                               |  | $ | (0.03    | )
|                                                             |  |                                                                                    |          |   |                                                                                  |   |          |                                                                               |  |   |          |  



Page 26 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



Revenue

For the three months ended March 31, 2005, adjustments were made to revenue for: (1) a utilization-based lease and (2) a gain on sale of assets recorded in the first quarter of 2005 that should have been recorded in the
fourth quarter of 2004. These two revenue adjustments resulted in: (1) decreasing operating lease revenue by $189,743 with a corresponding decrease in accounts receivable to adjust operating lease revenue for actual utilization of certain
leased assets by the lessee and (2) decreasing gain on sale of assets by $53,550 with a corresponding decrease to investments in equipment and leases, net as a result of recording the gain in the fourth quarter of 2004. Additionally, as a
result of amortizing unearned direct finance lease income over periods differing from the underlying lease period for a certain direct finance lease portfolio acquired in 1997, earned income from direct finance leases decreased by $69,507 with a
corresponding decrease to investments in equipment and leases, net.

For the three months ended June 30, 2005, two adjustments and one
reclassification were made to revenue. First, operating lease revenue was decreased by $130,636 with a corresponding decrease in accounts receivable to adjust for actual utilization of certain leased assets by a certain lessee. Second, earned income
from direct finance leases was decreased by $94,097 with a corresponding decrease to investments in equipment and leases, net to adjust for improper amortization of unearned direct finance lease income over periods differing from the underlying
lease period for a certain direct finance lease portfolio acquired in 1997. Additionally, other revenue was increased by $625,000 with a corresponding decrease in operating lease revenue as a result of a reclassification from operating lease revenue
to other revenue for payments received from a certain customer related to a legal settlement for past due rents.

For the six months ended June 30,
2005, adjustments were made to revenue related to: (1) a utilization-based lease, (2) the improper amortization of unearned direct financing lease income and (3) an asset sale recorded in the incorrect period and a reclassification of
revenue from operating lease revenue to other revenue. First, operating lease revenue was decreased by $320,379 for actual utilization of certain leased assets by a certain lessee. Second, earned income from direct finance leases was decreased by
$163,604 with a corresponding decrease to investments in equipment and leases, net to adjust for improper amortization of unearned direct finance lease income over periods differing from the underlying lease period for a certain direct finance lease
portfolio acquired in 1997. Third, gain on sales of assets was decreased by $53,550 with a corresponding decrease to investments in equipment and leases, net a result of recording the gain in the fourth quarter of 2004. Additionally, other revenue
was increased by $625,000 with a corresponding decrease in operating lease revenue as a result of a reclassification from operating lease revenue to other revenue for payments received from a certain customer related to a legal settlement for past
due rents.

Accrued liabilities

For the three
months ended March 31, 2005, adjustments were made to expenses and Limited Partners capital for certain liabilities that had not been recorded in the correct period. These period-end accrual adjustments resulted in a net increase in total
expenses of $161,951 with a corresponding increase to accounts payable and decrease in Limited Partners capital. Additionally, an $83,961 reclassification of fair value adjustment on interest rate swap contracts was made to other
income, net. The increase to total expenses was primarily the result of increasing marine vessel maintenance and other operating costs as well as other expense by $197,889 for period-end accruals, which was partially offset by a decrease
to equipment and incentive management fees to General Partner of $30,088 for the same reason.

For the three months ended June 30, 2005, adjustments
were made to expenses and Limited Partners capital for certain liabilities that had not been recorded in the correct period. These period-end accrual adjustments resulted in a net decrease in total expenses of $177,605 with a corresponding
decrease to accounts payable and increase in Limited Partners capital. Additionally, a $7,598 reclassification of fair value adjustment on interest rate swap contracts was made to other income, net. The decrease to total expenses
was primarily the result of decreasing equipment and incentive management fees to General Partner, railcar and equipment maintenance and other income, net by $328,343 for period-end accruals, which was partially offset by an increase to other
expense of $154,458 for the same reason.



Page 27 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



For the six months ended June 30, 2005, adjustments were made to expenses and Limited Partners capital for
certain liabilities that had not been recorded in the correct period. These period-end accrual adjustments resulted in a net increase in total expenses of $15,654 with a corresponding increase to accounts payable and decrease in Limited
Partners capital. Additionally, a $91,559 reclassification of fair value adjustment on interest rate swap contracts was made to other income (expense), net. The increase to total expenses was primarily the result of increasing
marine vessel maintenance and other operating costs and other expense by $373,119 for period end accruals, which was partially offset by a decrease to equipment and incentive management fees to General Partner, railcar and equipment
maintenance and other expense of $474,968 for the same reason.

Amortization of IDC

For the three months ended March 31, 2005 as well as the three and six months June 30, 2005, the adjustments made to amortization of IDC expense and related
accumulated amortization resulting from restating IDC costs in prior years were nominal.

Depreciation of operating lease assets

For the three months ended March 31, 2005 as well as the three and six months June 30, 2005, the adjustments decreased depreciation of operating lease assets
and related accumulated depreciation with corresponding increases to Limited Partners capital.

Effect to net income/(loss) and partners
capital

For the three months ended March 31, 2005, the above adjustments had the effect of (1) increasing the three month net loss by
$474,751 and (2) decreasing Limited Partners capital by the same amount or $0.03 per Limited Partnership Unit.

For the three months ended
June 30, 2005, the above adjustments had the effect of: (1) decreasing the three month net income by $47,128 and (2) decreasing Limited Partners capital by the same amount, which was a nominal amount per Limited Partnership Units.

For the six months ended June 30, 2005, the above adjustments had the effect of: (1) reducing the six month net income by $521,879, and
(2) reducing Limited Partners capital by the same amount, or $0.03 per Limited Partnership unit

Cumulative effect of restatement adjustments
prior to January 1, 2005

As more fully discussed in footnote 3 of the Companys 2004 Form 10-K/A, the Company restated periods prior to
January 1, 2005. The nature of the revenue, accrued liabilities and amortization of IDC restatement adjustments that impact the six months ended June 30, 2005, also impacted prior year periods. In addition, prior periods were impacted by
other adjustments related to: (1) certain of AFS labor costs incurred to syndicate subscriptions for the Companys Units that had not been reimbursed to AFS as per the Operating Agreement, (2) depreciation on assets. As a
result, the Company restated Other Members capital and accounts payable Managing Member. For all periods prior to January 1, 2005, the adjustments as discussed above had the effect of decreasing Partners capital by $162,269 at
December 31, 2004 from $31,382,533 as originally reported to $31,220,264.

Additionally, as described in footnote 3, the Partnership adjusted
beginning Partners capital primarily as a result of: (1) amortizing unearned direct finance lease income over periods differing from those of the underlying lease periods, and (2) over depreciating certain leased assets as they were
renewed and reclassified to operating lease assets from direct finance leases. This adjustment, which was made to opening 2004 Partners capital, had the effect of increasing Partners capital by $1,089,577 to $42,410,349 at
December 31, 2003 and to $32,309,841 at December 31, 2004.



Page 28 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



The following tables reflect the impacted financial statement line items resulting from the restatement for the
three months ended March 31, 2005 and the three and six months ended June 30, 2005:

Balance Sheets line items that have been restated as
of:



|                                        |  |                |            |               |   |             |  |          |            |  |   |           
|--------------------------------------- |  | -------------- | ---------- | ------------- | - | ----------- |  | -------- | ---------- |  | - | ----------
|                                        |  | March 31, 2005 |            | June 30, 2005
|                                        |  | As Reported    |            | Restated      |   | As Reported |  | Restated
|Assets:                                 |  |                |            |               |   |             |  |          |            |  |   |           
|Accounts receivables                    |  | $              | 1,125,538  |               | $ | 841,406     |  | $        | 991,493    |  | $ | 576,725   
|Other assets                            |  |                | 151,212    |               |   | 160,475     |  |          | 88,789     |  |   | 99,662    
|Investment in equipment and leases, net |  |                | 51,280,876 |               |   | 52,315,909  |  |          | 47,608,788 |  |   | 48,577,638
|Total assets                            |  |                | 53,762,999 |               |   | 54,323,163  |  |          | 50,449,235 |  |   | 51,014,190
|                                        |  |                |            |              
|Liabilities:                            |  |                |            |               |   |             |  |          |            |  |   |           
|Accounts payable:                       |  |                |            |               |   |             |  |          |            |  |   |           
|General Partner                         |  |                | 766,111    |               |   | 776,267     |  |          | 947,094    |  |   | 958,640   
|Other                                   |  |                | 310,853    |               |   | 608,303     |  |          | 667,087    |  |   | 815,067   
|Total liabilities                       |  |                | 23,222,396 |               |   | 23,530,002  |  |          | 18,996,587 |  |   | 19,156,113
|Limited Partners capital               |  |                | 30,803,793 |               |   | 31,256,351  |  |          | 31,691,262 |  |   | 32,096,691
|Total Partners capital                 |  |                | 30,540,603 |               |   | 30,993,161  |  |          | 31,452,648 |  |   | 31,858,077
|Total liabilities and Partners capital |  | $              | 53,762,999 |               | $ | 54,523,163  |  | $        | 50,449,235 |  | $ | 51,014,190



Page 29 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



Statements of Operations line items that have been restated for the following periods:



|                                                           |  |                                   |            |   |          |   |            |  
|---------------------------------------------------------- |  | --------------------------------- | ---------- | - | -------- | - | ---------- | -
|                                                           |  | Three Months Ended March 31, 2005 |           
|                                                           |  | As Reported                       |            |   | Restated |  
|Revenue:                                                   |  |                                   |            |   |          |   |            |  
|Operating leases                                           |  | $                                 | 3,379,137  |   |          | $ | 3,189,394  |  
|Direct finance leases                                      |  |                                   | 128,494    |   |          |   | 58,987     |  
|Gain on sale of assets                                     |  |                                   | 518,241    |   |          |   | 464,691    |  
|Total revenues                                             |  |                                   | 4,049,569  |   |          |   | 3,736,769  |  
|Expenses:                                                  |  |                                   |            |   |          |   |            |  
|Depreciation of operating lease assets                     |  |                                   | 2,354,194  |   |          |   | 2,319,713  |  
|Marine vessel maintenance and other operating costs        |  |                                   | 315,942    |   |          |   | 444,395    |  
|Interest expenses                                          |  |                                   | 251,611    |   |          |   | 278,252    |  
|Cost reimbursements to General Partner                     |  |                                   | 761,739    |   |          |   | 760,694    |  
|Equipment and incentive management fees to General Partner |  |                                   | 38,088     |   |          |   |           |  
|Professional fees                                          |  |                                   | 67,360     |   |          |   | 99,871     |  
|Amortization of initial direct costs                       |  |                                   | 8,711      |   |          |   | 11,801     |  
|Fair value adjustment on interest rate swap contracts      |  |                                   | (83,961    | ) |          |   |           |  
|Other                                                      |  |                                   | 94,651     |   |          |   | 164,097    |  
|Total expenses                                             |  |                                   | 4,092,432  |   |          |   | 4,362,920  |  
|Net loss from operations                                   |  |                                   | (42,863    | ) |          |   | (626,151   | )
|Other income, net                                          |  |                                   |           |   |          |   | 108,537    |  
|Net loss                                                   |  |                                   | (42,863    | ) |          |   | (517,614   | )
|                                                           |  |                                  
|Net income (loss):                                         |  |                                   |            |   |          |   |            |  
|General Partner                                            |  |                                   | 61,205     |   |          |   | 61,205     |  
|Limited Partners                                           |  |                                   | (104,068   | ) |          |   | (578,819   | )
|                                                           |  |                                  
|Net income (loss) per Limited Liability Partnership Unit   |  | $                                 |           |   |          | $ | (0.03      | )
|Weighted Average Number of Partnership Units               |  |                                   | 14,995,550 |   |          |   | 14,995,550 |  



Page 30 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



Statements of Cash Flows line items that have been restated for the following periods:



|                                                                               |  |                                  |           |   |          |   |           |  
|------------------------------------------------------------------------------ |  | -------------------------------- | --------- | - | -------- | - | --------- | -
|                                                                               |  | Three Months EndedMarch 31, 2005 |          
|                                                                               |  | As Reported                      |           |   | Restated |  
|Operating activities:                                                          |  |                                  |           |   |          |   |           |  
|Net loss                                                                       |  | $                                | (42,863   | ) |          | $ | (517,614  | )
|Adjustment to reconcile net loss to net cash provided by operating activities: |  |                                  |           |   |          |   |           |  
|Depreciation                                                                   |  |                                  | 2,354,194 |   |          |   | 2,319,713 |  
|Gain on sales of assets                                                        |  |                                  | (518,241  | ) |          |   | (464,691  | )
|Amortization of initial direct costs                                           |  |                                  | 8,711     |   |          |   | 11,801    |  
|Changes in operating assets and liabilities:                                   |  |                                  |           |   |          |   |           |  
|Accounts receivable                                                            |  |                                  | 84,846    |   |          |   | 274,587   |  
|Other assets                                                                   |  |                                  | (14,265   | ) |          |   | 15,819    |  
|Accounts payable, General Partner                                              |  |                                  | 307,651   |   |          |   | 317,807   |  
|Accounts payable, other                                                        |  |                                  | (220,184  | ) |          |   | (27,734   | )
|Unearned operating lease income                                                |  |                                  | 91,647    |   |          |   | 91,645    |  
|Prepaid expenses and other assets                                              |  |                                  | (14,265   | ) |          |   | 15,819    |  
|Net cash provided by operating activities                                      |  |                                  | 1,969,036 |   |          |   | 1,938,873 |  
|                                                                               |  |                                 
|Investing activities:                                                          |  |                                  |           |   |          |   |           |  
|Proceeds from sales of lease assets.                                           |  |                                  | 785,943   |   |          |   | 755,606   |  
|Reduction of net investment in direct financing leases                         |  |                                  | 281,472   |   |          |   | 341,971   |  
|Net cash provided by investing activities                                      |  |                                  | 347,048   |   |          |   | 377,210   |  



Page 31 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



Statements of Operations line items that have been restated for the following periods:



|                                                           |  |                                  |            |                                |          |   |             |  |   |            |   |  |   |           
|---------------------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------ | -------- | - | ----------- |  | - | ---------- | - |  | - | ----------
|                                                           |  | Three Months Ended June 30, 2005 |            | Six Months Ended June 30, 2005
|                                                           |  | As Reported                      |            |                                | Restated |   | As Reported |  |   | Restated  
|Revenue:                                                   |  |                                  |            |                                |          |   |             |  |   |            |   |  |   |           
|Operating leases                                           |  | $                                | 4,640,458  |                                |          | $ | 3,884,822   |  | $ | 8,019,595  |   |  | $ | 7,074,216 
|Direct finance leases                                      |  |                                  | 140,597    |                                |          |   | 46,501      |  |   | 269,092    |   |  |   | 105,488   
|Gain on sales of assets                                    |  |                                  |           |                                |          |   |            |  |   | 527,091    |   |  |   | 473,541   
|Other                                                      |  |                                  | 26,710     |                                |          |   | 651,710     |  |   | 48,283     |   |  |   | 673,283   
|Total revenues                                             |  |                                  | 4,828,373  |                                |          |   | 4,603,640   |  |   | 8,877,942  |   |  |   | 8,340,409 
|Expenses:                                                  |  |                                  |            |                                |          |   |             |  |   |            |   |  |   |           
|Depreciation of operating lease assets                     |  |                                  | 2,154,013  |                                |          |   | 2,121,910   |  |   | 4,508,207  |   |  |   | 4,441,623 
|Marine vessel maintenance and other operating costs        |  |                                  | 534,152    |                                |          |   | 554,914     |  |   | 850,094    |   |  |   | 999,309   
|Interest expense                                           |  |                                  | 325,170    |                                |          |   | 339,861     |  |   | 576,781    |   |  |   | 618,113   
|Cost reimbursements to General Partner                     |  |                                  | 11,954     |                                |          |   | 7,632       |  |   | 773,693    |   |  |   | 768,326   
|Equipment and incentive management fees to General Partner |  |                                  | 179,702    |                                |          |   |            |  |   | 217,790    |   |  |   |          
|Railcar and equipment maintenance                          |  |                                  | 256,177    |                                |          |   | 139,710     |  |   | 309,211    |   |  |   | 192,744   
|Professional fees                                          |  |                                  | 64,725     |                                |          |   | 50,191      |  |   | 132,085    |   |  |   | 150,062   
|Amortization of initial direct costs                       |  |                                  | 8,765      |                                |          |   | 12,953      |  |   | 17,476     |   |  |   | 24,754    
|Fair value adjustment on interest rate swap contracts      |  |                                  | (7,598     | )                              |          |   |            |  |   | (91,559    | ) |  |   |          
|Other                                                      |  |                                  | 89,176     |                                |          |   | 243,633     |  |   | 183,826    |   |  |   | 407,730   
|Total expenses                                             |  |                                  | 3,940,905  |                                |          |   | 3,795,474   |  |   | 8,033,337  |   |  |   | 8,158,394 
|Net income from operations                                 |  |                                  | 887,468    |                                |          |   | 808,166     |  |   | 844,605    |   |  |   | 182,015   
|Other income, net                                          |  |                                  |           |                                |          |   | 32,174      |  |   |           |   |  |   | 140,711   
|Net income                                                 |  |                                  | 887,468    |                                |          |   | 840,340     |  |   | 844,605    |   |  |   | 322,726   
|                                                           |  |                                  |            |                               
|Net income:                                                |  |                                  |            |                                |          |   |             |  |   |            |   |  |   |           
|General Partner                                            |  |                                  |           |                                |          |   |            |  |   | 61,205     |   |  |   | 61,205    
|Limited Partners                                           |  |                                  | 887,468    |                                |          |   | 840,340     |  |   | 783,400    |   |  |   | 261,521   
|                                                           |  |                                  |            |                               
|Net income per Limited Liability Partnership Unit          |  | $                                | 0.06       |                                |          | $ | 0.06        |  | $ | 0.05       |   |  | $ | 0.02      
|Weighted Average Number of Partnership Units               |  |                                  | 14,995,550 |                                |          |   | 14,995,550  |  |   | 14,995,550 |   |  |   | 14,995,550



Page 32 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|4. | Selected quarterly data (unaudited) (continued):
|-- | ------------------------------------------------



Statements of Cash Flows line items that have been restated for the following periods:



|                                                                                 |  |                                 |           |   |                                |   |           |             |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | ----------- |  | - | --------- | - |  | - | --------- | -
|                                                                                 |  | Three Months EndedJune 30, 2005 |           |   | Six Months Ended June 30, 2005 |  
|                                                                                 |  | As Reported                     |           |   | Restated                       |   |           | As Reported |  |   | Restated  |  
|Operating activities:                                                            |  |                                 |           |   |                                |   |           |             |  |   |           |   |  |   |           |  
|Net income                                                                       |  | $                               | 887,468   |   |                                | $ | 840,340   |             |  | $ | 844,605   |   |  | $ | 322,726   |  
|Adjustment to reconcile net income to net cash provided by operating activities: |  |                                 |           |   |                                |   |           |             |  |   |           |   |  |   |           |  
|Depreciation                                                                     |  |                                 | 2,154,013 |   |                                |   | 2,121,910 |             |  |   | 4,508,207 |   |  |   | 4,441,623 |  
|Amortization of initial direct costs                                             |  |                                 | 8,765     |   |                                |   | 12,953    |             |  |   | 17,476    |   |  |   | 24,754    |  
|Gain on sale of assets                                                           |  |                                 |          |   |                                |   |          |             |  |   | (527,091  | ) |  |   | (473,541  | )
|Changes in operating assets and liabilities:                                     |  |                                 |           |   |                                |   |           |             |  |   |           |   |  |   |           |  
|Accounts receivable                                                              |  |                                 | 54,806    |   |                                |   | 185,443   |             |  |   | 139,652   |   |  |   | 460,030   |  
|Other assets                                                                     |  |                                 | 57,751    |   |                                |   | 60,813    |             |  |   | 43,486    |   |  |   | 76,632    |  
|Accounts payable, General Partner                                                |  |                                 | 180,983   |   |                                |   | 182,373   |             |  |   | 488,634   |   |  |   | 500,180   |  
|Accounts payable, Other                                                          |  |                                 | 356,234   |   |                                |   | 206,764   |             |  |   | 136,050   |   |  |   | 179,030   |  
|Unearned operating lease income                                                  |  |                                 | (221,775  | ) |                                |   | (221,773  | )           |  |   | (130,128  | ) |  |   | (130,128  | )
|Net cash provided by operating activities                                        |  |                                 | 3,586,810 |   |                                |   | 3,497,388 |             |  |   | 5,555,846 |   |  |   | 5,436,261 |  
|                                                                                 |  |                                 |           |  
|Investing activities:                                                            |  |                                 |           |   |                                |   |           |             |  |   |           |   |  |   |           |  
|Proceeds from sales of lease assets.                                             |  |                                 | 1,301,709 |   |                                |   | 1,290,263 |             |  |   | 2,087,652 |   |  |   | 2,045,869 |  
|Reduction of net investment in direct financing leases                           |  |                                 | 221,127   |   |                                |   | 321,995   |             |  |   | 502,599   |   |  |   | 663,966   |  
|Net cash provided by investing activities                                        |  |                                 | 1,522,836 |   |                                |   | 1,612,258 |             |  |   | 1,869,884 |   |  |   | 1,989,468 |  



|5. | Concentration of credit risk and major customers:
|-- | -------------------------------------------------

The Partnership
leases equipment to lessees in diversified industries. Leases are subject to AFSs credit committee review. The leases provide for the return of the equipment upon default.

As of December 31, 2005 and 2004, there were concentrations (defined as greater than 10%) of equipment leased to lessees in certain industries (as a percentage of total equipment cost) as follows:



|                      |  |      |   |  |      |  
|--------------------- |  | ---- | - |  | ---- | -
|                      |  | 2005 |   |  | 2004 |  
|Transportation, rail  |  | 42   | % |  | 30   | %
|Containers            |  | 20   | % |  | *    |  
|Transportation, other |  | 17   | % |  | 26   | %

During 2005, two customers comprised 36% of the Partnerships revenue from leases. In 2004, one customer
comprised 17% of the Partnerships revenues from leases.



Page 33 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005





|6. | Reserves, impairments and provisions for doubtful accounts:
|-- | -----------------------------------------------------------

Activity in the reserve for losses and impairments and allowances for doubtful accounts consists of the following:



|                                    |  |                                   |          |   |                               |   |          |  
|----------------------------------- |  | --------------------------------- | -------- | - | ----------------------------- | - | -------- | -
|                                    |  | Reserves forLosses andImpairments |          |   | Allowance forDoubtfulAccounts |  
|Balance as of December 31, 2003     |  |                                   |         |   |                               |   | 524,880  |  
|Provision                           |  |                                   | 455,366  |   |                               |   | 313,892  |  
|Charge offs                         |  |                                   | (455,366 | ) |                               |   | (297,892 | )
|                                    |  |                                   |          |   |                               |   |          |  
|Balance as of December 31, 2004     |  |                                   |         |   |                               |   | 540,880  |  
|Provision (adjustment to provision) |  |                                   | 982,560  |   |                               |   | (10,794  | )
|Charge offs                         |  |                                   |         |   |                               |   | (16,449  | )
|                                    |  |                                   |          |   |                               |   |          |  
|Balance as of December 31, 2005     |  | $                                 | 982,560  |   |                               | $ | 513,637  |  
|                                    |  |                                   |          |   |                               |   |          |  



|7. | Investments in equipment and leases:
|-- | ------------------------------------

The Partnerships
investments in equipment and leases consist of the following:



|                                          |  |                                   |            |           |   |                             |  |   |                                                                         |   |  |              |            |   |                                     |   |            |                         |  |   |            |   |  |   |           
|----------------------------------------- |  | --------------------------------- | ---------- | --------- | - | --------------------------- |  | - | ----------------------------------------------------------------------- | - |  | ------------ | ---------- | - | ----------------------------------- | - | ---------- | ----------------------- |  | - | ---------- | - |  | - | ----------
|                                          |  | BalanceDecember 31,2004(Restated) |            | Additions |   | Provision forImpairmentLoss |  |   | Depreciation/AmortizationExpense orAmortization ofDirectFinancingLeases |   |  | Dispositions |            |   | Net Reductions andReclassifications |   |            | BalanceDecember 31,2005
|Investment in operating leases            |  | $                                 | 47,263,381 |           | $ | 720,367                     |  | $ |                                                                        |   |  | $            | (8,699,042 | ) |                                     | $ | (3,162,215 | )                       |  | $ | 731,686    |   |  | $ | 36,854,177
|Net investment in direct financing leases |  |                                   | 3,806,991  |           |   |                            |  |   |                                                                        |   |  |              |           |   |                                     |   |           |                         |  |   | (1,135,118 | ) |  |   | 2,671,873 
|Assets held for sale or lease             |  |                                   | 3,441,877  |           |   |                            |  |   | (982,560                                                                | ) |  |              |           |   |                                     |   | (755,640   | )                       |  |   | (731,686   | ) |  |   | 971,991   
|Initial direct costs                      |  |                                   | 47,692     |           |   |                            |  |   |                                                                        |   |  |              | (42,559    | ) |                                     |   |           |                         |  |   |           |   |  |   | 5,133     
|                                          |  |                                   |            |           |   |                             |  |   |                                                                         |   |  |              |            |   |                                     |   |            |                         |  |   |            |   |  |   |           
|                                          |  | $                                 | 54,559,941 |           | $ | 720,367                     |  | $ | (982,560                                                                | ) |  | $            | (8,741,601 | ) |                                     | $ | (3,917,855 | )                       |  | $ | (1,135,118 | ) |  | $ | 40,503,174
|                                          |  |                                   |            |           |   |                             |  |   |                                                                         |   |  |              |            |   |                                     |   |            |                         |  |   |            |   |  |   |           

Impairment of investments in leases and assets held for sale or lease:

Management periodically reviews the carrying values of its assets on leases and assets held for lease or sale. As a result of those reviews, management determined that
the fair values of certain assets, as detailed below, declined in value to the extent that the carrying values had become impaired. The fair value of the assets was determined based on the sum of the discounted estimated future cash flows of the
assets charges to operations were recorded for the declines in value of those assets in the amounts of $982,560, and $455,366 for the years ended December 31, 2005 and 2004 respectively. The nature of the impaired assets were barges in 2005,
and refuse trucks and other vehicles in 2004.

Impairment losses are recorded as an addition to accumulated depreciation of the impaired assets.
Depreciation expense and impairment losses on property subject to operating leases and property held for lease or sale consist of the following for each of the years ended December 31:



|                     |  |      |           |      |   |           
|-------------------- |  | ---- | --------- | ---- | - | ----------
|                     |  | 2005 |           | 2004
|Depreciation expense |  | $    | 8,699,042 |      | $ | 10,416,101
|Impairment losses    |  |      | 982,560   |      |   | 455,366   
|                     |  |      |           |      |   |           
|                     |  | $    | 9,681,602 |      | $ | 10,871,467
|                     |  |      |           |      |   |           



Page 34 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|7. | Investmentsin equipment and leases (continued):
|-- | -----------------------------------------------



All of the property subject to leases was acquired in the years 1997 through 2002.

Operating leases:

Property on operating leases consists of the
following:



|                                  |  |                                    |             |   |           |   |                     |  |   |                                  |   |  |                         |             |   |  |   |             |  
|--------------------------------- |  | ---------------------------------- | ----------- | - | --------- | - | ------------------- |  | - | -------------------------------- | - |  | ----------------------- | ----------- | - |  | - | ----------- | -
|                                  |  | BalanceDecember 31,2004 (Restated) |             |   | Additions |   | DepreciationExpense |  |   | Reclassificationsor Dispositions |   |  | BalanceDecember 31,2005 |            
|Transportation                    |  | $                                  | 95,382,373  |   |           | $ |                    |  | $ |                                 |   |  | $                       | (1,694,112  | ) |  | $ | 93,688,261  |  
|Marine vessels/barges             |  |                                    | 5,830,845   |   |           |   | 720,367             |  |   |                                 |   |  |                         | (3,250,926  | ) |  |   | 3,300,286   |  
|Construction                      |  |                                    | 7,954,379   |   |           |   |                    |  |   |                                 |   |  |                         | (4,698,380  | ) |  |   | 3,255,999   |  
|Mining equipment                  |  |                                    | 4,699,575   |   |           |   |                    |  |   |                                 |   |  |                         |            |   |  |   | 4,699,575   |  
|Manufacturing                     |  |                                    | 3,870,348   |   |           |   |                    |  |   |                                 |   |  |                         | (3,870,348  | ) |  |   |            |  
|Furniture, fixtures and equipment |  |                                    | 1,191,645   |   |           |   |                    |  |   |                                 |   |  |                         | (493,000    | ) |  |   | 698,645     |  
|Materials handling                |  |                                    | 3,447,312   |   |           |   |                    |  |   |                                 |   |  |                         | (1,496,992  | ) |  |   | 1,950,320   |  
|Office automation                 |  |                                    | 3,521,046   |   |           |   |                    |  |   |                                 |   |  |                         |            |   |  |   | 3,521,046   |  
|Other                             |  |                                    | 2,863,573   |   |           |   |                    |  |   |                                 |   |  |                         | (632,064    | ) |  |   | 2,231,509   |  
|                                  |  |                                    |             |   |           |   |                     |  |   |                                  |   |  |                         |             |   |  |   |             |  
|                                  |  |                                    | 128,761,096 |   |           |   | 720,367             |  |   |                                 |   |  |                         | (16,135,822 | ) |  |   | 113,345,641 |  
|Less accumulated depreciation     |  |                                    | (81,497,715 | ) |           |   |                     |  |   | (8,699,042                       | ) |  |                         | 13,705,293  |   |  |   | (76,491,464 | )
|                                  |  |                                    |             |   |           |   |                     |  |   |                                  |   |  |                         |             |   |  |   |             |  
|                                  |  | $                                  | 47,263,381  |   |           | $ | 720,367             |  | $ | (8,699,042                       | ) |  | $                       | (2,430,529  | ) |  | $ | 36,854,177  |  
|                                  |  |                                    |             |   |           |   |                     |  |   |                                  |   |  |                         |             |   |  |   |             |  

Direct financing leases:

As of December 31, 2005, investment in direct financing leases, consist of various transportation, manufacturing and medical equipment. The following lists the components of the Partnerships investment in
direct financing leases as of December 31, 2005:



|                                                             |  |      |           |   |                |   |           |  
|------------------------------------------------------------ |  | ---- | --------- | - | -------------- | - | --------- | -
|                                                             |  | 2005 |           |   | 2004(Restated) |  
|Total minimum lease payments receivable                      |  | $    | 1,570,538 |   |                | $ | 2,787,065 |  
|Estimated residual values of leased equipment (unguaranteed) |  |      | 1,375,331 |   |                |   | 1,299,911 |  
|                                                             |  |      |           |   |                |   |           |  
|Investment in direct financing leases                        |  |      | 2,945,869 |   |                |   | 4,086,976 |  
|Less unearned income                                         |  |      | (273,996  | ) |                |   | (279,985  | )
|                                                             |  |      |           |   |                |   |           |  
|Net investment in direct financing leases                    |  | $    | 2,671,873 |   |                | $ | 3,806,991 |  
|                                                             |  |      |           |   |                |   |           |  



Page 35 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|7. | Investmentsin equipment and leases (continued):
|-- | -----------------------------------------------



At December 31, 2005, the aggregate amounts of future minimum lease payments to be received under operating and
direct financing leases are as follows:



|                         |  |                 |            |                       |   |           |  |   |           
|------------------------ |  | --------------- | ---------- | --------------------- | - | --------- |  | - | ----------
|Year ending December 31, |  | OperatingLeases |            | DirectFinancingLeases |   | Total    
|2006                     |  | $               | 6,520,960  |                       | $ | 897,730   |  | $ | 7,418,690 
|2007                     |  |                 | 4,873,447  |                       |   | 481,581   |  |   | 5,355,028 
|2008                     |  |                 | 3,560,681  |                       |   | 191,227   |  |   | 3,751,908 
|2009                     |  |                 | 3,027,939  |                       |   |          |  |   | 3,027,939 
|2010                     |  |                 | 150,166    |                       |   |          |  |   | 150,166   
|Thereafter               |  |                 | 225,249    |                       |   |          |  |   | 225,249   
|                         |  |                 |            |                       |   |           |  |   |           
|                         |  | $               | 18,358,442 |                       | $ | 1,570,538 |  | $ | 19,928,980
|                         |  |                 |            |                       |   |           |  |   |           

The Partnership utilizes a straight line depreciation method for equipment in all of the categories currently in
its portfolio of operating lease transactions. The useful lives for investment in leases by category are as follows (in years):



|                   |  |            
|------------------ |  | -----------
|Equipment category |  | Useful Life
|Mining             |  | 30  40    
|Marine Vessels     |  | 20  30    
|Manufacturing      |  | 10  20    
|Materials Handling |  | 7  10     
|Transportation     |  | 7  10     
|Office Furniture   |  | 7  10     
|Office Automation  |  | 3  5      



|8. | Related party transactions:
|-- | ---------------------------

The terms of the Limited Partnership
Agreement provide that AFS and/or affiliates are entitled to receive certain fees for equipment management and resale and for management of the Partnership.

The Limited Partnership Agreement allows for the reimbursement of costs incurred by AFS in providing administrative services to the Partnership. Administrative services provided include Partnership accounting, investor relations, legal
counsel and lease and equipment documentation. AFS is not reimbursed for services whereby it is entitled to receive a separate fee as compensation for such services, such as disposition of equipment. Reimbursable costs incurred by AFS are allocated
to the Partnership based upon estimated time incurred by employees working on Partnership business and an allocation of rent and other costs based on utilization studies.

Each of ATEL Leasing Corporation (ALC); ATEL Equipment Corporation (AEC); ATEL Investor Services (AIS); and AFS is a wholly-owned subsidiary of ATEL Capital Group and performs
services for the Partnership. Acquisition services are performed for the Partnership by ALC; equipment management, lease administration and asset disposition services are performed by AEC; investor relations and communications services are performed
by AIS; and general administrative services for the Partnership are performed by AFS.

Cost reimbursements to General Partner are based on costs incurred
by AFS in performing administrative services for the Partnership that are allocated to each Partnership that AFS manages based on certain criteria such as existing or new leases, number of investors or equity depending on the type of cost incurred.

Incentive management fees are computed as 4.0% of distributions of cash from operations, as defined in the Limited Partnership Agreement and equipment
management fees are computed as 3.5% of gross revenues from operating leases, as defined in the Limited Partnership Agreement plus 2.0% of gross revenues from full payout leases, as defined in the Limited Partnership Agreement.



Page 36 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|8. | Related party transactions (continued):
|-- | ---------------------------------------



AFS earned fees, commissions and reimbursements, pursuant to the Limited Partnership Agreement as follows during each
of the years ended December 31:



|                                                           |  |      |           |      |   |          
|---------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                           |  | 2005 |           | 2004
|Equipment and incentive management fees to General Partner |  | $    | 406,688   |      | $ | 634,486  
|Cost reimbursements to General Partner                     |  |      | 797,988   |      |   | 801,634  
|                                                           |  |      |           |      |   |          
|                                                           |  | $    | 1,204,676 |      | $ | 1,436,120
|                                                           |  |      |           |      |   |          

The General Partner makes certain payments to third parties on behalf of the Partnership for convenience purposes.
During the years ended December 31, 2005 and 2004 the General Partner made such payments of $571,837 and $431,490, respectively.

The Limited
Partnership Agreement places an annual and a cumulative limit for cost reimbursements to AFS. The cumulative limit increases annually. Any reimbursable costs incurred by AFS during the year exceeding the annual and/or cumulative limits cannot be
reimbursed in the current year, though may be reimbursable in future years. As of December 31, 2005, AFS had incurred approximately $900,989 of costs that are expected to be reimbursed to AFS by the Partnership in 2006 and 2007.



|9. | Non-recourse debt:
|-- | ------------------

At December 31, 2005, non-recourse debt
consists of notes payable to financial institutions. The notes are due in monthly payments. Interest on the notes is at fixed rate of 7.0% per annum. The notes are secured by assignments of lease payments and pledges of assets. At
December 31, 2005, the carrying value of the pledged assets is $338,285. The notes mature from 2006 through 2008.

Future minimum payments of
non-recourse debt are as follows:



|                         |  |           |         |          |   |        |  |   |        
|------------------------ |  | --------- | ------- | -------- | - | ------ |  | - | -------
|Year ending December 31, |  | Principal |         | Interest |   | Total 
|2006                     |  | $         | 101,568 |          | $ | 11,462 |  | $ | 113,030
|2007                     |  |           | 90,838  |          |   | 5,141  |  |   | 95,979 
|2008                     |  |           | 23,717  |          |   | 277    |  |   | 23,994 
|                         |  |           |         |          |   |        |  |   |        
|                         |  | $         | 216,123 |          | $ | 16,880 |  | $ | 233,003
|                         |  |           |         |          |   |        |  |   |        



|10. | Borrowing Facilities:
|--- | ---------------------

The Partnership participates with AFS and
certain of its affiliates, as defined in the Partnership Agreement, in a financing arrangement (the Master Terms Agreement). The Master Terms Agreement is comprised of: (1) a working capital term loan facility to AFS, (2) an
acquisition facility, (3) a warehouse facility to AFS, and (4) a venture facility available to an affiliate. The Master Terms Agreement is with a group of financial institutions and includes certain financial and non-financial covenants.
The Master Terms Agreement totals $75,000,000 and expires in June 2007. The availability of borrowings to the Partnership under the Master Terms Agreement is reduced by the amount outstanding on any of the above mentioned facilities. As of
December 31, 2005, the Partnership had borrowed $6,500,000 under the acquisition facility.

As of December 31, 2005, borrowings under the
facility were as follows:



|                                                                                                           |  |   |            |  
|---------------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|Total available under the financing facility                                                               |  | $ | 75,000,000 |  
|Amount borrowed by the Partnership under the acquisition facility                                          |  |   | (6,500,000 | )
|Amounts borrowed by affiliated partnerships and limited liability companies under the acquisition facility |  |   | (6,000,000 | )
|                                                                                                           |  |   |            |  
|Total remaining available under the acquisition and warehouse facilities                                   |  | $ | 62,500,000 |  
|                                                                                                           |  |   |            |  



Page 37 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|10. | Borrowing Facilities (continued):
|--- | ---------------------------------



The Partnership is contingently liable for principal payments under the warehouse facility component of the Master
Terms Agreement. The Partnership is liable because borrowings are recourse, jointly and severally, to the extent of the pro-rata share of the Partnerships net worth as compared to the aggregate net worth of certain of: (1) the affiliated
partnerships and limited liability companies of the Partnership, and (2) AFS and ATEL Leasing Corporation (ALC) who are 100% liable. As of December 31, 2005, there were no borrowings under either the warehouse facility, the
working capital term loan or the venture facility. However, the Partnership and its affiliates pay an annual commitment fee to have access to all facilities under the Master Terms Agreement.

As of December 31, 2005, the Partnership had $6,500,000 outstanding under the acquisition facility. The interest rate on the Master Terms Agreement is based on
either the LIBOR/Eurocurrency rate of one, two, three, or six month maturities plus a lender designated spread, or the banks prime rate (i.e., reference rate), which re-prices daily. Principal amounts of loans made under the Master Terms
Agreement that are repaid may be re-borrowed on the terms and subject to the conditions set forth under the Master Terms Agreement. The effective interest rate on borrowings at December 31, 2005 is 5.93%.

Draws on the acquisition facility by any affiliated partnership and/or limited liability Partnership borrower are secured by a blanket lien on that borrowers
assets, including but not limited to equipment and related leases.

To manage the warehousing facility for the holding of assets prior to allocation to
specific investor programs, a Warehousing Trust Agreement has been entered into by the Partnership, AFS, ALC, and certain of the affiliated partnerships and limited liability companies. The warehousing facility is used to acquire and hold, on a
short-term basis, certain lease transactions that meet the investment objectives of each of such entities. Each of the leasing programs sponsored by AFS and ALC currently in its acquisition stage is a pro rata participant in the Warehousing Trust
Agreement, as described below. When a program no longer has a need for short term financing provided by the warehousing facility, it is removed from participation, and as new leasing investment entities are formed by AFS and ALC and commence their
acquisition stages, these new entities will be added. As of December 31, 2005, the warehousing facility participants were the Partnership, ATEL Capital Equipment Fund VIII, LLC, ATEL Capital Equipment Fund IX, LLC, ATEL Capital Equipment Fund
X, LLC and ATEL Capital Equipment Fund XI, LLC. Pursuant to the Warehousing Trust Agreement, the benefit of the lease transaction assets, and the corresponding liabilities under the warehousing facility, inure to each of such entities based upon
each entitys pro-rata share in the warehousing trust estate. The pro-rata share is calculated as a ratio of the net worth of each entity over the aggregate net worth of all entities benefiting from the warehouse trust estate,
excepting that the trustees, AFS and ALC, are both liable for their pro-rata shares of the obligations based on their respective net worth, and jointly liable for the pro rata portion of the obligations of each of the affiliated partnerships and
limited liability companies participating under the warehousing facility. Transactions are financed through this warehousing facility only until the transactions are allocated to a specific program for purchase or are otherwise disposed by AFS and
ALC. When a determination is made to allocate the transaction to a specific program for purchase by the program, the purchaser repays the debt associated with the asset, either with cash or by means of the acquisition facility, the asset is removed
from the warehouse facility collateral, and ownership of the asset and any debt obligation associated with the asset are assumed solely by the purchasing entity.

The Master Terms Agreement discussed above includes certain financial and non-financial covenants applicable to each borrower. The Partnership and affiliates were not in compliance with non-financial covenants as of December 31, 2005.
The General Partner, on behalf of all borrowers, requested and received a waiver of this covenant from the financial institutions. As of January 31, 2007, the Partnership is no longer a participant in the borrowing facility and all amounts have
been paid.



|11. | Receivables Funding Program:
|--- | ----------------------------

In 1998, the Partnership entered into
a $65 million receivables funding program (the Program) with a third party receivables financing company that issues commercial paper rated A1 by Standard and Poors and P1 by Moodys Investor Services. Under the Program, the
receivables financing company receives a general lien against all of the otherwise unencumbered assets of the Partnership.

In order to maintain the
availability of the receivables funding program, the Partnership is required to make standby payments. These fees totaled $30,862 and $64,320 in 2005 and 2004, respectively, and are included in interest expense in the Partnerships statement of
operations.



Page 38 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|11. | Receivables Funding Program (continued):
|--- | ----------------------------------------



The Program provides for borrowing at a variable interest rate 4.37% at December 31, 2005, based on an index of
A1 commercial paper. The Program expired as to new borrowings in April 2002. As of December 31, 2005 and 2004, the Partnership had $3,580,000 and $8,997,000 outstanding under the program, respectively.

The Program requires AFS, on behalf of the Partnership, to enter into various interest rate swaps with a financial institution (also rated A1/P1) to manage interest rate
exposure associated with variable rate obligations under the Program by effectively converting the variable rate debt to fixed rates. The interest rate swaps were designated as cash flow hedges of the interest payment on the long term debt. As of
December 31, 2005, the Partnership receives or pays interest on a notional principal of $3,621,138 based on the difference between nominal rates ranging from 4.36% to 7.58% and the variable rate under the Program. No actual borrowing or lending
is involved. The termination of swaps was to coincide with the maturity of the debt with the last of the swaps maturing in 2008. Through the swap agreements, the interest rates have been effectively fixed. The differential to be paid or received is
accrued as interest rates change and is recognized currently as an adjustment to interest expense related to the debt.

The interest rate swaps were
originally designated as cash flow hedges of the interest payment on the long term debt. Effective January 1, 2005, the Partnership de-designated the original hedge relationships. Prior to this de-designation, changes in the fair value of the
swaps were generally recognized in accumulated other comprehensive loss (AOCL). Subsequent to this de-designation, changes in fair value of the swaps were reflected in the statement of operations in other income, net. In addition,
amounts remaining in AOCL subsequent to the de-designation of the swaps are to be reclassified into earning in a manner consistent with the earnings pattern of the underlying hedged item. During the year ended December 31, 2005, AOCL decreased
by $197,836 related to the reclassification of AOCL to earnings (included in interest expense). During the year ended December 31, 2004, AOCL decreased by $5,120 related to the reclassification of AOCL to earnings (included in interest
expense). The Partnership realized total comprehensive income (loss) of $582,413 and ($1,157,112) for the years ended December 31, 2005 and 2004, respectively.

Borrowings under the Program are as follows:



|              |  |                        |            |                         |   |                                  |  |                            |           |  |                                      |         |   |  |      |  
|------------- |  | ---------------------- | ---------- | ----------------------- | - | -------------------------------- |  | -------------------------- | --------- |  | ------------------------------------ | ------- | - |  | ---- | -
|Date Borrowed |  | OriginalAmountBorrowed |            | BalanceDecember 31,2005 |   | Notional BalanceDecember 31,2005 |  | Swap ValueDecember 31,2005 |           |  | Payment Rateon InterestSwapAgreement |        
|7/1/1998      |  | $                      | 25,000,000 |                         | $ | 1,205,000                        |  | $                          | 1,217,741 |  | $                                    | (17,473 | ) |  | 6.16 | %
|4/16/1999     |  |                        | 9,000,000  |                         |   | 215,000                          |  |                            | 219,297   |  |                                      | (930    | ) |  | 5.89 | %
|1/26/2000     |  |                        | 11,700,000 |                         |   | 1,610,000                        |  |                            | 1,604,810 |  |                                      | (46,232 | ) |  | 7.58 | %
|5/25/2001     |  |                        | 2,000,000  |                         |   | 187,000                          |  |                            | 194,728   |  |                                      | (1,195  | ) |  | 5.79 | %
|9/28/2001     |  |                        | 6,000,000  |                         |   | 320,000                          |  |                            | 384,562   |  |                                      | 500     |   |  | 4.36 | %
|1/31/2002     |  |                        | 4,400,000  |                         |   | 43,000                           |  |                            |          |  |                                      |        |   |  | *    |  
|              |  |                        |            |                         |   |                                  |  |                            |           |  |                                      |         |   |  |      |  
|              |  | $                      | 58,100,000 |                         | $ | 3,580,000                        |  | $                          | 3,621,138 |  | $                                    | (65,330 | ) |  |      |  
|              |  |                        |            |                         |   |                                  |  |                            |           |  |                                      |         |   |  |      |  

---

|* | Under the terms of the Program, no interest rate swap agreements were required for these borrowings.
|- | ----------------------------------------------------------------------------------------------------

The long-term debt borrowings mature in 2006 and 2007. Future minimum principal payments of long-term debt and annual swap notional reductions are as follows:



|                         |  |                      |           |                          |   |          |  |       |         |                                 |   |           |  |              |  
|------------------------ |  | -------------------- | --------- | ------------------------ | - | -------- |  | ----- | ------- | ------------------------------- | - | --------- |  | ------------ | -
|Year ending December 31, |  | DebtPrincipalSwapped |           | DebtPrincipalNot Swapped |   | Interest |  | Total |         | Rates onInterest SwapAgreements |  
|2006                     |  | $                    | 2,033,000 |                          | $ | 43,000   |  | $     | 167,037 |                                 | $ | 2,243,037 |  | 6.593%-6.897 | %
|2007                     |  |                      | 1,504,000 |                          |   |         |  |       | 16,816  |                                 |   | 1,520,816 |  | 6.872%-6.879 | %
|                         |  |                      |           |                          |   |          |  |       |         |                                 |   |           |  |              |  
|                         |  | $                    | 3,537,000 |                          | $ | 43,000   |  | $     | 183,853 |                                 | $ | 3,763,853 |  |              |  
|                         |  |                      |           |                          |   |          |  |       |         |                                 |   |           |  |              |  



Page 39 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



|11. | Receivables Funding Program (continued):
|--- | ----------------------------------------



At December 31, 2005, there are specific leases that are identified as collateral under the receivables funding
program with expected future lease receivables of approximately $29,312,882 at their discounted present value.

During the fiscal year ended
December 31, 2005, the weighted average interest rate on the receivables funding program was 6.6%. The receivables funding program discussed above includes certain financial and non-financial covenants applicable to each borrower.

The Partnership and affiliates were in compliance with all covenants as of December 31, 2005. In 2006, the receivables funding program was repaid.



|12. | Commitments:
|--- | ------------

At December 31, 2005, the Partnership had no
commitments to purchase lease assets.



|13. | Guarantees:
|--- | -----------

The Partnership enters into contracts that contain a
variety of indemnifications. The Partnerships maximum exposure under these arrangements is unknown. However, the Partnership has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

In the normal course of business, the Partnership enters into contracts of various types, including lease contracts, contracts for the sale or purchase of lease
assets, management contracts, loan agreements, credit lines and other debt facilities. It is prevalent industry practice for most contracts of any significant value to include provisions that each of the contracting parties  in addition to
assuming liability for breaches of the representations, warranties, and covenants that are part of the underlying contractual obligations  also assume an obligation to indemnify and hold the other contracting party harmless for such breaches,
for harm caused by such partys gross negligence and willful misconduct, including, in certain instances, certain costs and expenses arising from the contract. The General Partner has substantial experience in managing similar leasing programs
subject to similar contractual commitments in similar transactions, and the losses and claims arising from these commitments have been insignificant, if any. Generally, to the extent these contracts are performed in the ordinary course of business
under the reasonable business judgment of the General Partner, no liability will arise as a result of these provisions. The General Partner has no reason to believe that the facts and circumstances relating to the Partnerships contractual
commitments differ from those it has entered into on behalf of the prior programs it has managed. The General Partner knows of no facts or circumstances that would make the Partnerships contractual commitments outside standard mutual covenants
applicable to commercial transactions between businesses. Accordingly, the Partnership believes that these indemnification obligations are made in the ordinary course of business as part of standard commercial and industry practice, and that any
potential liability under the Partnerships similar commitments is remote. Should any such indemnification obligation become payable, the Partnership would separately record and/or disclose such liability in accordance with GAAP.



|14. | Partners capital:
|--- | ------------------

As of December 31, 2005, 14,995,550
Units were issued and outstanding. The Partnership is authorized to issue up to 15,000,050 Units, including the 50 Units issued to the Initial Limited Partners, as defined.

The Partnerships Net Profits, Net Losses, and Tax Credits are to be allocated 92.5% to the Limited Partners and 7.5% to AFS. In accordance with the terms of the Limited Partnership Agreement, additional
allocations of income were made to AFS in 2005 and 2004. The amounts allocated were determined to bring AFSs ending capital account balance to zero at the end of each period.

As defined in the Limited Partnership Agreement, available Cash from Operations shall be distributed as follows:

First,
Distributions of Cash from Operations shall be 88.5% to the Limited Partners, 7.5% to AFS and 4% to AFS or its affiliate designated as the recipient of the Incentive Management Fee, until the Limited Partners have received Aggregate Distributions in
an amount equal to their Original Invested Capital, as defined, plus a 10% per annum cumulative (compounded daily) return on their Adjusted Invested Capital, as defined in the Limited Partnership Agreement.



Page 40 of 47



---

ATEL CAPITAL EQUIPMENT FUND VII, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005



Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its affiliate designated as the recipient of the
Incentive Management Fee.

As defined in the Limited Partnership Agreement, available Cash from Sales or Refinancing are to be distributed as follows:

First, Distributions of Sales or Refinancing shall be 92.5% to the Limited Partners and 7.5% to AFS, until the Limited Partners have received Aggregate
Distributions in an amount equal to their Original Invested Capital, as defined, plus a 10% per annum cumulative (compounded daily) return on their Adjusted Invested Capital.

Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its affiliate designated as the recipient of the Incentive Management Fee.

Adjustment to beginning Limited Partners capital:

In preparing the 2005 financial statements, the
Partnerships General Partner determined that an error had occurred in the accounting for a certain direct finance lease portfolio acquired during 1997. The magnitude of the error was material in the aggregate for years prior to 2004.
Accordingly, the Partnership recorded a prior period adjustment to increase Partners capital as of January 1, 2004 by $1,089,577. The adjustment was primarily the result of: (1) amortizing unearned direct finance lease income over
periods longer than the underlying lease period, and (2) over depreciating certain leased assets as they were renewed and reclassified to operating lease costs from direct finance leases. Of the $1,089,577 adjustment increasing beginning
Partners capital, $1,031,955 was attributable to the under recognition of unearned direct finance lease income beginning in 1997 through December 31, 2003, and $57,622 was attributable to the over depreciation of certain operating lease
costs beginning in 2001 through December 31, 2003. The corresponding offset to this adjustment increased investments in equipment and leases, net.



|15. | Fair value of financial instruments:
|--- | ------------------------------------

The recorded amounts of the
Partnerships cash and cash equivalents, accounts receivable, accounts payable and accruals at December 31, 2005 approximate fair value because of the liquidity and short-term maturity of these instruments.

Non-recourse debt:

The fair value of the Partnerships
non-recourse debt is estimated using discounted cash flow analyses, based on the Partnerships current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair value of the Partnerships non-recourse debt
at December 31, 2005 is $216,123.

Acquisition facility obligation:

The carrying value of the Partnerships acquisition facility obligation approximates its fair value at December 31, 2005 as borrowings are at a variable interest rate that adjusts to current market interest
rates.

Receivables funding program obligation:

The
carrying amount of the Partnerships Receivable Funding Program obligation approximates fair value as borrowings are at a variable interest rate that adjusts to current market rates.

Interest rate swaps:

The fair value of interest rate swaps is
estimated by management based on independent valuations or discounting the fixed cash flows paid under each swap using the rate at which the Partnership could enter into new swaps of similar maturities. Swaps are recorded on the balance sheet at
fair value at December 31, 2005.



Page 41 of 47



---

|Item 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
|------- | -------------------------------------------------------------------------------------

None.



|Item 8A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of disclosure controls
and procedures

The Partnerships General Partners Chief Executive Officer, and Executive Vice President and Chief Financial and
Operating Officer, evaluated the effectiveness of the Partnerships disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) during and as of the end of the period covered by this report. Based on this evaluation, the
Chief Executive Officer and Executive Vice President and Chief Financial and Operating Officer concluded that for the years ended December 31, 2005, and 2004, certain material weaknesses existed in the Partnerships internal control over
financial reporting.

The Partnership does not control the financial reporting process, and is dependent on the General Partner, who is responsible for
providing the Partnership with financial statements in accordance with generally accepted accounting principles. The General Partners disclosure controls and procedures over the: a) application of generally accepted accounting principles for
leasing transactions (specifically, timely identification and recording of impairment in leased assets, accumulating and capitalizing costs for initiating leases (IDC), and properly amortizing costs associated with the initiation of a
lease); b) allocation of costs incurred by the General Partner on behalf of the Partnership; c) process of identifying and estimating liabilities in the correct period; and d) financial statement close process, including evaluating the relative
significance of misstatements and preparation of financial statements and related disclosures, were determined to be ineffective and constitute material weaknesses in internal control over financial reporting.

Changes in internal control

The General Partner has reviewed
the material weaknesses believes that the following corrective actions taken as a whole will address the material weaknesses in its disclosure controls and procedures described above. These corrective actions are as follows:

With regard to the timely identification and recording of impairment of leased assets, the General Partner has strengthened its quarterly impairment analysis through
additional management review of the analysis.

With regard to IDC, the accounting guidance has been reviewed, and a standard cost model (the
Model) has been developed that includes quarterly reviews by management. Information from the Model drives the amounts to be capitalized on a lease by lease basis. IDC is amortized over the term of the lease based on a straight-line
basis for operating leases and on the effective interest method for direct finance leases and notes receivable.

With regard to the allocations of costs
and expenses incurred by the General Partner, the allocation process has been reviewed and the costs and expenses have been properly allocated in accordance with the Limited Partnership Agreement.

With regard to identifying and estimating liabilities in the correct period the General Partner has performed a detailed review to identify and record the liabilities,
in the correct period. A standardized quarterly review process has been implemented to ensure the identification and estimation of the liabilities.

The
General Partner has taken the following steps to mitigate the weakness regarding its financial statement close process: a Chief Accounting Officer and an SEC reporting manager have been hired; the controller position has been split into two separate
roles to ensure proper management of the General Partner and the managed Funds accounting operations. Controls and job functions are being redesigned to increase the documentation of processes and transparency of procedures going forward.



Page 42 of 47



---

PART III



|Item 9. | DIRECTORS AND EXECUTIVE OFFICERS
|------- | --------------------------------

The registrant is a Limited
Partnership and, therefore, has no officers or directors.

ATEL Financial Services, LLC (AFS) is the Partnerships General Partner. AFS is
controlled by ATEL Capital Group (ACG or ATEL), a holding company formed to control ATEL and affiliated companies, through its subsidiaries, ATEL Leasing Corporation (ALC), AFSs General Partner, and ATEL
Business Credit, Inc. (ABC), the other member of AFS. ALC and ABC are AFSs only members. The outstanding voting capital stock of ATEL Capital Group is owned 100% by Dean Cash.

Each of ATEL Leasing Corporation (ALC), ATEL Equipment Corporation (AEC), ATEL Investor Services (AIS) and ATEL Financial Services,
LLC (AFS) is a subsidiary under the control of ATEL Capital Group and performs services for the Partnership. Acquisition services are performed for the Partnership by ALC, equipment management, lease administration and asset disposition
services are performed by AEC, investor relations and communications services are performed by AIS and general administrative services for the Partnership are performed by AFS. ATEL Securities Corporation (ASC) is a wholly-owned
subsidiary of AFS which performed distribution services in connection with the Partnerships public offering of its Units.

The officers and directors
of ATEL Capital Group and its affiliates are as follows:



|                   |  |                                                                                                                     
|------------------ |  | --------------------------------------------------------------------------------------------------------------------
|Dean L. Cash       |  | President and Chief Executive Officer of ATEL Financial Services, LLC (General Partner)                             
|                   | 
|Paritosh K. Choksi |  | Executive Vice President and Chief Financial and Operating Officer of ATEL Financial Services, LLC (General Partner)
|                   | 
|Vasco H. Morais    |  | Senior Vice President, Secretary and General Counsel of ATEL Financial Services, LLC (General Partner)              

Dean L. Cash, age 56, joined ATEL as director of marketing in 1980 and has been a vice president since 1981,
executive vice president since 1983 and a director since 1984. He has been President and CEO since April 2001. Prior to joining ATEL, Mr. Cash was a senior marketing representative for Martin Marietta Corporation, data systems division, from
1979 to 1980. From 1977 to 1979, he was employed by General Electric Corporation, where he was an applications specialist in the medical systems division and a marketing representative in the information services division. Mr. Cash was a
systems engineer with Electronic Data Systems from 1975 to 1977, and was involved in maintaining and developing software for commercial applications. Mr. Cash received a B.S. degree in psychology and mathematics in 1972 and an M.B.A. degree
with a concentration in finance in 1975 from Florida State University. Mr. Cash is an arbitrator with the American Arbitration Association.

Paritosh
K. Choksi, age 54, joined ATEL in 1999 as a director, senior vice president and its chief financial officer. He became its executive vice president and CFO/COO in April 2001. Prior to joining ATEL, Mr. Choksi was chief financial officer at Wink
Communications, Inc. from 1997 to 1999. From 1977 to 1997, Mr. Choksi was with Phoenix American Incorporated, a financial services and management company, where he held various positions during his tenure, and was senior vice president, chief
financial officer and director when he left the company. Mr. Choksi was involved in all corporate matters at Phoenix and was responsible for Phoenixs capital market needs. He also served on the credit committee overseeing all corporate
investments, including its venture lease portfolio. Mr. Choksi was a part of the executive management team which caused Phoenixs portfolio to increase from $50 million in assets to over $2 billion. Mr. Choksi is a member of the board
of directors of Syntel, Inc. Mr. Choksi received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology, Bombay; and an M.B.A. degree from the University of California, Berkeley.

Vasco H. Morais, age 48, joined ATEL in 1989 as general counsel to provide legal support in the drafting and reviewing of lease documentation, advising on general
corporate law matters, and assisting on securities law issues. From 1986 to 1989, Mr. Morais was employed by the BankAmeriLease Companies, Bank of Americas equipment leasing subsidiaries, providing in-house legal support on the
documentation of tax-oriented and non-tax oriented direct and leveraged lease transactions, vendor leasing programs and general corporate matters. Prior to the BankAmeriLease Companies, Mr. Morais was with the Consolidated Capital Companies in
the corporate and securities legal department involved in drafting and reviewing contracts, advising on corporate law matters and securities law issues. Mr. Morais received a B.A. degree in 1982 from the University of California in Berkeley, a
J.D. degree in 1986 from Golden Gate University Law School and an M.B.A. (Finance) in 1997 from Golden Gate University. Mr. Morais has been an active member of the State Bar of California since 1986.



Page 43 of 47



---

Audit Committee

ATEL Leasing Corporation is the General Partner of ATEL Financial Services, LLC. ATEL Financial Services, LLC is the General Partner of the registrant. The board of directors of ATEL Leasing Corporation acts as the audit committee of the
registrant. Dean L. Cash and Paritosh K. Choksi are members of the board of directors of ALC and are deemed to be financial experts. They are not independent of the Partnership.

Section 16(a) Beneficial Ownership Reporting Compliance

During March 2006, each of the executive officers and
directors of the registrants manager, Dean Cash, Paritosh Choksi and Vasco Morais, filed a statement of beneficial ownership of Units on Form 3 under Section 16. These statements were due at the time the registrant filed its Form 8A
registration statement under the Securities Exchange Act of 1934. Based solely on a review of Forms 3, 4 and 5, the Partnership is not otherwise aware of any failures to file reports of beneficial ownership required to be filed during or for the
year ended December 31, 2005.

Code of Ethics

ACG on behalf of AFS and ALC has adopted a code of ethics for its Chief Executive Officer and Chief Financial and Operating Officer. The Code of Ethics is included as Exhibit 14.1 to this report.



|Item 10. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The registrant is a Limited Partnership
and, therefore, has no officers or directors.

Set forth hereinafter is a description of the nature of remuneration paid and to be paid to AFS and its
Affiliates. The amount of such remuneration paid in 2005 and 2004 is set forth in Item 7a of this report under the caption Financial Statements and Supplementary Data - Notes to the Financial Statements - Related party transactions,
at footnote 7 thereof, which information is hereby incorporated by reference.

Equipment Management Fees

As compensation for its service rendered generally in managing or supervising the management of the Partnerships equipment and in supervising other ongoing service
and activities including, among others, arranging for necessary maintenance and repair of equipment, collecting revenue, paying operating expenses, determining the equipment is being used in accordance with all operative contractual arrangements,
property and sales tax monitoring and preparation of financial data, AFS or its affiliates are entitled to receive management fees which are payable for each fiscal quarter and are to be in an amount equal to (i) 3.5% of the gross lease
revenues from operating leases and (ii) 2% of gross lease revenues from full payout leases, as defined, which contain net lease provisions.

Incentive Management Fees

As compensation for its service rendered in establishing and maintaining the
composition of the Partnerships equipment portfolio and its acquisition and debt strategies and supervising fund administration including supervision the preparation of reports and maintenance of financial and operating data of the
Partnership, Securities and Exchange Commission and Internal Revenue service filings, returns and reports, AFS is entitled to receive the Incentive management fee which shall be payable for each fiscal quarter.

See footnote 7 to the financial statements included in Item 8 of this report for amounts paid for equipment management fees and incentive management fees.

Available Cash from Operations, as defined in the Limited Partnership Agreement, shall be distributed as follows:

First, Distributions of Cash from Operations shall be 88.5% to the Limited Partners, 7.5% to AFS and 4% to AFS or its affiliate designated as the recipient of the
Incentive Management Fee, until the Limited Partners have received Aggregate Distributions in an amount equal to their Original Invested Capital, as defined, plus a 10% per annum cumulative (compounded daily) return on their Adjusted Invested
Capital, as defined in the Limited Partnership Agreement.

Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its affiliate designated as
the recipient of the Incentive Management Fee.

Available Cash from Sales or Refinancing, as defined in the Limited Partnership Agreement, shall be
distributed as follows:

First, Distributions of Sales or Refinancing shall be 92.5% to the Limited Partners and 7.5% to AFS, until the
Limited Partners have received Aggregate Distributions in an amount equal to their Original Invested Capital, as defined, plus a 10% per annum cumulative (compounded daily) return on their Adjusted Invested Capital.



Page 44 of 47



---

Second, 85% to the Limited Partners, 7.5% to AFS and 7.5% to AFS or its affiliate designated as the
recipient of the Incentive Management Fee.

Equipment Resale Fees

As compensation for service rendered in connection with the sale of equipment, AFS is entitled to receive an amount equal to the lesser of (i) 3% of the sales price of the equipment, or (ii) one-half the
normal competitive equipment sales commission charged by unaffiliated parties for such service. Such fee is payable only after the Limited Partners have received a return of their adjusted invested capital (as defined in the Limited Partnership
Agreement) plus 10% of their adjusted invested return of their adjusted invested capital (as defined in the Limited Partnership Agreement) plus 10% of their adjusted invested capital per annum calculated on a cumulative basis, compounded daily,
commencing the last day of the quarter in which the Limited Partner was admitted to the Partnership. To date, none have been accrued or paid.

Equipment Re-lease Fee

As compensation for providing re-leasing service, AFS is entitled to receive fees equal to 2% of the gross
rentals or the comparable competitive rate for such service relating to comparable equipment, whichever is less, derived from the re-lease provided that (i) AFS or their affiliates have and will maintain adequate staff to render such service to
the Partnership, (ii) no such re-lease fee is payable in connection with the re-lease of equipment to a previous lessee or its affiliates, (iii) AFS or its affiliates have rendered substantial re-leasing service in connection with such
re-lease and (iv) AFS or its affiliates are compensated for rendering equipment management service. To date, $180 has been accrued and is unpaid.

General Partners Interest in Operating Proceeds

Net income, net loss and investment tax credits are allocated 92.5% to the
Limited Partners and 7.5% to AFS. In accordance with the terms of the Limited Partnership Agreement, additional allocations of income were made to AFS in 2005 and 2004. The amounts allocated were determined so as to bring AFSs ending capital
account balance to zero at the end of each period.



|Item 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------

Security Ownership of Certain Beneficial Owners

At December 31, 2005, no investor is known to hold beneficially more than 5% of
the issued and outstanding Units.

Security Ownership of Management

The ultimate shareholders of AFS are beneficial owners of Limited Partnership Units as follows:



|                          |  |                                          |  |                                               |  |                     
|------------------------- |  | ---------------------------------------- |  | --------------------------------------------- |  | --------------------
|(1) Title of Class        |  | (2) Name and Address of Beneficial Owner |  | (3) Amount and Nature of Beneficial Ownership |  | (4) Percent of Class
|Limited Partnership Units |  | Dean Cash                                |  | Initial Limited Partner Units                 |  | 0.0002%             
|                          |  | 600 California Street, 6th Floor         |  | 25 Units ($250)                               |  |                     
|                          |  | San Francisco, CA 94108                  |  | (owned by wife)                               |  |                     

Changes in Control

The Limited Partners have the right, by vote of the Limited Partners owning more than 50% of the outstanding Limited Partnership units, to remove a General Partner.

AFS may at any time call a meeting of the Limited Partners or a vote of the Limited Partners without a meeting, on matters on which they are entitled to vote, and shall
call such meeting or for vote without a meeting following receipt of a written request therefore of Limited Partners holding 10% or more of the total outstanding Limited Partnership units.



Page 45 of 47



---

|Item 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

The responses to
Item 1 of this report under the caption Equipment Leasing Activities, Item 8 of this report under the caption Financial Statements and Supplemental Data - Notes to the Financial Statements - Related party
transactions at footnote 7 thereof, and Item 10 of this report under the caption Executive Compensation, are hereby incorporated by reference.



|Item 13. | EXHIBITS AND REPORST ON FORM 8-K
|-------- | --------------------------------



| | (a) | Reports on Form 8-K for the fourth quarter of 2005
| | --- | --------------------------------------------------

None



| | (b) | Exhibits
| | --- | --------

(3) and (4) Amended and Restated Agreement
of Limited Partnership, included as Exhibit B to the Prospectus included in the registrants registration statement on form S-1 effective November 29, 1996, (File No. 333-08879) is hereby incorporated herein by this reference



| | (14.1) | Code of Ethics
| | ------ | --------------



| | (31.1) | Rule 13a-14(a)/ 15d-14(a) Certification of Paritosh K. Choksi
| | ------ | -------------------------------------------------------------



| | (31.2) | Rule 13a-14(a)/ 15d-14(a) Certification of Dean L. Cash
| | ------ | -------------------------------------------------------



| | (32.1) | Certification Pursuant to 18 U.S.C. section 1350 of Dean L. Cash
| | ------ | ----------------------------------------------------------------



| | (32.2) | Certification Pursuant to 18 U.S.C. section 1350 of Paritosh K. Choksi
| | ------ | ----------------------------------------------------------------------



|Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

During the most recent two
years, the Partnership incurred audit, audit related, tax and other fees with its principal auditors as follows:



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2005 |         | 2004
|Audit fees         |  | $    | 184,261 |      | $ | 161,017
|Audit related fees |  |      |        |      |   |       
|Tax fees           |  |      | 45,149  |      |   | 31,478 
|                   |  |      |         |      |   |        
|                   |  | $    | 229,410 |      | $ | 192,495
|                   |  |      |         |      |   |        

The Company restated its audited financial statements for the years ended December 31, 2004 and 2003, as well
as the unaudited interim statements for the first and second quarters of 2005.

ATEL Leasing Corporation is the General Partner of ATEL Financial Services,
LLC. ATEL Financial Services, LLC is the General Partner of the registrant. The board of directors of ATEL Leasing Corporation acts as the audit committee of the registrant. Engagements for audit services, audit related services and tax services are
approved in advance by the Chief Financial Officer of ATEL Leasing Corporation acting on behalf the board of directors of ATEL Leasing Corporation in its role as the audit committee of the Partnership.



Page 46 of 47



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|      |  |                                       |  | 
|----- |  | ------------------------------------- |  | 
|Date: |  | August 6, 2007                        |  | 
|      | 
|      |  | ATEL Capital Equipment Fund VII, L.P.
|      |  | (Registrant)                         
|      |  |                                      
|By:   |  | ATEL Financial Services, LLC,         |  | 
|      |  | General Partner of Registrant         |  | 

| |  |     |  |                                                                                                                      |  | 
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------- |  | 
| |  |     | 
| |  | By: |  | /s/ Dean Cash                                                                                                        |  | 
| |  |     |  | Dean Cash,                                                                                                           |  | 
| |  |     |  | President and Chief Executive Officer of ATEL
Financial Services, LLC (General Partner)                              |  | 
| |  |     | 
| |  | By: |  | /s/ Paritosh K. Choksi                                                                                               |  | 
| |  |     |  | Paritosh K. Choksi,                                                                                                  |  | 
| |  |     |  | Executive Vice President and Chief Financial and
Operating Officer of ATEL Financial Services, LLC (General Partner) |  | 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
persons in the capacities and on the dates indicated.



|                       |  |                                                            |  |               
|---------------------- |  | ---------------------------------------------------------- |  | --------------
|SIGNATURE              |  | CAPACITIES                                                 |  | DATE          
|                       |  |                                                           
|/s/ Dean Cash          |  | President and Chief Executive Officer of                   |  | August 6, 2007
|Dean Cash              |  | ATEL Financial Services, LLC (General Partner)             |  |               
|                       |  |                                                           
|/s/ Paritosh K. Choksi |  | Executive Vice President and Chief Financial and Operating |  | August 6, 2007
|Paritosh K. Choksi     |  | Officer of ATEL Financial Services, LLC (General Partner)  |  |               

No proxy materials have been or will be sent to security holders. An annual report will be furnished to security
holders subsequent to the filing of this report on Form 10-KSB, and copies thereof will be furnished supplementally to the Commission when forwarded to the security holders.



Page 47 of 47