Form 10K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                        |X|  Annual  report  pursuant  to section 13 or 15(d) of
                             the  Securities   Exchange  Act  of  1934  (no  fee
                             required) For the Year Ended December 31, 1998
                                                                 OR
                        |_|  Transition  report  pursuant to section 13 or 15(d)
                             of the  Securities  Exchange  Act of  1934  (no fee
                             required)  For the  transition  period from ____ to
                             ____

                         Commission File number 0-24175

                      ATEL Capital Equipment Fund VII, L.P.

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

                         235 Pine Street, 6th Floor, San
                           Francisco, California 94104
                         (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

Indicate  by a check  mark  whether  the  registrant  (1) has filed all  reports
required to be filed by section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes |X| No |_|

State the aggregate market value of voting stock held by  non-affiliates  of the
registrant: Inapplicable


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of  Regulation  S-K  (ss.229.405)  is not  contained  herein,  and  will  not be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|





<PAGE>

                                     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 Corporation
(ATEL).

The  Partnership  conducted  a public  offering of  15,000,000  Units of Limited
Partnership  Interest  (Units),  at a price of $10 per Unit.  As of November 27,
1998, the Partnership had received  subscriptions for 15,000,000  ($150,000,000)
Limited Partnership Units. As of December 31, 1998, 14,996,050 Units were issued
and outstanding. On January 7, 1997, the Partnership commenced operations in its
primary business (leasing activities).

The Partnership's  principal objectives are to invest in a diversified portfolio
of  equipment  which 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,  ending 72 months after the end of the year in
which the Final Closing occurs (1998) 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.


Narrative Description of Business

The  Partnership  has acquired and intends to acquire various types of equipment
and to lease such  equipment  pursuant to  "Operating"  leases and "High Payout"
leases,  where  "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 the  General  Partner  that  a  majority  of the
aggregate  purchase  price of equipment will  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 will be
invested in equipment acquired from a single manufacturer.

The Partnership will generally only purchase  equipment for which a lease exists
or for which a lease will be entered into at the time of the purchase.

As of December 31, 1998, the  Partnership  had purchased  equipment with a total
acquisition price of $273,312,297.

The  Partnership's  objective  is to  lease a  minimum  of 75% of the  equipment
acquired  with the net  proceeds of the  offering  to lessees  which (i) have an
aggregate credit rating by Moody's Investor  service,  Inc. of Baa or better, or
the credit  equivalent as determined by the General Partner,  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 the General
Partner, would not satisfy the general credit rating criteria for the portfolio.


<PAGE>

During  1998 and 1997  certain  lessees  generated  significant  portions of the
Partnership's total lease revenues as follows:

<TABLE>
<CAPTION>
          Lessee                              Type of Equipment                    1998    1997
          ------                              -----------------                    ----    ----
<S>                                           <C>                                   <C>    <C>
Burlington Northern Santa Fe Railroad         Locomotives & intermodal containers   17%    24%
   Company
NYK Lines                                     Intermodal containers                 10%     *
Cargill, Incorporated                         Covered Rail Hopper Cars               *     15%
</TABLE>

*  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 which 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 the General Partner or the Partnership), such 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.

The General  Partner 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.

Equipment Leasing Activities:

Through December 31, 1998, the Partnership has disposed of certain leased assets
as set forth below:

                                                                  Excess of
          Type of            Original                             Rents Over
         Equipment         Equipment Cost     Sale Price         Expenses *
Manufacturing                 $ 1,450,028        $ 1,359,079          $ 473,370
Aircraft                          954,124          1,306,203            357,158
Mining                            816,729            888,685            173,808
Furniture and fixtures            482,860            621,960            143,026
Other                             285,378            277,197            125,745
Office automation                 261,347            229,272            138,499
Transporation                     134,000            130,413             15,534
Materials handling                 31,237             17,594             18,296
                          ----------------  -----------------  -----------------
                              $ 4,415,703        $ 4,830,403        $ 1,445,436
                          ================  =================  =================

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


<PAGE>

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, 1998 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 setoff exists.

<TABLE>
<CAPTION>
                                        Purchase price excluding   Percentage of total
        Asset types                         acquisition fees         acquisitions
        -----------                         ----------------         ------------
<S>                                            <C>                           <C>   
Transportation, rail cars                      $ 64,328,409                  23.55%
Manufacturing                                    41,542,129                  15.20%
Mining                                           26,916,403                   9.85%
Transportation, intermodal containers            26,631,519                   9.74%
Transportation, other                            23,488,001                   8.59%
Marine vessels                                   22,335,250                   8.17%
Other                                            17,146,553                   6.27%
Motor Vehicles                                   12,407,749                   4.54%
Office automation                                 9,798,645                   3.59%
Medical                                           9,133,951                   3.34%
Aircraft                                          6,310,979                   2.31%
Materials handling                                5,687,221                   2.08%
Railroad locomotives                              5,010,960                   1.83%
Furniture, fixtures and equipment                 2,574,528                   0.94%
                                            ----------------        ----------------
                                              $ 273,312,297                 100.00%
                                            ================        ================
</TABLE>


<TABLE>
<CAPTION>
                                        Purchase price excluding   Percentage of total
    Industry of lessee                      acquisition fees         acquisitions
    ------------------                      ----------------         ------------
<S>                                            <C>                           <C>   
Transportation, rail                           $ 73,779,368                  27.01%
Municipalities                                   45,050,058                  16.48%
Transportation, other                            43,079,361                  15.76%
Electronics                                      24,418,734                   8.93%
Manufacturing, other                             24,065,726                   8.81%
Other                                            19,159,874                   7.01%
Mining                                           17,194,252                   6.29%
Business services                                13,971,080                   5.11%
Primary metals                                    9,411,556                   3.44%
Oil & gas                                         3,182,288                   1.16%
                                            ----------------        ----------------
                                              $ 273,312,297                 100.00%
                                            ================        ================
</TABLE>

For further information regarding the Partnership's equipment lease portfolio as
of December 31, 1998,  see Note 3 to the financial  statements,  Investments  in
equipment  and  leases,   set  forth  in  Item  8,   Financial   Statements  and
Supplementary Data.



<PAGE>

Item 2.  PROPERTIES

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


Item 3.  LEGAL PROCEEDINGS

No material legal  proceedings are currently  pending against the Partnership or
against any of its assets.

There is a claim by the General  Partner on behalf of the  Partnership  and ATEL
Cash  Distribution  Fund  III,  in  the  approximate  amount  of  $2,000,000  to
$3,000,000,  for bad faith and interference with contract. PSEG Resources,  Inc.
("PSEG"), the defendant,  unreasonably refused consent to the acquisition by the
Partnership  of a  beneficial  interest in an equipment  trust,  where PSEG is a
co-trustor/owner.  Currently, each party has been served with, and has responded
to, requests for production of documents and interrogatories. As the Partnership
is the plaintiff,  and no  counter-claim  has been filed,  there is little or no
negative  impact that an  unfavorable  result in this  action  would have on the
Partnership.


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

Inapplicable.


                                     PART II

Item 5.  MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP UNITS
              AND RELATED MATTERS

Market Information

The Units are transferable  subject to restrictions on transfers which have been
imposed under the securities  laws of certain  states.  However,  as a result of
such restrictions, the size of the Partnership and its investment objectives, to
the General Partner's knowledge,  no established public secondary trading market
has developed and it is unlikely  that a public  trading  market will develop in
the future.

Holders

As of December 31, 1998, a total of 5,347 investors were record holders of Units
in the Partnership.

Dividends

The  Partnership  does not make  dividend  distributions.  However,  the Limited
Partners of the  Partnership are entitled to certain  distributions  as provided
under the Limited Partnership Agreement.

The General  Partner  shall have sole  discretion in  determining  the amount of
distributions;  provided, however, that the General Partner will not reinvest in
equipment,  but will  distribute,  subject to payment of any  obligations of the
Partnership,  such  available  cash  from  operations  and  cash  from  sales or
refinancing  as may be  necessary  to cause total  distributions  to the Limited
Partners for each year during the  reinvestment  period to equal $1.00 per Unit.
The reinvestment period ends December 31, 2004.


<PAGE>

The rate for monthly  distributions  from 1998  operations was $0.0833 per Unit.
The  distributions  were made in  February  1998  through  December  1998 and in
January 1999. For each quarterly  distribution  (made in April, July and October
1998 and in January 1999) the rate was $0.25 per Unit.  Distributions  were from
1998 cash  flows  from  operations.  The  amounts  paid to holders of Units were
adjusted  based on the length of time  within  the  previous  calendar  month or
quarter that the Units were outstanding.

The rate for monthly  distributions  from 1997  operations was $0.0833 per Unit.
The  distributions  were made in  February  1997  through  December  1997 and in
January 1998. For each quarterly  distribution  (made in April, July and October
1997 and in January 1998) the rate was $0.25 per Unit.  Distributions  were from
1997 cash  flows  from  operations.  The  amounts  paid to holders of Units were
adjusted  based on the length of time  within  the  previous  calendar  month or
quarter that the Units were outstanding.

The following table presents summarized  information regarding  distributions to
Limited Partners:

                                                 1998             1997
                                                 ----             ----
Distributions of net income (loss)                   $ 0.46          $ (0.20)
Return of investment                                   0.45             0.99
                                           ----------------- ----------------
Distributions per Unit                                 0.91             0.79
Differences due to timing of distributions             0.09             0.21
                                           ----------------- ----------------
Nominal distribution rates from above                $ 1.00           $ 1.00
                                           ================= ================


<PAGE>

Information provided pursuant to ss. 228.701 (Item 701(f)) (formerly included in
Form SR) (final report):
<TABLE>
<CAPTION>

                             (1) Effective  date of the  offering:  November 29,
                             1996;  File Number:  33388 (2) Offering  commenced:
                             November   29,  1996  (3)  The   offering  did  not
                             terminate  before any securities were sold. (4) The
                             offering was  terminated  November 27, 1998. All of
                             the  securities  had been sold as of that date. (5)
                             The  managing   underwriter   is  ATEL   Securities
                             Corporation.  (6) The title of the registered class
                             of  securities  is  "Units of  Limited  Partnership
                             interest" (7) Aggregate  amount and offering  price
                             of  securities  registered  and sold as of November
                             27, 1998.

                                                                                   Aggregate                           Aggregate
                                                                                    price of                            price of
                                                                                    offering                            offering
                                                                   Amount            amount           Amount             amount
                             Title of Security                   Registered        registered          sold               sold

<S>                        <C>                                    <C>            <C>                 <C>              <C>         
                           Limited Partnership units              15,000,000     $ 150,000,000       15,000,000       $150,000,000

                           (8)  Costs  incurred  for the  issuers  account  in
                           connection  with the issuance and  distribution  of
                           the securities  registered for each category listed
                           below:

                                                              Direct or indirect payments to
                                                               directors, officers, general
                                                              partners of the issuer or their
                                                               associates; to persons owning
                                                                ten percent or more of any         Direct or
                                                               class of equity securities of       indirect
                                                             the issuer; and to affiliates of     payments to
                                                               the issuer                           others             Total

                           Underwriting discounts and
                           commissions                           $ 1,922,703                       $ 12,327,297       $ 14,250,000

                           Other expenses                                  -                          7,000,000          7,000,000

                                                             ----------------                   ----------------  -----------------
                           Total expenses                        $ 1,922,703                       $ 19,327,297       $ 21,250,000
                                                             ================                   ================  =================

                           (9) Net offering proceeds to the issuer after the total expenses in item 8:                $128,750,000

                           (10) The  amount of net  offering  proceeds  to the
                                issuer  used for each of the  purposes  listed
                                below:

                                                                Direct or indirect payments
                                                              to directors, officers, general
                                                              partners of the issuer or their
                                                                  associates; to persons
                                                                owning ten percent or more         Direct or
                                                                  of any class of equity           indirect
                                                               securities of the issuer; and      payments to
                                                                to affiliates of the issuer         others             Total

                           Purchase and installation of
                           machinery and equipment                       $ -                      $ 128,000,000       $128,000,000

                           Working capital                                 -                            750,000            750,000
                                                             ----------------                   ----------------  -----------------
                                                                         $ -                      $ 128,750,000       $128,750,000
                                                             ================                   ================  =================

                           (11)   The use of the  proceeds in Item 10 does not
                                  represent  a material  change in the uses of
                                  proceeds described in the prospectus.
</TABLE>
<PAGE>


Item 6.  SELECTED FINANCIAL DATA

The following  table  presents  selected  financial  data of the  Partnership at
December  31,  1998,  1997 and  1996.  This  financial  data  should  be read in
conjunction with the financial  statements and related notes included under Item
8 of this report.


<TABLE>
<CAPTION>
                                                            1998             1997          1996
                                                            ----             ----          ----
<S>                                                       <C>               <C>                   <C>
Gross revenues                                            $ 37,195,090      $ 7,373,981           $ -

Net income (loss)                                          $ 5,279,496       $ (738,233)          $ -

Weighted average Units outstanding                          10,729,510        3,380,442            50

Net income (loss) per Unit, based on weighted average
   Units outstanding                                            $ 0.46          $ (0.20)          $ -

Distributions per Unit, based on weighted average
   Units outstanding                                            $ 0.91           $ 0.79           $ -

Total Assets                                             $ 212,456,902    $ 104,416,786         $ 600

Non-recourse Debt                                         $ 16,599,347      $ 8,127,374           $ -

Other long-term debt                                      $ 61,553,000              $ -           $ -

Total Partners' Capital                                  $ 119,711,246     $ 53,900,414         $ 600
</TABLE>


Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS


Capital Resources and Liquidity

The Partnership  commenced its offering on November 29, 1996. As of December 31,
1996,  all of the proceeds of the offering were held by the escrow  agent.  Upon
sale of the minimum amount of Units (120,000 Units) ($1,200,000) and the receipt
of  the  proceeds  thereof  on  January  7,  1997,  the  Partnership   commenced
operations.  During  the  funding  period  and until the  Partnership's  initial
portfolio of equipment had been  purchased,  funds which had been received,  but
which  had  not  yet  been  invested  in  leased  equipment,  were  invested  in
interest-bearing  accounts  or  high-quality/short-term  commercial  paper.  The
Partnership's  public offering  provided for a total maximum  capitalization  of
$150,000,000.  As of November 27, 1998, the offering was  concluded.  As of that
date, subscriptions for 15,000,000 Units had been received and accepted.

During the funding  period,  the  Partnership's  primary  source of liquidity is
subscription  proceeds from the public  offering of Units.  The liquidity of the
Partnership  will vary in the future,  increasing  to the extent cash flows from
leases and  proceeds of asset sales exceed  expenses,  and  decreasing  as lease
assets are acquired,  as  distributions  are made to the Limited Partners and to
the extent expenses exceed cash flows from leases and proceeds from asset sales.


<PAGE>

As another source of liquidity,  the Partnership is expected to have contractual
obligations  with a diversified  group of lessees for fixed lease terms at fixed
rental amounts. As the initial lease terms expire, the Partnership will re-lease
or sell the  equipment.  The future  liquidity  beyond the  contractual  minimum
rentals will depend on the General  Partner's  success in  re-leasing or selling
the equipment as it comes off lease.

The  Partnership  participates  with the  General  Partner  and  certain  of its
affiliates  in  a  $90,000,000   revolving  line  of  credit  with  a  financial
institution  that  includes  certain  financial  covenants.  The line of  credit
expires on January 31,  2000.  As of December  31,  1998,  the  Partnership  had
$11,781,707  of  borrowings   under  this  line  of  credit  and  the  remaining
availability was $13,070,344.

The Partnership  anticipates reinvesting a portion of lease payments from assets
owned in new leasing  transactions.  Such reinvestment will occur only after the
payment  of  all  obligations,   including  debt  service  (both  principal  and
interest), the payment of management and acquisition fees to the General Partner
and providing for cash  distributions to the Limited  Partners.  At December 31,
1998, commitments to purchase lease assets totaled $9,975,600. These amounts are
expected to be funded from the existing line of credit,  additional non-recourse
borrowings, existing cash balances and cash flows generated by operations.

As of December 31, 1998,  all cash  balances  consisted of amounts  reserved for
distributions in January 1999, generated from operations in 1998.

The Partnership  currently has available adequate reserves to meet its immediate
cash requirements,  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.  The General  Partner  envisions  no such
requirements for operating purposes.

In 1998, the Partnership  established a $65 million dollar  receivables  funding
program with a receivables  financing company that issues commercial paper rated
A1 from  Standard  and  Poors 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 provides for
borrowing at a variable  interest rate and requires the General Partner to enter
into hedge  agreements with certain hedge  counterparties  (also rated A1/P1) to
mitigate  the  interest  rate risk  associated  with a variable  rate note.  The
General  Partner  anticipates  that this program will allow the  Partnership  to
avail itself of lower cost debt than that available for individual  non-recourse
debt transactions. It is the intention of the Partnership to use the receivables
funding  program to finance assets leased to those lessees which, in the opinion
of the General Partner,  have a relatively lower potential risk of lease default
than  those  lessees  with  equipment   financed  with  non-recourse  debt.  The
Partnership will continue to use its traditional sources of non-recourse secured
debt financing on a transaction basis as a means of mitigating credit risk.

The General  Partner  expects that  aggregate  borrowings  in the future will be
approximately  50% of  aggregate  equipment  cost.  In any  event,  the  Limited
Partnership  Agreement  limits  such  borrowings  to 50% of the  total  cost  of
equipment, in aggregate.

The  Partnership  commenced  regular  distributions,  based on cash  flows  from
operations,  beginning with the month of January 1997. See Items 5 and 6 of this
report for additional information regarding distributions.

If  inflation  in the general  economy  becomes  significant,  it may affect the
Partnership  inasmuch 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.


<PAGE>

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.

Cash Flows

             1998 vs. 1997:

Cash flows from  operations  increased from $6,061,438 in 1997 to $21,650,163 in
1998, an increase of  $15,558,725.  Rents from  operating  leases is the primary
source of operating cash flows.  Purchases of operating lease assets in 1997 and
1998 led to an increase in operating  lease revenues of $26,516,153  compared to
1997.

In 1998,  sources of cash from investing  activities  consisted of proceeds from
the sales of lease assets and rents from direct financing  leases. In late 1997,
the  Partnership  purchased a portfolio of lease  transactions.  This  portfolio
included a number of leases  which were  scheduled  to mature in 1998.  As these
leases  matured,  certain of the assets were sold. This gave rise to an increase
in sales  proceeds  of  $4,611,709  compared  to 1997.  Sales  proceeds  are not
expected  to be  comparable  from one  period  to  another.  Rents  from  direct
financing  leases  increased  by  $2,112,641  as a result of purchases of direct
financing lease assets in 1997 and in 1998.

In 1998, the  Partnership's  primary sources of cash were generated by financing
activities.  Capital  contributions  provided  $82,831,540  in 1998. The capital
contributions  were used  primarily to purchase  assets on operating  and direct
financing  leases.  Borrowings  under the line of credit  provided  $53,029,261,
which was also used to purchase lease assets.  Proceeds of other  long-term debt
($66,770,000)  were used to pay down the amounts borrowed on the line of credit.
Proceeds of non-recourse debt ($11,165,217) was also used to reduce the balances
outstanding  on the  line  of  credit.  Distributions  to the  limited  partners
increased  by  $7,113,487  compared to 1997 as a result of the larger  number of
Units outstanding in 1998 compared to 1997.


Results of Operations

As of January 7, 1997,  subscriptions  for the  minimum  amount of the  offering
($1,200,000) had been received and accepted by the Partnership. As of that date,
the  Partnership   commenced   operations  in  its  primary  business   (leasing
activities).  There were no operations in 1996. After the  Partnership's  public
offering  and its initial  asset  acquisition  stage  terminate,  the results of
operations are expected to change significantly.

             1998 vs. 1997:

In 1998,  operations resulted in net income of $5,279,496 compared to a net loss
of $738,233 in 1997.

The Partnership's offering was in progress through all of 1997 and most of 1998.
During both years,  the Partnership was acquiring its portfolio of lease assets.
Because of these  factors,  results of operations in 1998 are not  comparable to
those of 1997 and are not expected to be comparable to future periods.

As a result of purchases of lease assets in both 1997 and 1998,  operating lease
rents  increased  from  $7,139,544 in 1997 to  $33,655,697 in 1998. For the same
reason,  direct  financing  lease  revenues  increased  from $171,026 in 1997 to
$1,532,235 in 1998.  Asset  purchases also led to the increase of $17,013,342 in
depreciation and amortization expense compared to 1997.

Management  fees are based primarily on lease rents and increased as a result of
the increases in rents noted above.


<PAGE>

Impact of the Year 2000

The year 2000 issue is the result of certain  computer  programs  being  written
using two digits  rather than four to define the  applicable  year. As a result,
these  programs are not designed to make the  transition to the year 2000.  This
computer  software problem is commonly referred to as the "year 2000" (or "Y2K")
issue. Computer programs with date-sensitive  applications may, if not modified,
fail or miscalculate  dates,  causing system failures,  the inability to process
transactions or other disruptions of operations.

ATEL uses,  and expects on behalf of the  Partnership  to use,  primarily  third
party software and is communicating with key software vendors to ensure that the
systems used by General Partner and the Partnership are not impacted by the year
2000 issue.  Currently,  all of ATEL's critical software systems are believed by
ATEL to be Y2K compliant except one. Compliance of this final system is expected
to be obtained in the first half of 1999. Based on discussions with ATEL's third
party  software  vendor,  ATEL  believes  that  any cost to be  incurred  by the
Partnership to bring this system into  compliance  will not be material.  ATEL's
third party  software  vendor for the system in question has  indicated  that it
expects  the  cost of  compliance  to be  included  in the  annual  upgrade  and
maintenance cost for the software system,  and that the total incremental amount
of such cost is expected to be minimal. Any such cost would be allocated by ATEL
over the six public funds (including the Partnership) under its management which
use or will use the  software.  This  allocation  would be based on the relative
size of each such  program  and its  proportionate  allocation  of the  expected
minimal cost will in itself be minimal.  In no event will  offering  proceeds be
required to be committed to any such expenditure. If any cost is incurred by the
Partnership, it would be an operating expense funded out of operating revenues.

The ultimate impact of the year 2000 issue on the  Partnership  will depend to a
great extent on the manner in which the issue is  addressed by those  businesses
whose operational  capability is important to the Partnership.  Failure of these
businesses to be Y2K  compliant  may impact  credit  quality or cause a delay in
payments made to the Partnership. ATEL has contacted those businesses with which
the  Partnership  currently  has  material  relationships  in order  to  request
verification of Y2K  compliance.  ATEL believes that each of those entities will
have a material self interest in resolving any year 2000 issue affecting its own
operations.

Equipment  purchased by the  Partnership may include  technology  subject to the
year 2000  issue.  Potential  year 2000  issues  will be among the many  factors
considered   by  ATEL  and  its   affiliates  in  analyzing  and  pricing  lease
transactions  for acquisition by the  Partnership.  The lessees of the equipment
will select  such  equipment  and may be  expected to consider  year 2000 issues
themselves in determining the suitability of the equipment for the lessee's use.
Most equipment is subject to fixed term,  non-cancelable,  triple net leases. In
addition, new equipment may be covered by manufacturer's warranties. As a result
of such triple net provisions and warranties, repairs or modifications necessary
to  correct  year 2000  issues  will most  likely be the  responsibility  of the
manufacturers or the lessees,  and the Partnership's rights to lease payments as
a triple net lessor will not be affected by any functional  issues affecting the
equipment.  It is expected that the lease terms for such  equipment  will extend
well beyond the year 2000.

As a result of the year 2000 issue,  the  Partnership  may experience  increased
costs resulting from delayed  payments from lessees,  the costs  associated with
the collection of those payments,  or costs  associated  with manual  processing
efforts in the event of a Y2K related system  failure.  In any event,  ATEL does
not expect these  increased costs to be significant or that such costs will have
any material adverse effect on the operations of the Partnership.  Nevertheless,
the  impact of year 2000  issues  cannot be  predicted  with  certainty  and the
Partnership may be affected both by the impact these issues have on parties with
which it has  direct  contractual  and other  relationships  as well as by their
impact on financial institutions and the national and international economy as a
whole.  Accordingly,  there can be no assurance  that year 2000 issues might not
have  some  adverse  impact  on  the  operating   results   experienced  by  the
Partnership.



<PAGE>

Item 7a.  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  manages its  exposure  to interest  rate risk by
obtaining fixed rate debt which is coterminous with the Partnership's fixed rate
lease  receivables.  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 rates.  Nevertheless,  the Partnership  frequently
funds leases with its floating  rate line of credit and is therefore  exposed to
interest rate risk until fixed rate financing is arranged,  or the floating rate
line of credit is repaid.  As of December 31, 1998,  $11,781,707 was outstanding
on the floating rate line of credit.  Also, as described in the caption "Capital
Resources and  Liquidity",  the Partnership  entered into a receivables  funding
facility in 1998. Since interest on the outstanding  balances under the facility
varies,  the  Partnership  is exposed to market risks  associated  with changing
interest rates.

To hedge its interest rate risk, the Partnership enters into interest rate swaps
which effectively modify 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 interest  expense  related to the
facility balances. The amount paid or received represents the difference between
the payments required under the variable rate facility and the amounts due under
facility at the fixed (hedged) rate. As of December 31, 1998,  borrowings on the
facility  were  $61,553,000  and the  associated  variable  rate was 5.72%.  The
average fixed rate achieved with the swap agreements was 5.83%.

In general, these swap agreements eliminate the Partnership's interest rate risk
associated with variable rate borrowings. However, the Partnership is exposed to
and manages credit risk  associated  with the  counterparty by dealing only with
institutions it considers financially sound. In the absence of these agreements,
based  on  the  Partnership's  facility  borrowings  at  December  31,  1998,  a
hypothetical 1.00% increase or decrease in market interest rates, would increase
or decrease the  Partnership's  1999 variable  interest expense by approximately
$534,000.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


See the  Report  of  Independent  Auditors,  Financial  Statements  and Notes to
Financial Statements attached hereto at pages 12 through 27.

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS






The Partners
ATEL Capital Equipment Fund VII, L.P.


We have audited the accompanying  balance sheets of ATEL Capital  Equipment Fund
VII,  L.P. as of  December  31, 1998 and 1997,  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, 1998,  and the related  statements  of
changes in  partners'  capital  and cash flows for the period  from May 17, 1996
(inception)  through  December  31,1996.  These  financial  statements  are  the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of ATEL Capital  Equipment Fund
VII,  L.P. at December  31,  1998 and 1997,  and the results of its  operations,
changes in its partners' capital and its cash flows for each of the two years in
the period ended  December 31,  1998,  and its changes in partners'  capital and
cash  flows  for the  period  from May 17,  1996  (inception)  through  December
31,1996, in conformity with generally accepted accounting principles.


                                                               ERNST & YOUNG LLP
San Francisco, California
February 2, 1999




<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                                 BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1997


                                     ASSETS

                                               1998               1997
                                               ----               ----
Cash and cash equivalents                     $ 1,576,029        $ 2,014,706

Accounts receivable                             6,380,886            917,219

Other assets                                      170,003            200,000

Investments in equipment and leases           204,329,984        101,284,861
                                          ----------------  -----------------
Total assets                                $ 212,456,902       $104,416,786
                                          ================  =================




                       LIABILITIES AND PARTNERS' CAPITAL


Non-recourse debt                            $ 16,599,347        $ 8,127,374
Other long-term debt                           61,553,000                  -

Line of credit                                 11,781,707         40,390,460

Accounts payable and accruals:
   General Partner                                377,955            334,256
   Other                                          684,475            535,621

Accrued interest payable                          805,753            197,664

Unearned lease income                             943,419            930,997
                                          ----------------  -----------------
                                               92,745,656         50,516,372

Partners' capital (deficit):
     General Partner                             (717,165)          (247,461)
     Limited Partners                         120,428,411         54,147,875
                                          ----------------  -----------------
Total partners' capital                       119,711,246         53,900,414
                                          ----------------  -----------------
Total liabilities and partners' capital     $ 212,456,902       $104,416,786
                                          ================  =================




                             See accompanying notes.

<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                            STATEMENTS OF OPERATIONS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997



<TABLE>
<CAPTION>
                                                            1998               1997
                                                            ----               ----
Revenues:
Leasing activities:
<S>                                                       <C>                 <C>        
   Operating leases                                       $ 33,655,697        $ 7,139,544
   Direct financing leases                                   1,532,235            171,026
   Leveraged leases                                            131,515                  -
   Gain on sales of assets                                   1,795,336              3,752
Interest income                                                 67,313             56,642
Other                                                           12,994              3,017
                                                       ----------------  -----------------
                                                            37,195,090          7,373,981

Expenses:

Depreciation and amortization                               22,861,169          5,847,827
Interest                                                     5,473,480            714,701
Equipment and incentive management fees to affiliates        1,559,090            358,846
Administrative cost reimbursements to General Partner        1,056,746            645,437
Other                                                          756,971            380,821
Professional fees                                              151,183             90,305
Provision for losses and impairments                            56,955             74,277
                                                       ----------------  -----------------
                                                            31,915,594          8,112,214
                                                       ----------------  -----------------
Net income (loss)                                          $ 5,279,496         $ (738,233)
                                                       ================  =================

Net income (loss):
   General Partner                                           $ 395,962          $ (55,367)
   Limited Partners                                          4,883,534           (682,866)
                                                       ----------------  -----------------
                                                           $ 5,279,496         $ (738,233)
                                                       ================  =================

Net income (loss) per Limited Partnership unit                  $ 0.46            $ (0.20)

Weighted average number of units outstanding                10,729,510           3,380,442
</TABLE>



                             See accompanying notes.

<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                AND FOR THE PERIOD FROM MAY 17, 1996 (INCEPTION)
                            THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                         Limited Partners      General
                                                             Units            Amount           Partner            Total

<S>                                                          <C>            <C>                 <C>              <C>         
Capital contributions                                                50             $ 500            $ 100              $ 600
                                                        ---------------- ----------------- ----------------  -----------------
Balance December 31, 1996                                            50               500              100                600

Capital contributions received                                6,716,846        67,168,460                -         67,168,460
Less selling commissions paid to affiliates                                    (6,381,004)               -         (6,381,004)
Other syndication costs paid to affiliates                                     (3,272,580)               -         (3,272,580)
Distributions to Limited Partners ($0.79 per Unit)                             (2,684,635)               -         (2,684,635)
Distributions to General Partner                                                        -         (192,194)          (192,194)
Net loss                                                                         (682,866)         (55,367)          (738,233)
                                                        ---------------- ----------------- ----------------  -----------------
Balance December 31, 1997                                     6,716,896        54,147,875         (247,461)        53,900,414
Capital contributions received                                8,283,154        82,831,540                -         82,831,540
Less selling commissions paid to affiliates                                    (7,868,996)               -         (7,868,996)
Other syndication costs paid to affiliates                                     (3,727,420)               -         (3,727,420)
Recission of investment                                          (4,000)          (40,000)               -            (40,000)
Distributions to Limited Partners ($0.91 per Unit)                             (9,798,122)               -         (9,798,122)
Distributions to General Partner                                                        -         (865,666)          (865,666)
Net income                                                                      4,883,534          395,962          5,279,496
                                                        ---------------- ----------------- ----------------  -----------------
Balance December 31, 1998                                    14,996,050     $ 120,428,411       $ (717,165)      $119,711,246
                                                        ================ ================= ================  =================
</TABLE>



                             See accompanying notes.

<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                            STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                AND FOR THE PERIOD FROM MAY 17, 1996 (INCEPTION)
                            THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                               1998             1997               1996
                                                                               ----             ----               ----
Operating activities:
<S>                                                                           <C>               <C>        
Net income (loss)                                                             $ 5,279,496       $ (738,233)
Adjustment to reconcile net income (loss) to net cash provided by
   operating activities:
     Leveraged lease income                                                      (131,515)               -
     Depreciation and amortization                                             22,861,169        5,847,827
     Provision for losses and impairments                                          56,955           74,277
     Gain on sales of assets                                                   (1,795,336)          (3,752)
     Changes in operating assets and liabilities:
         Accounts receivable                                                   (5,463,667)        (917,219)
         Other assets                                                              29,997         (200,000)
         Accounts payable, General Partner                                         43,699          334,256
         Accounts payable, other                                                  148,854          535,621
         Accrued interest payable                                                 608,089          197,664
         Unearned lease income                                                     12,422          930,997
                                                                         ----------------- ----------------
Net cash provided by operating activities                                      21,650,163        6,061,438
                                                                         ----------------- ----------------

Investing activities:
Purchases of equipment on operating leases                                   (120,126,565)      (89,242,615)
Purchases of equipment on direct financing leases                             (10,800,420)      (16,841,671)
Purchases of equipment on leveraged leases                                              -        (1,449,068)
Initial direct lease costs                                                       (196,646)          (32,744)
Reduction of net investment in direct financing leases                          2,345,113          232,472
Proceeds from sales of assets                                                   4,742,122          130,413
                                                                         ----------------- ----------------
Net cash used in investing activities                                        (124,036,396)    (107,203,213)
                                                                         ----------------- ----------------

Financing activities:
Capital contributions received                                                 82,831,540       67,168,460               $600
Payment of selling commissions and other syndication costs to General 
   Partner                                                                    (11,596,416)      (9,653,584)                 -
Recission of investment                                                           (40,000)               -                  -
Distributions to Limited Partners                                              (9,798,122)      (2,684,635)                 -
Distributions to General Partner                                                 (865,666)        (192,194)                 -
Borrowings under line of credit                                                53,029,261       59,174,080                  -
Repayments of borrowings under line of credit                                 (81,638,014)     (18,783,620)                 -
Proceeds of long-term debt                                                     66,770,000                -                  -
Repayments of long-term debt                                                   (5,217,000)               -                  -
Proceeds of non-recourse debt                                                  11,165,217        8,324,416                  -
Repayments of non-recourse debt                                                (2,693,244)        (197,042)                 -
                                                                         ----------------- ----------------  -----------------
Net cash provided by financing activities                                     101,947,556      103,155,881                600
                                                                         ----------------- ----------------  -----------------

Net (decrease) increase in cash and cash equivalents                             (438,677)       2,014,106                600
Cash and cash equivalents at beginning of period                                2,014,706              600                  -
                                                                         ----------------- ----------------  -----------------
Cash and cash equivalents at end of period                                    $ 1,576,029      $ 2,014,706               $600
                                                                         ================= ================  =================
</TABLE>

<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                            STATEMENTS OF CASH FLOWS
                                   (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                AND FOR THE PERIOD FROM MAY 17, 1996 (INCEPTION)
                            THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>

                                                                               1998             1997               1996
                                                                               ----             ----               ----

Supplemental disclosures of cash flow information:
<S>                                                                           <C>                <C>      
Cash paid during the year for interest                                        $ 4,865,391        $ 517,037
                                                                         ================= ================
</TABLE>


                             See accompanying notes.

<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


1.  Organization and 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.  Contributions in
the amount of $600 were received as of July 17, 1996, $100 of which  represented
the  General  Partner's  (ATEL  Financial   Corporation's)  (ATEL's)  continuing
interest,  and $500 of which  represented the Initial Limited  Partners' capital
investment.

Upon the sale of the  minimum  amount of Units of Limited  Partnership  interest
(Units) (120,000 Units)  ($1,200,000) and the receipt of the proceeds thereof on
January 7, 1997, the Partnership commenced operations.

The Partnership or the General Partner on behalf of the Partnership,  will incur
costs in  connection  with the  organization,  registration  and issuance of the
Units. The amount of such costs to be borne by the Partnership is limited to 15%
of Gross  Proceeds of up to  $25,000,000  and 14% of Gross Proceeds in excess of
$25,000,000.

The Partnership's business consists of leasing various types of equipment. As of
December 31, 1998,  the original  terms of the leases  ranged from six months to
eleven years.

Pursuant to the Limited  Partnership  Agreement,  the General  Partner  receives
compensation  and   reimbursements  for  services  rendered  on  behalf  of  the
Partnership  (Note 6).  The  General  Partner 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:

Equipment on operating leases:

Revenues  from  operating  leases  are  recognized  evenly  over the life of the
related leases.

Equipment on operating leases is stated at cost.  Depreciation is being provided
by use of the  straight-line  method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases.

Direct financing leases:

Income from direct  financing  lease  transactions  is reported on 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 income portion of each rental payment is calculated so as to
generate a constant rate of return on the net receivable outstanding.

Investment in leveraged leases:

Leases which are financed  principally with non-recourse debt at lease inception
and which meet certain other  criteria are  accounted  for as leveraged  leases.
Leveraged lease contracts  receivable are stated net of the related non-recourse
debt service (which  includes  unpaid  principal and aggregate  interest on such
debt) plus estimated  residual values.  Unearned income represents the excess of
anticipated  cash flows (after  taking into account the related debt service and
residual  values)  over the  investment  in the lease and is  amortized  using a
constant rate of return  applied to the net investment  when such  investment is
positive.

Statements of cash flows:

For purposes of the Statements of Cash Flows, cash and cash equivalents includes
cash in banks and cash equivalent investments with original maturities of ninety
days or less.


<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


2. Summary of significant accounting policies (continued):

Income taxes:

The  Partnership  does not provide for income  taxes since all income and losses
are the liability of the  individual  partners and are allocated to the partners
for inclusion in their individual tax returns.

The tax basis of the  Partnership's  net assets and liabilities  varies from the
amounts presented in these financial statements (unaudited).

                                                  1998             1997
                                                  ----             ----
    Financial statement basis of net assets    $ 119,711,246     $ 53,900,414
    Tax basis of net assets                      102,049,780       56,424,733
                                            ----------------- ----------------
    Difference                                  $ 17,661,466      $ 2,524,319
                                            ================= ================

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

The  following  reconciles  the net income  (loss)  reported in these  financial
statements  to  the  loss  reported  on the  Partnership's  federal  tax  return
(unaudited):
                                                   1998             1997
                                                   ----             ----
 Net income (loss) per financial statements       $ 5,279,496       $ (738,233)
 Adjustment to depreciation expense               (34,679,816)      (6,820,550)
 Adjustments to lease revenues                      2,840,660         (382,993)
 Provision for losses                                  56,955           74,277
                                             ----------------- ----------------
 Net loss per federal tax return                $ (26,502,705)    $ (7,867,499)
                                             ================= ================

Per unit data:

Net income and distributions per unit are based upon the weighted average number
of units outstanding during the period.

Credit Risk:

Financial   instruments   which   potentially   subject   the   Partnership   to
concentrations  of credit risk  include cash and cash  equivalents  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 and direct financing  leases.  See Note 8 for a description of lessees
by industry as of December 31, 1998 and 1997.

Use of estimates:

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

<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

Reserve for losses and impairments:

The  Partnership  maintains a reserve on its investments in equipment and leases
for losses and impairments which are inherent in the portfolio as of the balance
sheet date. The General Partner's evaluation of the adequacy of the allowance is
a judgmental  estimate that is based on a review of individual leases, past loss
experience and other factors.  While the General Partner  believes the allowance
is adequate to cover known losses, it is reasonably  possible that the allowance
may change in the near term.  However,  such  change is not  expected  to have a
material  effect on the financial  position or future  operating  results of the
Partnership.  It is the Partnership's policy to charge off amounts which, in the
opinion  of the  General  Partner,  are  not  recoverable  from  lessees  or the
disposition of the collateral.


3. Investments in equipment and leases:

As of December 31, 1998, the  Partnership's  investments in equipment and leases
consist of the following:

<TABLE>
<CAPTION>
                                                                            Depreciation
                                                                             Expense or        Reclass-
                                        December 31,                        Amortization     ifications or    December 31,
                                             1997           Additions        of Leases       Dispositions           1998
                                             ----           ---------        ---------       ------------           ----
<S>                                         <C>            <C>               <C>               <C>                <C>         
Net investment in operating leases          $83,268,573    $ 120,126,565     $ (22,691,501)    $ (3,301,874)      $177,401,763
Net investment in direct financing
   leases                                    16,609,199       10,800,420        (2,345,113)            (545)        25,063,961
Net investment in leveraged leases            1,449,068                -           131,515                -          1,580,583
Reserve for losses and impairments              (74,277)         (56,955)                -                -           (131,232)
Assets held for sale or lease                         -                -                 -          355,633            355,633
Initial direct costs, net of
   accumulated amortization of
   $170,114 in 1998 and $446 in 1997             32,298          196,646          (169,668)               -             59,276
                                        ---------------- ---------------- ----------------- ----------------  -----------------
                                           $101,284,861    $ 131,066,676     $ (25,074,767)    $ (2,946,786)      $204,329,984
                                        ================ ================ ================= ================  =================
</TABLE>

Operating leases:

Property on operating  lease  consists of the following as of December 31, 1997,
additions and dispositions during 1998 and as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                   Reclass-
                             December 31,                        ifications or    December 31,
                                  1997           Additions       Dispositions           1998
                                  ----           ---------       ------------           ----
<S>                             <C>               <C>                <C>              <C>         
Transportation                  $ 51,120,754      $ 51,500,460       $ (483,036)      $102,138,178
Mining                             6,275,273        20,641,130         (816,729)        26,099,674
Manufacturing                     14,342,104        11,755,463       (1,706,226)        24,391,341
Marine vessels                             -        22,335,250                -         22,335,250
Office automation                  1,624,385         4,843,694         (160,598)         6,307,481
Materials handling                 3,127,344         2,446,806                -          5,574,150
Motor vehicles                     5,454,671                 -                -          5,454,671
Aircraft                           3,430,000         2,516,096         (954,124)         4,991,972
Other                              2,601,605         2,306,751         (305,607)         4,602,749
Furniture and fixtures             1,132,479         1,780,915         (451,861)         2,461,533
                             ---------------- ----------------- ----------------  -----------------
                                  89,108,615       120,126,565       (4,878,181)       204,356,999
Less accumulated depreciation     (5,840,042)      (22,691,501)       1,576,307        (26,955,236)
                             ---------------- ----------------- ----------------  -----------------
                                $ 83,268,573      $ 97,435,064     $ (3,301,874)      $177,401,763
                             ================ ================= ================  =================
</TABLE>


<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


3.  Investments in equipment and leases (continued):

Direct financing leases:

As of December  31,  1998,  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, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                  1998             1997
                                                                  ----             ----
<S>                                                             <C>              <C>         
Total minimum lease payments receivable                         $ 24,791,553     $ 14,612,091
Estimated residual values of leased equipment (unguaranteed)       8,774,768        7,106,748
                                                            ----------------- ----------------
Investment in direct financing leases                             33,566,321       21,718,839
Less unearned income                                              (8,502,360)      (5,109,640)
                                                            ----------------- ----------------
Net investment in direct financing leases                       $ 25,063,961     $ 16,609,199
                                                            ================= ================
</TABLE>

All of the property on leases was acquired in 1998 and 1997.

At December 31, 1998,  the aggregate  amounts of future  minimum lease  payments
under operating and direct financing leases are as follows:

                                                 Direct
            Year ending        Operating        Financing
            December 31,        Leases           Leases            Total
                     1999       $36,222,258      $ 5,020,160      $ 41,242,418
                     2000        32,984,586        4,372,068        37,356,654
                     2001        25,741,662        4,246,194        29,987,856
                     2002        18,060,022        3,500,139        21,560,161
                     2003         9,484,754        2,248,358        11,733,112
               Thereafter                 -        5,404,634         5,404,634
                            ---------------- ---------------- -----------------
                               $122,493,282     $ 24,791,553     $ 147,284,835
                            ================ ================ =================

Leveraged leases:

As of December 31, 1998, investment in leveraged leases consists of railroad box
cars.  The following  lists the  components of the  Partnership's  investment in
leveraged leases as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>

                                                                                      1998             1997
                                                                                      ----             ----
<S>                                                                                   <C>              <C>       
Aggregate rentals receivable                                                          $1,499,042       $2,241,056
Less aggregate principal and interest payable on non-recourse loans                   (1,291,273)      (2,033,287)
Estimated residual value of leased assets                                              1,672,855        1,672,855
Less unearned income                                                                    (300,041)        (431,556)
                                                                                ----------------- ----------------
Net investment in leveraged leases                                                   $ 1,580,583      $ 1,449,068
                                                                                ================= ================
</TABLE>


<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


3.  Investments in equipment and leases (continued):

Reserves for losses and impairments:

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

                             Balance 12/31/96                        $       -
                             Provision                                  74,277
                                                               ----------------
                             Balance 12/31/97                           74,277
                             Provision                                  56,955
                                                               ----------------
                             Balance 12/31/98                        $ 131,232
                                                               ================

At December 31, 1998, commitments to purchase lease assets totaled $18,781,017.


4.  Non-recourse debt

At December 31, 1998,  non-recourse  debt consists of notes payable to financial
institutions.  The notes are due in varying  monthly,  quarterly and semi-annual
payments.  Interest  on the notes is at rates from 7.5% to 10.0%.  The notes are
secured by assignments of lease payments and pledges of assets.  At December 31,
1998, the carrying value of the pledged assets is approximately $31,359,527. The
notes mature from 2000 through 2008.

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

         Year ending
         December 31,       Principal        Interest           Total
                  1999       $ 2,786,956      $ 1,771,389       $ 4,558,345
                  2000         3,358,169        1,341,263         4,699,432
                  2001         3,900,748          978,708         4,879,456
                  2002         4,170,658          561,524         4,732,182
                  2003         1,744,858          182,192         1,927,050
            Thereafter           637,958           78,582           716,540
                         ---------------- ---------------- -----------------
                             $16,599,347      $ 4,913,658      $ 21,513,005
                         ================ ================ =================


5. Other long-term debt:

In 1998, the Partnership  entered into a $65 million receivables funding program
(the Program) with a receivables  financing company that issues commercial paper
rated A1 by Standard and Poors 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.  The Program provides
for borrowing at a variable  interest  rate (5.7243% at December 31, 1998).  The
General Partner anticipates that the Program will allow the Partnership to avail
itself to lower cost debt than that available for individual  non-recourse  debt
transactions.  It is the  intention  of the  Partnership  to use the  Program to
finance  assets  leased to those  credits  which,  in the opinion of the General
Partner,  have a relatively  lower  potential  risk of lease  default than those
lessees with equipment  financed with  non-recourse  debt. The Partnership  will
continue to use its traditional  sources of non-recourse  secured debt financing
on a selected transaction basis as a means of mitigating credit risk.

The Program  requires the General  Partner 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. As of December 31,
1998,  the  Partnership  receives or pays  interest on a notional  principal  of
$61,553,000, based on the difference between nominal rates ranging from 5.55% to
6.22% and the vaiable rate under the Program.  No actual borrowing or lending is
involved.  The last of the swaps terminates in 2008. The differential to be paid
or received is acrued as interest rates change and is recognized currently as an
adjustment to interest expense related to the debt.


<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


5.  Other long-term debt (continued):

Borrowings under the Program are as follows:


                             Original          Balance          Rate on
                              Amount        December 31,     Interest Swap
          Date Borrowed      Borrowed           1998           Agreement

           April 1998         $21,770,000     $ 19,010,000       6.22%
           July 1998           25,000,000       22,815,000       5.75%
          October 1998         20,000,000       19,728,000       5.55%
                          ---------------- ----------------
                              $66,770,000     $ 61,553,000
                          ================ ================


The long-term  debt  borrowings  mature from 2004 through 2008.  Future  minimum
principal payments of long-term debt are as follows:

            Year ending
            December 31,        Principal        Interest           Total
                      1999       $16,088,000      $ 3,114,446      $ 19,202,446
                      2000        14,861,000        2,222,543        17,083,543
                      2001        11,000,000        1,432,767        12,432,767
                      2002         8,716,000          861,897         9,577,897
                      2003         4,666,000          485,020         5,151,020
                Thereafter         6,222,000          492,118         6,714,118
                             ---------------- ---------------- -----------------
                                 $61,553,000      $ 8,608,791      $ 70,161,791
                             ================ ================ =================


6.  Related party transactions:

The terms of the Limited Partnership  Agreement provide that the General Partner
and/or   Affiliates   are  entitled  to  receive   certain  fees  for  equipment
acquisition, management and resale and for management of the Partnership.

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

Substantially  all  employees  of the General  Partner  record time  incurred in
performing administrative services on behalf of all of the Partnerships serviced
by the General  Partner.  The General Partner believes that the costs reimbursed
are the lower of (i) actual costs incurred on behalf of the  Partnership or (ii)
the amount the  Partnership  would be  required to pay  independent  parties for
comparable  administrative  services  in the same  geographic  location  and are
reimbursable in accordance with the Limited Partnership Agreement.

<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


6.  Related party transactions (continued):

The  General   Partner   and/or   Affiliates   earned  fees,   commissions   and
reimbursements,  pursuant to the Limited Partnership Agreement as follows during
1998 and 1997:

<TABLE>
<CAPTION>
                                                                                        1998               1997
                                                                                        ----               ----
<S>                                                                                    <C>                <C>        
Selling commissions (equal to 9.5% of the selling price of the Limited Partnership
units, deducted from Limited Partners' capital)                                        $ 7,868,996        $ 6,381,004

Reimbursement of other syndication costs                                                 3,727,420          3,272,580

Administrative cost reimbursements to General Partner                                    1,056,746            645,437

Incentive  management  fees  (computed  as 4.0% of  distributions  of cash  from
operations,  as defined in the  Limited  Partnership  Agreement)  and  equipment
management  fees (computed as 3.5% of gross revenues from operating  leases,  as
defined in the Limited Partnership Agreement plus 2% of gross revenues from full
payout leases, as defined in the Limited Partnership Agreement).                         1,559,090            358,846
                                                                                   ----------------  -----------------
                                                                                      $ 14,212,252       $ 10,657,867
                                                                                   ================  =================
</TABLE>

The General Partner 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  (generally  not in excess of six
months) 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
the General Partner or Affiliate  (including any out-of-pocket  carrying costs),
except for compensation permitted by the Agreement of Limited Partnership; (iii)
there is no difference  in interest  terms of the loans secured by the equipment
at the time  acquired by the General  Partner or Affiliate and the time acquired
by the Partnership;  (iv) there is no benefit arising out of such transaction to
the  General  Partner or its  Affiliate  apart from the  compensation  otherwise
permitted by the Agreement of Limited Partnership;  and (v) all income generated
by, and all expenses associated with,  equipment so acquired shall be treated as
belonging to the Partnership.


7.  Partners' capital:

As of  December  31,  1998,  14,996,050  Units  ($149,960,050)  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.

The  Partnership  Net Profits,  Net Losses,  and Tax Credits are to be allocated
92.5% to the Limited Partners and 7.5% to the General Partner.

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 the  General  Partner  and 4% to the  General  Partner 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>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


7.  Partners' capital (continued):

Second, 85% to the Limited Partners, 7.5% to the General Partner and 7.5% to the
General  Partner 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  Refinancings  shall be 92.5% to the  Limited
Partners  and 7.5% to the  General  Partner,  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 the General Partner and 7.5% to the
General  Partner or its  affiliate  designated as the recipient of the Incentive
Management Fee.


8. Concentration of credit risk and major customers:

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

As of December 31, 1998 and 1997 there were concentrations (greater than 10%) of
equipment  leased to lessees in certain  industries  (as a  percentage  of total
equipment cost) as follows:

                                          1998              1997
                                          ----              ----
   Transportation, rail                    27%              15%
   Municipalities                          16%              26%
   Transportation, other                   16%              18%
   Electronics                              *               15%

                    *  Less than 10%

During 1998,  one customer  comprised  17% of the  Partnership's  revenues  from
leases.  During 1997, two customers  comprised 24% and 15% of the  Partnership's
revenues from leases.





<PAGE>

                      ATEL CAPITAL EQUIPMENT FUND VII, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


9.  Line of credit:

The  Partnership  participates  with the  General  Partner  and  certain  of its
Affiliates in a $90,000,000 revolving credit agreement with a group of financial
institutions  which  expires on January  31,  2000.  The  agreement  includes an
acquisition  facility and a warehouse  facility which are used to provide bridge
financing  for  assets  on  leases.  Draws on the  acquisition  facility  by any
individual  borrower  are  secured  only by that  borrower's  assets,  including
equipment and related leases.  Borrowings on the warehouse facility are recourse
jointly to certain of the Affiliates, the Partnership and the General Partner.

During 1998,  the  Partnership  borrowed  $53,029,261  under the line of credit.
Repayments on the line of credit were  $81,638,014  during 1998 and  $11,781,707
remained  outstanding as of December 31, 1998. At December 31, 1998, the rate on
such borrowings was 7.75%. Interest on the line of credit is based on either the
thirty day LIBOR rate or the bank's prime rate.

The credit agreement  includes certain  financial  covenants  applicable to each
borrower.  The  Partnership  was in compliance with its covenants as of December
31, 1998. At December 31, 1998, $13,070,344 was available under this agreement.


10. Fair value of financial instruments:

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial  instrument for which it is practicable to estimate that
value.

Cash and cash equivalents:

The carrying amount of cash and cash equivalents approximates fair value because
of the 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,  1998  is
$18,093,559.

Other long-term debt:

The fair value of the  Partnership's  other  long-term  debt is estimated  using
discounted  cash flow  analyses,  based on the  Partnership's  current  variable
borrowing rate for the facility. The estimated fair value of the other long-term
debt at December 31, 1998 is $61,652,841.

Line of credit:

The  carrying  amounts  of  the  Partnership's  variable  rate  line  of  credit
approximates fair value.

Interest rate swaps:

The fair value of interest rate swaps is estimated by discounting the fixed cash
flows paid under each swap using the rate at which the  Partnership  could enter
into new swaps of similar maturities.  The carrying amounts of the interest rate
swaps approximate fiar value at December 31, 1998.


<PAGE>

Item 9.  CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON
           ACCOUNTING AND FINANCIAL DISCLOSURES

Inapplicable.


                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS

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

All of the outstanding capital stock of ATEL Financial  Corporation (the General
Partner) is held by ATEL Capital  Group  ("ACG"),  a holding  company  formed to
control the General  Partner and  affiliated  companies  pursuant to a corporate
restructuring  completed in July 1994.  The  outstanding  capital  stock of ATEL
Capital Group is owned 75% by A. J. Batt and 25% by Dean Cash,  and was obtained
in the  restructuring in exchange for their capital  interests in ATEL Financial
Corporation.

Each of ATEL Leasing Corporation  ("ALC"),  ATEL Equipment  Corporation ("AEC"),
ATEL  Investor  services  ("AIS") and ATEL  Financial  Corporation  ("AFC") 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  service are
performed by AEC, investor relations and communications service are performed by
AIS and general administrative service for the Partnership are performed by AFC.
ATEL  Securities  Corporation  ("ASC"),  is a  wholly-owned  subsidiary  of ATEL
Financial Corporation.

The officers and directors of ATEL Capital Group, ATEL Financial Corporation and
their affiliates are as follows:

A. J. Batt                   Chairman of the Board of Directors of ACG, AFC, 
                             ALC, AEC, AIS and ASC; President and Chief 
                             Executive Officer of ACG, AFC and AEC

Dean L. Cash                 Director, Executive Vice President and Chief 
                             Operating Officer of ACG, AFC, and AEC; Director, 
                             President and Chief Executive Officer of ALC, AIS 
                             and ASC

Donald E. Carpenter          Vice President and Controller of ACG, AFC, ALC, AEC
                             and AIS; Chief Financial Officer of ASC

Vasco H. Morais              Senior Vice President, Secretary and General 
                             Counsel for ACG, AFC, ALC, AIS and AEC

William J. Bullock           Director of Asset Management of AEC

Carl W. Magnuson             Vice President - Syndication of ALC

Barbara F. Medwadowski       Vice President - Syndication of ALC

James A. Kamradt             Director of Pricing and Syndication of ALC

Thomas D. Sbordone           Senior Vice President - Marketing of ALC

Russell H. Wilder            Vice President - Credit of AEC

John P. Scarcella            Vice President of ASC


<PAGE>

A. J. Batt, age 62, founded ATEL in 1977 and has been its president and chairman
of the  board of  directors  since  its  inception.  From  1973 to 1977,  he was
employed by GATX  Leasing  Corporation  as  manager-data  processing  and equity
placement for the lease underwriting department, which was involved in equipment
financing  for  major  corporations.  From  1967 to 1973  Mr.  Batt was a senior
technical representative for General Electric Corporation, involved in sales and
support  services for computer  time-sharing  applications  for corporations and
financial  institutions.  Prior to that time, he was employed by North  American
Aviation as an  engineer  involved in the Apollo  project.  Mr. Batt  received a
B.Sc.  degree with honors in  mathematics  and physics  from the  University  of
British Columbia in 1961.

Dean L. Cash,  age 48, 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.   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.

Donald E. Carpenter, age 50, joined ATEL in 1986 as controller. Prior to joining
ATEL, Mr. Carpenter was an audit supervisor with Laventhol & Horwath,  certified
public accountants in San Francisco, California, from 1983 to 1986. From 1979 to
1983,  Mr.  Carpenter  was an  audit  senior  with  Deloitte,  Haskins  & Sells,
certified public accountants,  in San Jose,  California.  From 1971 to 1975, Mr.
Carpenter was a Supply Corp officer in the U. S. Navy. Mr. Carpenter  received a
B.S. degree in mathematics  (magna cum laude) from California State  University,
Fresno in 1971 and completed a second major in accounting in 1978. Mr. Carpenter
has been a California certified public accountant since 1981.

Vasco H. Morais, age 40, 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 MBA (Finance) in 1997 from Golden Gate University.  Mr. Morais has
been an active member of the State Bar of California since 1986.

William J.  Bullock,  age 35,  joined  ATEL in 1991,  as the  director  of asset
management. He assumed responsibility for the disposition of off-lease equipment
and  residual  valuation  analysis on new lease  transactions.  Prior to joining
ATEL,  Mr.  Bullock  was a senior  member of the  equipment  group at  McDonnell
Douglas  Finance  Corporation  ("MDFC")  responsible for managing its $4 billion
portfolio of leases.  Mr. Bullock was involved in negotiating sales and renewals
as well as preparing and  inspecting  equipment.  Prior to joining MDFC in 1989,
Mr. Bullock was the Senior  Negotiator at Equitable  Leasing (a subsidiary of GE
Capital Equipment Corp.) in San Diego. At Equitable, he handled the end-of-lease
negotiations  and equipment  dispositions of a portfolio  comprised of equipment
leased primarily to Fortune 200 companies.  Mr. Bullock has been a member of the
Equipment Lessors  Association  ("ELA") since 1987 and has authored ELA industry
articles.  He  received a B.S.  degree in  Finance in 1987 from San Diego  State
University and is pursuing his M.B.A.


<PAGE>

Carl W. Magnuson, age 55, joined ATEL in 1994 and is Vice  President-Syndication
for ALC. Mr. Magnuson is responsible foracquiring third party lease transactions
and debt  placement.  Prior to joining ATEL he was a Regional  Group Manager and
Portfolio  Sales Manager for Bell Atlantic  Systems  Leasing for 10 years.  From
1983 to 1984 he was Vice President and Chief Financial  Officer of the Handi-Kup
Company,  a plastics  manufacturer,  and from 1981 to 1982 he was Controller for
the Cyclotron Corporation, engaged in nuclear medicine research and development.
From  1978  to  1981  he was  Executive  Vice  President  of  Shannon  Financial
Corporation,  a middle market  leasing  corporation.  From 1975 to 1978 he was a
Deputy Program  Manager for the Watkins Johnson  Company.  From 1968 to 1973 Mr.
Magnuson  was an  engineering  duty  officer  in the U. S.  Navy.  Mr.  Magnuson
received a B.S. in Engineering  Science and an M.S. in Applied  Mathematics from
the Rensselaer Polytechnic Institute, an MS in Industrial Engineering/Operations
Research  from  Stanford  University,  and an  M.B.A.  from  the  University  of
California at Berkeley.

Barbara F.  Medwadowski,  age 59,  joined  ATEL in 1997 and is vice  president -
syndication  for ALC. Ms.  Medwadoski is responsible  for acquiring  third party
lease  transactions.  Prior to joining ATEL, she was a syndications  manager for
Mellon US Leasing  (successor to USL Capital and U.S.  Leasing  Corporation) for
nine  years.  From 1985 to 1987,  she was a vice  president  with Great  Western
Leasing where she acquired lease and loan transactions from intermediaries. From
1982 through 1984, she was a portfolio  manager with U.S.  Leasing  Corporation.
Ms. Medwadowski  received an M.B.A.  degree from the University of California at
Berkeley in 1982. From 1964 through 1979, she was a senior  researcher in lipids
and  lipoproteins  at the  University of California  at Berkeley.  In 1964,  she
earned  an  M.S.  degree  in  nutrition  and  in  1961 a B.S.  degree  in  child
development, each from the University of California at Berkeley

James A. Kamradt,  age 37,  Director of Pricing and  Syndication for ALC, joined
ATEL in 1997. Mr. Kamradt is involved in the pricing of lease  transactions  and
the placement of debt to leverage certain  transactions.  From 1985 to 1997, Mr.
Kamradt managed his own private consulting business,  providing underwriting and
operational services for numerous leasing companies.  Prior to that, Mr. Kamradt
was the National Operations Officer for the computer leasing division of Phoenix
American;  and Regional Credit Manager for Dana Commercial  Credit  Corporation.
Mr.  Kamradt  received  his  B.S.  from  Michigan   Technological   University's
Engineering  School of Business,  and his M.B.A. from Haas School of Business of
the University of California, Berkeley.

Thomas D.  Sbordone,  age 40, is Senior Vice  President - Marketing  for ALC. He
joined ATEL in 1993, as a regional  vice  president in the  northeastern  United
States.  Mr.  Sbordone is currently  responsible  for new  business  development
within the eastern  U.S.,  including  management  of filed sales  personnel  and
directly interfacing with ATEL's existing and prospective clients to achieve the
company's lease investment  objectives.  Prior to joining ATEL, Mr. Sbordone was
employed, from 1985, by American Finance Group, a Boston-based equipment lessor.
While there, Mr. Sbordone's various responsibilities  involved lease origination
of vendor finance  relationships.  Mr. Sbordone  earned a B.S., with honors,  in
finance and marketing from  Northeastern  University,  and has attended  Bentley
College Graduate School of Business.

Russell  H.  Wilder,  age 44,  joined  ATEL in  1992 as Vice  President  of ATEL
Business Credit, a wholly-owned  subsidiary of ACG. Immediately prior to joining
ATEL,  Mr.  Wilder was a personal  property  broker  specializing  in  equipment
leasing  and  financing  and an  outside  contractor  in the areas of credit and
collections.  From 1985 to 1990 he was Vice President and Manager of Leasing for
Fireside Thrift Co., a Teledyne subsidiary,  and was responsible for all aspects
of setting up and  managing  the  department,  which  operated as a small ticket
lease  funding  source.  From  1983 to  1985 he was  with  Wells  Fargo  Leasing
Corporation  as  Assistant  Vice  President  in the credit  department  where he
oversaw all credit analysis on  transactions in excess of $2 million.  From 1978
to 1983 he was District Credit Manager with  Westinghouse  Credit  Corporation's
Industrial Group and was responsible for all non-marketing operations of various
district offices. Mr. Wilder holds a B.S. with Honors in Agricultural  Economics
and Business  Management from the University of California at Davis. He has been
awarded the Certified Lease Professional  designation by the Western Association
of Equipment Lessors.


<PAGE>

John P. Scarcella,  age 37, joined ATEL Securities as vice president in 1992. He
is involved in the marketing of securities offered by ASC. Prior to joining ASC,
from 1987 to 1991,  he was  employed  by Lansing  Pacific  Fund,  a real  estate
investment  trust in San Mateo,  California  and acted as  director  of investor
relations.   From  1984  to  1987,   Mr.   Scarcella   acted  as  broker  dealer
representative  for Lansing  Capital  Corporation,  where he was involved in the
marketing of direct  participation  programs and REITs. Mr. Scarcella received a
B.S.C.  degree with emphasis in investment finance in 1983 and an M.B.A.  degree
with a concentration in marketing in 1991 from Santa Clara University.


Item 11.  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 the  General  Partner  and  their  Affiliates.  The  amount  of such
remuneration  paid  through  December  31,  1998 is set  forth in Item 8 of this
report under the caption "Financial Statements and Supplementary Data - Notes to
the Financial  Statements - Related party transactions," at Note 6 thereof which
information is hereby incorporated by reference.

Selling Commissions

The  Partnership  will pay  selling  commissions  in the amount of 9.5% of Gross
Proceeds,  as defined,  to ATEL  Securities  Corporation,  an  affiliate  of the
General  Partner.  Of this  amount,  the majority is expected to be reallowed to
other broker/dealers.

Through  December  31,  1998,  $14,250,000  of  such  commissions  (the  maximum
allowable  amount) had been paid to the General  Partner or its  affiliates.  Of
that amount, $12,327,297 was reallowed to other broker/dealers.

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,  the  General  Partner 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
which contain net lease provisions.

See Note 6 to the  financial  statements  included  in Item 8 of this report for
amounts paid.

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,  the General Partner shall be entitled to receive
the Incentive management fee which shall be payable for each fiscal quarter.


<PAGE>

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 the  General  Partner  and 4% to the  General  Partner 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 the General Partner and 7.5% to the
General  Partner 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  Refinancings  shall be 92.5% to the  Limited
Partners  and 7.5% to the  General  Partner,  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 the General Partner and 7.5% to the
General  Partner or its  affiliate  designated as the recipient of the Incentive
Management Fee.

See Note 6 to the  financial  statements  included  in Item 8 of this report for
amounts paid.

Equipment Resale Fees

As compensation  for service  rendered in connection with the sale of equipment,
the General  Partner  shall be 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 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,  the General Partner shall
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  provide that (i) the General Partner 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) the General Partner or its affiliates
have rendered  substantial  re-leasing  service in connection with such re-lease
and (iv) the General  Partner or its  affiliates are  compensated  for rendering
equipment management service. To date, none have been accrued or paid.

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 the general  partner.  See  financial  statements
included in Item 8, Part I of this report for amounts  allocated  to the General
Partner in 1998 and 1997.



<PAGE>

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

At December 31, 1998 no investor is known to hold  beneficially  more than 5% of
the issued and outstanding Units.

Security Ownership of Management

The  shareholders  of the  General  Partner  are  beneficial  owners of  Limited
Partnership Units as follows:

<TABLE>
<CAPTION>
            (1)                                     (2)                               (3)                                 (4)
                                                    Name and Address of               Amount and Nature of              Percent
       Title of Class                                 Beneficial Owner                Beneficial Ownership              of Class

<S>                                             <C>                             <C>                                         <C>     
Limited Partnership Units                       A. J. Batt                        Initial Limited Partner Units             0.00017%
                                                 235 Pine Street, 6th Floor     25 Units ($250)
                                                  San Francisco, CA 94104                (owned by wife)

Limited Partnership Units                        Dean Cash                        Initial Limited Partner Units             0.00017%
                                                 235 Pine Street, 6th Floor     25 Units ($250)
                                                  San Francisco, CA 94104                (owned by wife)
</TABLE>

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.

The General Partner 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 therefor of Limited Partners holding 10%
or more of the total outstanding Limited Partnership units.


Item 13.  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 Note 6 thereof,  and Item 11 of this report  under the caption
"Executive Compensation," are hereby incorporated herein by reference.



<PAGE>

                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
               ON FORM 8-K

                         (a)Financial Statements and Schedules
                         1.  Financial Statements
                             Included in Part II of this report:
                             Report of Independent Auditors
                             Balance Sheets at December 31, 1998 and 1997
                             Statement of Operations for the years ended 
                                December 31, 1998 and 1997
                             Statements of Changes in Partners'  Capital for the
                                years ended  December  31, 1998 and 1997 and for
                                the period from May 17, 1996 (inception) through
                                December 31, 1996
                             Statement  of  Cash  Flows  for  the  years   ended
                                December  31,  1998 and 1997 and the period from
                                May 17, 1996  (inception)  through  December 31,
                                1996
                             Notes to Financial Statements

                         2.  Financial Statement Schedules
                             Allschedules  for  which  provision  is made in the
                                applicable   accounting   regulations   of   the
                                Securities  and  Exchange   Commission  are  not
                                required under the related  instructions  or are
                                inapplicable, and therefore have been omitted.

                         (b) Reports on Form 8-K for the fourth quarter of 1998
                             None

                         (c)Exhibits
                             (3)and  (4)   Agreement  of  Limited   Partnership,
                                included  as  Exhibit B to  Prospectus  (Exhibit
                                28.1),  is  incorporated  herein by reference to
                                the  report  on Form  10K for the  period  ended
                                December 31, 1996 (File No. 333-08879).


<PAGE>

                                   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:  3/26/1999

                             ATEL Capital  Equipment Fund VII, L.P.
                        (Registrant)


 By:  ATEL Financial Corporation,
      General Partner of Registrant



                 By:   /s/  A. J. Batt
                       ---------------------------------------------------
                       A. J. Batt,
                       President and Chief Executive Officer of
                       ATEL Financial Corporation (General
                       Partner)




                 By:    /s/ Dean Cash
                       ---------------------------------------------------
                       Dean Cash,
                       Executive vice President of ATEL
                       Financial Corporation (General Partner)






<PAGE>

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/ A. J. Batt        President, chairman and chief executive     3/26/1999
-------------------------- officer of ATEL Financial Corporation
       A. J. Batt         



      /s/ Dean Cash        Executive vice president and director of    3/26/1999
-------------------------- ATEL Financial Corporation
        Dean Cash          



 /s/ Donald E. Carpenter   Principal financial officer of registrant;  3/26/1999
-------------------------- principalfinancial officer of ATEL 
   Donald E. Carpenter     Financial Corporation Principal accounting 
                           officer of registrant; principal accounting 
                           officer of ATEL Financial Corporation



Supplemental  Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act:

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-K, and copies thereof will be furnished  supplementally to the
Commission when forwarded to the security holders.