<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
            ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].

                   For the fiscal year ended December 31, 1997
                                             -----------------

                                       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 0-16834

                              IEA INCOME FUND VII,
                        A California Limited Partnership
             (Exact name of registrant as specified in its charter)

             California                              94-2966976
   (State or other jurisdiction of       (I.R.S. Employer Identification No.)
   incorporation or organization)

         444 Market Street, 15th Floor, San Francisco, California 94111
               (Address of principal executive offices)        (Zip Code)

        Registrant's telephone number, including area code (415) 677-8990

           Securities registered pursuant to Section 12(b) of the Act:

                                             Name of each exchange on
         Title of each class                     which registered
         -------------------                     ----------------
           Not Applicable
     ---------------------------           ----------------------------

           Securities registered pursuant to Section 12(g) of the Act:

                     UNITS OF LIMITED PARTNERSHIP INTERESTS
                     --------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.  Yes   X  .  No .
                                        -----      -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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]

The aggregate market value of the voting stock held by non-affiliates of the
registrant is not applicable.

                                  Documents incorporated by Reference

PART I

Item 1 - Business              Prospectus of IEA Income Fund VII, A California
                               Limited Partnership dated December 3, 1986
                               included as part of Registration Statement on
                               Form S-1 (No. 33-9351)

                               Certificate of Limited Partnership of IEA Income
                               Fund VII, A California Limited Partnership filed
                               as Exhibit 3.4 to the Registration Statement on
                               Form S-1 (No. 33-9351)

PART II

Item 9 - Changes in and Dis-   Current Report on Form 8-K of IEA Income Fund
         agreements with       VII, A California Limited Partnership filed
         Accountants on        February 7, 1997 and April 14, 1997,
         Accounting and        respectively, and Amendment No. 1 to Current
         Financial Disclosure  Report on Form 8-K filed February 26, 1997.




<PAGE>   2

                                     PART I


Item 1. Business

   (a)  General Development of Business

   The Registrant is a California limited partnership formed on June 27, 1985 to
engage in the business of leasing marine dry cargo containers to unaffiliated
third-party lessees. The Registrant was initially capitalized with $100, and
commenced offering its limited partnership interests to the public during the
week of December 3, 1986, pursuant to its Registration Statement on Form S-1
(File No. 33-9351). The offering terminated on August 31, 1987.

   The Registrant raised $4,657,100 in subscription proceeds. The following
table sets forth the use of said subscription proceeds:

<TABLE>
<CAPTION>
                                                                Percentage of
                                                     Amount     Gross Proceeds
                                                   ----------       -----
        <S>                                        <C>              <C>
        Gross Subscription Proceeds                $4,657,100       100.0%

        Public Offering Expenses:
            Underwriting Commissions               $  465,700        10.0%
            Offering and Organization Expenses     $  232,850         5.0%
                                                   ----------       -----

            Total Public Offering Expenses         $  698,550        15.0%
                                                   ----------       -----

        Net Proceeds                               $3,958,550        85.0%

        Acquisition Fees                           $   38,705         0.8%

        Working Capital Reserve                    $   49,345         1.1%
                                                   ----------       -----

        Gross Proceeds Invested in Equipment       $3,870,500        83.1%
                                                   ==========       =====
</TABLE>








                                       2
<PAGE>   3




   The managing general partner of the Registrant is Cronos Capital Corp.
("CCC"), a wholly-owned subsidiary of Cronos Holdings/Investments (U.S.), Inc.,
a Delaware corporation. Cronos Holdings/Investments (U.S.), Inc. is a
wholly-owned subsidiary of The Cronos Group, a Luxembourg company. These and
other affiliated companies are ultimately wholly-owned by The Cronos Group, a
holding company registered in Luxembourg ("the Holding Company") and are
collectively referred to as the "Group". The activities of the container
division of the Group are managed through the Group's subsidiary in the United
Kingdom, Cronos Containers Limited ("the Leasing Company"). The Leasing Company
manages the leasing operations of all equipment owned or managed by the Group on
its own behalf or on behalf of other third-party container owners, including all
other programs organized by CCC. The associate general partners are: Dennis J.
Tietz, President and Director of CCC; John M. Foy; Paul E. Jeremiassen; Paul W.
Botterill; James E. Hoelter; John A. Maccarone; and Robert J. Corbolotti.

   Pursuant to the Limited Partnership Agreement of the Registrant, all
authority to administer the business of the Registrant is vested in CCC. CCC has
entered into a Leasing Agent Agreement, whereby the Leasing Company has assumed
the responsibility for the container leasing activities of CCC's managed
programs.

   For information concerning the containers acquired by the Registrant, see
Item 2, "Properties."

   As reported in the Registrant's Current Report on Form 8-K and Amendment No.
1 to Current Report on Form 8-K, filed with the Commission on February 7, 1997
and February 26, 1997, respectively, Arthur Andersen, London, England, resigned
as auditors of The Cronos Group, a Luxembourg Corporation headquartered in
Orchard Lea, England (the "Parent Company"), on February 3, 1997.

   The Parent Company is the indirect corporate parent of CCC, the Managing
General Partner of the Partnership. In its letter of resignation to the Parent
Company, Arthur Andersen stated that it resigned as auditors of the Parent
Company and all other entities affiliated with the Parent Company. While its
letter of resignation was not addressed to CCC, Arthur Andersen confirmed to CCC
that its resignation as auditors of the entities referred to in its letter of
resignation included its resignation as auditors of CCC and the Registrant.

   CCC does not believe, based upon the information currently available to it,
that Arthur Andersen's resignation was triggered by any concern over the
accounting policies and procedures followed by the Registrant.

   Arthur Andersen's report on the financial statements of CCC and the
Registrant, for years preceding 1996, has not contained an adverse opinion or a
disclaimer of opinion, nor was any such report qualified or modified as to
uncertainty, audit scope, or accounting principles.

   During the Registrant's 1995 fiscal year and the subsequent interim period
preceding Arthur Andersen's resignation, there have been no disagreements
between CCC or the Registrant and Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.

   The Registrant retained a new auditor, Moore Stephens, P.C. on April 10,
1997, as reported in its Current Report on Form 8-K, filed April 14, 1997.

   In connection with its resignation, Arthur Andersen also prepared a report
pursuant to the provisions of Section 10A(b)(2) of the Securities Exchange Act
of 1934, as amended, for filing by the Parent Company with the Securities and
Exchange Commission (the "SEC"). Following the report of Arthur Andersen, the
SEC, on February 10, 1997, commenced a private investigation of the Parent
Company for the purpose of investigating the matters discussed in such report
and related matters. The Registrant does not believe that the focus of the SEC's
investigation is upon the Registrant or CCC. CCC is unable to predict the
outcome of the SEC's ongoing private investigation of the Parent Company.



                                       3
<PAGE>   4




   In 1993, the Parent Company negotiated a credit facility (hereinafter, the
"Credit Facility") with several banks for the use of the Parent Company and its
affiliates, including CCC. At December 31, 1996, approximately $73,500,000 in
principal indebtedness was outstanding under the Credit Facility. As a party to
the Credit Facility, CCC is jointly and severally liable for the repayment of
all principal and interest owed under the Credit Facility. The obligations of
CCC, and the five other subsidiaries of the Parent Company that are borrowers
under the Credit Facility, are guaranteed by the Parent Company.

   Following negotiations in 1997 with the banks providing the Credit Facility,
an Amended and Restated Credit Agreement was executed in June 1997, subject to
various actions being taken by the Parent Company and its subsidiaries,
primarily relating to the provision of additional collateral. This Agreement was
further amended in July 1997 and the provisions of the Agreement and its
Amendment converted the facility to a term loan, payable in installments, with a
final maturity date of May 31, 1998. At December 31, 1997, approximately
$37,600,000 was outstanding under the Credit Facility.

   The terms of the Agreement and its Amendment also provide for additional
security over shares in the subsidiary of the Parent Company that owns the head
office of the Parent Company's container leasing operations. They also provided
for the loans to Stefan M. Palatin, the Chairman of the Parent Company (the
"Chairman") and its Chief Executive Officer (and a Director of CCC), of
approximately $5,990,000 and $3,700,000 (totaling approximately $9,690,000) to
be restructured as obligations of the Chairman to another subsidiary of the
Parent Company. These obligations have been collaterally assigned to the lending
banks, together with the pledge of 1,000,000 shares of the Parent Company's
Common Stock owned by the Chairman. These 1,000,000 shares represent 11% of the
issued and outstanding shares of Common Stock of the Parent Company as of
December 31, 1997. The shares of the Parent Company are traded on NASDAQ
(CRNSF). (The Chairman, including the 1,000,000 shares pledged to the banks,
owns approximately 55% of the issued and outstanding shares of Common Stock of
the Parent Company as of December 31, 1997). Additionally, CCC granted the
lending banks a security interest in the fees to which it is entitled for the
services it renders to the container leasing partnerships of which it acts as
general partner, including its fee income payable by the Partnership.

   The lending banks have indicated that they will not renew the Credit
Facility, and the Parent Company has yet to secure a source for repayment of the
balance due under the Credit Facility at May 31, 1998. CCC is currently in
discussions with the management of the Parent Company to provide assurance that
the management of the container leasing partnerships managed by CCC, including
the Registrant, is not disrupted pending a refinancing or reorganization of the
indebtedness of the Parent Company and its affiliates.

   The Registrant is not a borrower under the Credit Facility, and neither the
containers nor the other assets of the Registrant have been pledged as
collateral under the Credit Facility.

   The Registrant is unable to determine the impact, if any, these concerns may
have on the future operating results and financial condition of the Registrant
or CCC and the Leasing Company's ability to manage the Registrant's fleet in
subsequent periods.


   (b)  Financial Information About Industry Segments

   Inapplicable.

   (c)  Narrative Description of Business

   (c)(1)(i) A marine cargo container is a reusable metal container designed for
the efficient carriage of cargo with a minimum of exposure to loss from damage
or theft. Containers are manufactured to conform to worldwide standards of
container dimensions and container ship fittings adopted by the International
Standards Organization ("ISO") in 1968. The standard container is either 20'
long x 8' wide x 8'6" high (one twenty-foot equivalent unit ("TEU"), the
standard unit of physical measurement in the container industry) or 40' long x
8' wide x 8'6" high (two TEU). Standardization of the construction, maintenance
and handling of containers allows containers to be picked up, dropped off,
stored and repaired effectively throughout the world. This standardization is
the foundation on which the container industry has developed.



                                       4
<PAGE>   5




   Standard dry cargo containers are rectangular boxes with no moving parts,
other than doors, and are typically made of steel. They are constructed to carry
a wide variety of cargos ranging from heavy industrial raw materials to
light-weight finished goods. Specialized containers include, among others,
refrigerated containers for the transport of temperature-sensitive goods and
tank containers for the carriage of liquid cargo.

   One of the primary benefits of containerization has been the ability of the
shipping industry to effectively lower freight rates due to the efficiencies
created by standardized intermodal containers. Containers can be handled much
more efficiently than loose cargo and are typically shipped via several modes of
transportation, including truck, railway and ship. Containers require loading
and unloading only once and remain sealed until arrival at the final
destination, significantly reducing transport time, labor and handling costs and
losses due to damage and theft. Efficient movement of containerized cargo
between ship and shore reduces the amount of time that a ship must spend in port
and reduces the transit time of freight moves.

   The logistical advantages and reduced freight rates brought about by
containerization have been a major catalyst for world trade growth during the
last twenty-five years, which in turn has generated increased demand for
containerization.

   The rapid growth of containerization began with the standardization of
equipment sizes by international agreement in the late 1960's. Initially
confined to the highly competitive trade routes among the industrialized
nations, containerization expanded into substantially all free-world trade
routes by the early 1970's.

   Throughout the decade of the 1970's, conversion from break bulk shipping
methods to containers gained momentum in an environment of generally robust
growth in world trade (except during the 1975-76 world-wide recession). Both
shipping lines and container leasing companies responded to this growing market
demand with major container purchases, while container manufacturers
substantially boosted production capacity.

   During the early and mid-1980's, the container industry encountered
alternating periods of slow trade growth, creating excess container capacity,
followed by periods of economic recovery. From the late 1980s to 1991, the
container industry generally experienced a balance in supply and demand for
equipment. In 1992, companies embarked on ambitious container production
programs encouraged by positive economic forecasts and the profitability of the
industry in previous years. This produced an oversupply of containers as some of
the major world economies slipped into recession and ocean carriers and leasing
companies built up large container inventories. During 1993, container
purchasing declined, generally helping to reduce the oversupply of containers.

   During 1994 and 1995, the world's major industrialized nations emerged from a
global economic recession. Consequently, excess equipment inventories that had
resulted from the sluggish growth in world trade during 1992 and 1993, as well
as increased production capacity, were absorbed. However, since 1995, the growth
of the industry's fleet, as well as containership tonnage, outpaced increases in
world containerized trade and resulted in a steady decline in container prices
to levels not seen in a decade. Consequently, ocean carriers reduced their
holding of leased container equipment and increased the number of containers
purchased for their own account. Additionally, ocean carriers, through the
efforts of strategic shipping alliances, were able to increase the efficiency of
utilizing owned containers, further reducing their reliance on leased
containers. As a result, the container leasing industry has, since mid - 1995,
experienced a decline in container utilization and per-diem rental rates.

   The Registrant believes that the favorable growth of containerization has
been and will be impacted in subsequent years for the following reasons:

   o  Lower freight rates resulting from containerization are generating new
      cargos that previously were not economical to export. Containerization
      provides inexpensive, timely and secure transport to manufacturers
      allowing them to take advantage of regional opportunities in technology or
      labor, and to move products to different locations at various stages of
      production;



                                       5
<PAGE>   6




   o  Intermodal traffic is expected to continue to grow, and industrialized
      countries are continuing to improve intermodal infrastructure (i.e.,
      railways, roads and ports);

   o  Shippers continue to demand transportation of cargo by containers rather
      than break-bulk;

   o  Countries with rapidly-growing economies in emerging markets are
      continuing to build new container port facilities that accommodate an
      increased flow of containerized trade; and

   o  Trade agreements, such as the North American Free Trade Agreement
      ("NAFTA") and the General Agreement on Tariffs and Trade ("GATT"), should
      further stimulate world trade, and, therefore containerized trade.

   The container leasing industry has been a significant contributor to the
growth of containerization. To an ocean carrier, the primary benefits of leasing
rather than owning containers are as follows:

   o  Reduced Capital Expenditures. Leasing is an attractive option to ocean
      carriers because ownership of containers requires significant capital
      expenditures. Carriers constantly evaluate their investment strategy, with
      container purchasing competing directly with other expenditure
      requirements, such as ship purchases, ship conversions and terminal
      improvements. Container leasing allows ocean carriers to invest capital in
      assets that are more central to their business.

   o  Improved Asset Management. Trade flow imbalances and seasonal demands
      frequently leave ocean carriers with regional surpluses or shortages of
      containers, requiring costly repositioning of empty containers. Leasing
      companies help ocean carriers manage these trade imbalances by providing
      the inventory to service demand, reducing the costs of maintaining local
      inventories and minimizing repositioning expenses. By matching different
      carriers' container needs, leasing companies can reduce their own risks of
      container inventory imbalances and seasonality through a portfolio of
      lessees as well as variations in lease terms.

   o  Increased Container Fleet Flexibility. Ocean carriers benefit from the
      variety of lease types offered by leasing companies such as the master
      lease, long-term and short-term lease and direct financing lease. These
      various leases give ocean carriers flexibility in sizing their fleets
      while minimizing capital costs. For example, master lease agreements give
      ocean carriers the option of adjusting the size of their fleets, with the
      flexibility to pick-up and drop-off containers at various locations around
      the world.

   Dry cargo containers are the most-commonly used type of container in the
shipping industry. The Registrant's dry cargo container fleet is constructed of
all Corten(R) steel (Corten(R) roofs, walls, doors and undercarriage), a
high-tensile steel yielding greater damage and corrosion resistance than mild
steel.

   The Registrant's containers are leased primarily to ocean-going steamship
companies operating in major trade routes (see Item 1(d)). Most if not all of
the Registrant's marine dry cargo containers are leased pursuant to operating
leases, primarily master leases where the containers are leased to the ocean
carrier on a daily basis for any desired length of time, with the flexibility of
picking up and dropping off containers at various agreed upon locations around
the world and, secondarily, term leases (1-5 years) and one-way or round-trip
leases.

   Master lease agreements. A master lease is designed to provide greater
flexibility by allowing customers to pick-up and drop-off containers where and
when needed, subject to restrictions and availability, on pre-agreed terms. The
commercial terms of master leases are generally negotiated annually. Master
leases also define the number of containers that may be returned within each
calendar month and the return locations and applicable drop-off charges. Because
of the increased flexibility they offer, master leases usually command higher
per-diem rates and generate more ancillary fees (including pick-up, drop-off,
handling and off-hire fees) than term leases.



                                       6
<PAGE>   7




   Term lease agreements. Term lease agreements include short-term and long-term
leases. Long-term lease agreements define the number of containers to be leased,
the pick-up and drop-off locations, the applicable per-diem rental rate for the
duration of the lease and the early termination penalties that may apply in the
event of early redelivery. Ocean carriers use long-term leases when they have a
need for identified containers for a specified term. Long-term leases usually
are not terminated early by the customer and provide the Registrant with stable
and relatively predictable sources of revenue, although per-diem rates and
ancillary charges are lower under long-term leases than under master lease
agreements. Short-term lease agreements have a duration of less than one year
and include one-way, repositioning and round-trip leases. They differ from
master leases in that they define the number and the term of containers to be
leased. Ocean carriers use one-way leases to manage trade imbalances (where more
containerized cargo moves in one direction than another) by picking up a
container in one port and dropping it off at another after one or more legs of a
voyage. Except for direct financing leases, lease rates typically are highest
for short-term leases.

   Under these leases, customers are responsible for paying all taxes and
service charges arising from container use, maintaining the containers in good
and safe operating condition while on lease and paying for repairs upon
redelivery, other than ordinary wear and tear. Some leases provide for a "damage
protection plan" whereby lessees, for an additional payment (which may be in the
form of a higher per-diem rate), are relieved of the responsibility of paying
some of the repair costs upon redelivery of the containers. The Leasing Company
has historically provided this service on a limited basis to selected customers.
Repairs provided under such plans are carried out by the same depots, under the
same procedures, as are repairs to containers not covered by such plans.
Customers also are required to insure leased containers against physical damage
and loss, and against third party liability for loss, damage, bodily injury or
death.

   All containers are inspected and repaired when redelivered by a customer, and
customers are obligated to pay for all damage repair, excluding wear and tear,
according to standardized industry guidelines. Depots in major port areas
perform repair and maintenance which is verified by independent surveyors or the
Leasing Company's technical and operations staff.

   Before any repair or refurbishment is authorized on older containers in the
Registrant's fleet, the Leasing Company's technical and operations staff reviews
the age, condition and type of container and its suitability for continued
leasing. The Leasing Company compares the cost of such repair or refurbishment
with the prevailing market resale price that might be obtained for that
container and makes the appropriate decision whether to repair or sell the
container.

   The non-cancelable terms of the operating leases of the Registrant's
containers will not be sufficient to return to the Registrant as lessor the
purchase price of the equipment. In order to recover the original investment in
the equipment and achieve an adequate return thereon, it is necessary to renew
the lease, lease the equipment to another lessee at the end of the initial lease
term, or sell the equipment.

   The Registrant estimates that a dry cargo or refrigerated container may be
used as a leased marine cargo container for a period ranging from 10 to 15
years. The Registrant disposes of used containers in a worldwide market for used
containers in which buyers include wholesalers, mini-storage operators,
construction companies and others. As the Registrant's fleet ages, a larger
proportion of its revenue will be derived from selling its containers.

   Of the 841 twenty-foot and 860 forty-foot dry cargo containers owned by the
Registrant as of December 31, 1997, 677 twenty-foot (or 80% thereof) and 712
forty-foot dry cargo containers (or 83% thereof) were on lease. The following
table sets forth the information on the lease terms with respect to the
containers on lease:

<TABLE>
<CAPTION>
                                                   Number of
                                                   Containers
                                                   ----------
        <S>                                           <C>
        20-Foot Dry Cargo Containers:
          Term Leases                                  66
          Master Leases                               611
        40-Foot Dry Cargo Containers:
          Term Leases                                  94
          Master Leases                               618
</TABLE>




                                       7
<PAGE>   8




   The Leasing Company will make payments to the Registrant based upon rentals
collected from ocean carriers after deducting certain operating expenses
associated with the containers, such as the base management fee payable to CCC,
certain expense reimbursements to CCC, the costs of maintenance and repairs not
performed by lessees, independent agent fees and expenses, depot expenses for
handling, inspection and storage, and additional insurance.

   The Registrant's sales and marketing operations are conducted through the
Leasing Company, in the United Kingdom, with support provided by area offices
and dedicated agents located in San Francisco, California; Iselin, New Jersey;
Windsor, England; Hamburg; Antwerp; Auckland; Genoa; Singapore; Hong Kong;
Sydney; Tokyo; Taipei; Seoul; Rio de Janeiro; and Shanghai. Each of the Leasing
Company's area offices and dedicated agents is staffed with local people
familiar with the customers and language of the region. The Leasing Company's
marketing directors have been employed in the container industry in their
respective regions for an average of 12 years, building direct personal
relationships with the local ocean carriers and locally-based representatives of
other ocean carriers.

   The Leasing Company also maintains agency relationships with over 45
independent agents around the world, who are generally paid a commission based
upon the amount of revenues they generate in the region or the number of
containers that are leased from their area on behalf of the Registrant. They are
located in jurisdictions where the volume of the Leasing Company's business
necessitates a presence in the area but is not sufficient to justify a
fully-functioning Leasing Company office or dedicated agent. These agents
provide marketing support to the area offices covering the region, together with
limited operational support.

   In addition, the Leasing Company relies on the services of over 350
independently-owned and operated depots around the world to inspect, repair,
maintain and store containers while off-hire. The Leasing Company's area offices
authorize all container movements into and out of the depot and supervise all
repair and maintenance performed by the depot. The Leasing Company's technical
staff sets the standards for repair of its owned and managed fleet throughout
the world and monitors the quality of depot repair work. The depots provide a
vital link to the Leasing Company's operations, as the redelivery of a container
into a depot is the point at which the container is off-hired from one customer
and repaired in preparation for re-leasing to the next, and the point when the
Leasing Company's area offices report the container's movements onto the Leasing
Company's equipment tracking system. The Leasing Company's computer system has
the capability to accommodate future developments, such as allowing depots
access to record directly on the system the on-hire and off-hire activity of
containers delivered into the depot. It also has the capability of verifying the
terms of redelivery authorized by the area offices. These functions are
currently being performed by the Leasing Company's area offices.

   The Registrant relies upon the financial and operational systems provided by
the Leasing Company and its affiliates, as well as the systems provided by other
independent third parties. The Registrant has received assurances from the
Leasing Company and independent third parties, indicating that plans have been
developed and implemented to address issues related to the impact year 2000 will
have on these systems. The financial impact of making these required system
changes is not expected to be material to the Registrant's financial position,
results of operations or cash flows.

   (c)(1)(ii) Inapplicable.

   (c)(1)(iii) Inapplicable.

   (c)(1)(iv) Inapplicable.

   (c)(1)(v) The Registrant's containers are leased globally, therefore,
seasonal fluctuations are minimal. Other economic and business factors to which
the transportation industry in general and the container leasing industry in
particular are subject, include inflation and fluctuations in general business
conditions and fluctuations in supply and demand for equipment resulting from,
among other things, obsolescence, changes in the methods or economics of a
particular mode of transportation or changes in governmental regulations or
safety standards.

   (c)(1)(vi) The Registrant established an initial working capital reserve of
approximately $49,000 (approximately 1.1% of subscription proceeds raised). In
addition, the Registrant may reserve additional amounts from anticipated cash
distributions to the partners to meet working capital requirements.




                                       8
<PAGE>   9




   Amounts due under master leases are calculated at the end of each month and
billed approximately six to eight days thereafter. Amounts due under short-term
and long-term leases are set forth in the respective lease agreements and are
generally payable monthly. However, payment is normally received within 45-100
days of receipt. Past due penalties are not customarily collected from lessees,
and accordingly are not generally levied by the Leasing Company against lessees
of the Registrant's containers.

   (c)(1)(vii) For the fiscal year ended December 31, 1997, no single lessee
accounted for 10% or more of the Registrant's rental income. The Registrant does
not believe that its ongoing business is dependent upon a single customer,
although the loss of one or more of its largest customers could have an adverse
effect upon its business.

   (c)(1)(viii) Inapplicable.

   (c)(1)(ix) Inapplicable.

   (c)(1)(x) Competition among container leasing companies is based upon several
factors, including the location and availability of inventory, lease rates, the
type, quality and condition of the containers, the quality and flexibility of
the service offered and the confidence in and professional relationship with the
lessor. Other factors include the speed with which a leasing company can prepare
its containers for lease and the ease with which a lessee believes it can do
business with a lessor or its local area office. The Leasing Company believes
that it, on behalf of the Registrant, competes favorably on all of these
factors.

   The Leasing Company, on behalf of the Registrant, competes with various
container leasing companies in the markets in which it conducts business,
including Transamerica Leasing, GE-Seaco, Florens Container Corp., Textainer
Group, Triton Container International, Interpool Inc., Xtra Group, Container
Applications Inc. and others. During 1996 and 1997, two of the container leasing
industry's largest mergers transpired. The acquisition of Trans Ocean Ltd by
Transamerica Leasing in 1996, and the 1997 merger between the fleets of Genstar
Container Corp. and Sea Containers to form GE-Seaco, resulted in the creation of
the two largest leasing organizations in the container leasing industry. It is
estimated that, at the end of 1997, these two organizations controlled
approximately 45% of the worldwide leased container fleet. These and other
competitors of the Leasing Company may have greater financial resources and may
be capable of offering lower per-diem rates. Since 1996, the container leasing
industry has also experienced the formation of new leasing companies, which have
been able to compete at lower per-diem rates as a result of the decline in
container prices and cost of capital. In the Leasing Company's experience,
however, ocean carriers will generally lease containers from more than one
leasing company in order to minimize dependence on a single supplier. In
addition, not all container leasing companies compete in the same market, as
some supply only dry cargo containers and not specialized containers, while
others offer only long-term leasing.

   (c)(1)(xi) Inapplicable.

   (c)(1)(xii) Inapplicable.

   (c)(1)(xiii) The Registrant, as a limited partnership, is managed by CCC, the
managing general partner, and accordingly does not itself have any employees.
CCC has 19 employees, consisting of 4 officers, 4 other managers and 11 clerical
and staff personnel.

   (d) Financial Information About Foreign and Domestic Operations and Export
Sales

   The Registrant's business is not divided between foreign or domestic
operations. The Registrant's business is the leasing of containers worldwide to
ocean-going steamship companies. To this extent, the Registrant's operations are
subject to the fluctuations of worldwide economic and political conditions that
may affect the pattern and levels of world trade.

   Rental income from leases to foreign customers exceeded 90% of the
Registrant's total rental income for the years 1997, 1996 and 1995. The
Registrant believes that the profitability of, and risks associated with, leases
to foreign customers is generally the same as those of leases to domestic
customers. The Registrant's leases generally require all payments to be made in
United States currency.




                                       9
<PAGE>   10




Item 2. Properties

   As of December 31, 1997, the Registrant owned 841 twenty-foot and 860
forty-foot marine dry cargo containers suitable for transporting cargo by rail,
sea or highway. The Registrant's containers were originally acquired from four
container manufacturers located in Korea and India. The average age and
manufacturers' invoice cost of the containers in the Registrant's fleet as of
December 31, 1997 were as follows:

<TABLE>
<CAPTION>
                                         Estimated
                                        Useful Life     Average Age    Average Cost
                                        -----------     -----------    ------------
        <S>                             <C>               <C>            <C>
        20-Foot Dry Cargo Containers    10-15 years       9 years        $2,234
        40-Foot Dry Cargo Containers    10-15 years      10 years        $2,764
</TABLE>

   Utilization by lessees of the Registrant's containers fluctuates over time
depending on the supply of and demand for containers in the Registrant's
inventory locations. During 1997, utilization of the Registrant's containers
averaged 78%.

   During 1997, the Registrant disposed of 66 twenty-foot and 101 forty-foot
marine dry cargo containers at an average book gain of $410 per container.


Item 3. Legal Proceedings

   As reported in the Registrant's Current Report on Form 8-K and Amendment No.
1 to Current Report on Form 8-K, filed with the Commission on February 7, 1997
and February 26, 1997, respectively, Arthur Andersen, London, England, resigned
as auditors of The Cronos Group, a Luxembourg Corporation headquartered in
Orchard Lea, England (the "Parent Company"), on February 3, 1997.

   The Parent Company is the indirect corporate parent of CCC, the Managing
General Partner of the Partnership. In its letter of resignation to the Parent
Company, Arthur Andersen stated that it resigned as auditors of the Parent
Company and all other entities affiliated with the Parent Company. While its
letter of resignation was not addressed to CCC, Arthur Andersen confirmed to CCC
that its resignation as auditors of the entities referred to in its letter of
resignation included its resignation as auditors of CCC and the Registrant.

   CCC does not believe, based upon the information currently available to it,
that Arthur Andersen's resignation was triggered by any concern over the
accounting policies and procedures followed by the Registrant.

   Arthur Andersen's report on the financial statements of CCC and the
Registrant, for years preceding 1996, has not contained an adverse opinion or a
disclaimer of opinion, nor was any such report qualified or modified as to
uncertainty, audit scope, or accounting principles.

   During the Registrant's 1995 fiscal year and the subsequent interim period
preceding Arthur Andersen's resignation, there have been no disagreements
between CCC or the Registrant and Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.

   The Registrant retained a new auditor, Moore Stephens, P.C. on April 10,
1997, as reported in its Current Report on Form 8-K, filed April 14, 1997.

   In connection with its resignation, Arthur Andersen also prepared a report
pursuant to the provisions of Section 10A(b)(2) of the Securities Exchange Act
of 1934, as amended, for filing by the Parent Company with the Securities and
Exchange Commission (the "SEC"). Following the report of Arthur Andersen, the
SEC, on February 10, 1997, commenced a private investigation of the Parent
Company for the purpose of investigating the matters discussed in such report
and related matters. The Registrant does not believe that the focus of the SEC's
investigation is upon the Registrant or CCC. CCC is unable to predict the
outcome of the SEC's ongoing private investigation of the Parent Company.



                                       10
<PAGE>   11




   In 1993, the Parent Company negotiated a credit facility (hereinafter, the
"Credit Facility") with several banks for the use of the Parent Company and its
affiliates, including CCC. At December 31, 1996, approximately $73,500,000 in
principal indebtedness was outstanding under the Credit Facility. As a party to
the Credit Facility, CCC is jointly and severally liable for the repayment of
all principal and interest owed under the Credit Facility. The obligations of
CCC, and the five other subsidiaries of the Parent Company that are borrowers
under the Credit Facility, are guaranteed by the Parent Company.

   Following negotiations in 1997 with the banks providing the Credit Facility,
an Amended and Restated Credit Agreement was executed in June 1997, subject to
various actions being taken by the Parent Company and its subsidiaries,
primarily relating to the provision of additional collateral. This Agreement was
further amended in July 1997 and the provisions of the Agreement and its
Amendment converted the facility to a term loan, payable in installments, with a
final maturity date of May 31, 1998. At December 31, 1997, approximately
$37,600,000 was outstanding under the Credit Facility.

   The terms of the Agreement and its Amendment also provide for additional
security over shares in the subsidiary of the Parent Company that owns the head
office of the Parent Company's container leasing operations. They also provided
for the loans to Stefan M. Palatin, the Chairman of the Parent Company (the
"Chairman") and its Chief Executive Officer (and a Director of CCC), of
approximately $5,990,000 and $3,700,000 (totaling approximately $9,690,000) to
be restructured as obligations of the Chairman to another subsidiary of the
Parent Company. These obligations have been collaterally assigned to the lending
banks, together with the pledge of 1,000,000 shares of the Parent Company's
Common Stock owned by the Chairman. These 1,000,000 shares represent 11% of the
issued and outstanding shares of Common Stock of the Parent Company as of
December 31, 1997. The shares of the Parent Company are traded on NASDAQ
(CRNSF). (The Chairman, including the 1,000,000 shares pledged to the banks,
owns approximately 55% of the issued and outstanding shares of Common Stock of
the Parent Company as of December 31, 1997). Additionally, CCC granted the
lending banks a security interest in the fees to which it is entitled for the
services it renders to the container leasing partnerships of which it acts as
general partner, including its fee income payable by the Partnership.

   The lending banks have indicated that they will not renew the Credit
Facility, and the Parent Company has yet to secure a source for repayment of the
balance due under the Credit Facility at May 31, 1998. CCC is currently in
discussions with the management of the Parent Company to provide assurance that
the management of the container leasing partnerships managed by CCC, including
the Registrant, is not disrupted pending a refinancing or reorganization of the
indebtedness of the Parent Company and its affiliates.

   The Registrant is not a borrower under the Credit Facility, and neither the
containers nor the other assets of the Registrant have been pledged as
collateral under the Credit Facility.

   The Registrant is unable to determine the impact, if any, these concerns may
have on the future operating results and financial condition of the Registrant
or CCC and the Leasing Company's ability to manage the Registrant's fleet in
subsequent periods.


Item 4. Submission of Matters to a Vote of Security Holders

   Inapplicable.



                                       11
<PAGE>   12



                                     PART II


Item 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters

   (a)  Market Information

   (a)(1)(i) The Registrant's outstanding units of limited partnership interests
are not traded on any market nor does an established public trading market exist
for such purposes.

   (a)(1)(ii) Inapplicable.

   (a)(1)(iii) Inapplicable.

   (a)(1)(iv) Inapplicable.

   (a)(1)(v) Inapplicable.

   (a)(2) Inapplicable.

   (b)  Holders

<TABLE>
<CAPTION>
                                              Number of Unit Holders
   (b)(1) Title of Class                      as of December 31, 1997
          --------------                      -----------------------
          <S>                                         <C>
          Units of limited partnership
            interests                                 546
</TABLE>

   (c)  Dividends

   Inapplicable. For the distributions made by the Registrant to its limited
partners, see Item 6 below, "Selected Financial Data."









                                       12
<PAGE>   13



Item 6. Selected Financial Data

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                       ----------------------------------------------------------------------
                                          1997           1996           1995           1994           1993
                                          ----           ----           ----           ----           ----
<S>                                    <C>            <C>            <C>            <C>            <C>
   Net lease revenue                   $  476,181     $  619,504     $  864,468     $  870,781     $1,059,690
   Net earnings                        $  273,177     $  408,537     $  611,498     $  618,243     $  772,199
   Net earnings per unit of
      limited partnership interest     $    20.69     $    34.05     $    55.42     $    55.49     $    71.48

   Cash distributions per unit of
      limited partnership interest     $    73.13     $    84.06     $    88.75     $    97.50     $   121.25
   At year-end:
   Total assets                        $2,226,210     $2,709,813     $3,171,248     $3,478,236     $3,869,643
   Partners' capital                   $2,226,210     $2,709,813     $3,171,248     $3,478,236     $3,861,242
</TABLE>

----------------------


Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Liquidity and Capital Resources

   The Registrant's primary objective is to generate cash from operations for
distribution to its limited partners. Aside from the initial working capital
reserve retained from gross subscription proceeds (equal to approximately 1.1%
of such proceeds), the Registrant relies primarily on container rental receipts
to meet this objective as well as to finance current operating needs. No credit
lines are maintained to finance working capital.

   At December 31, 1997, the Registrant had $347,836 in cash and cash
equivalents, an increase of $16,669 and a decrease of $35,869 from December 31,
1996 and 1995.

   The Registrant's allowance for doubtful accounts declined from $87,523 at
December 31, 1996 to $22,298 at December 31, 1997. This decrease was a direct
result of the Leasing Company's decision, after exhausting all other
alternatives, to write-off $87,714 of outstanding receivable balances that were
mostly reserved for in prior years and considered to be uncollectable.

   Having just completed the 11th year of operations, the Registrant will
continue to focus its attention on the disposition of its fleet in accordance
with another of its original investment objectives, realizing the residual value
of its containers after the expiration of their economic useful lives, estimated
to be 10 to 15 years. During this period, cash proceeds from equipment
disposals, in addition to cash from operations, will provide the cash flow for
distributions to limited partners. The decision to dispose of containers is
influenced by various factors including age, conditions, suitability for
continued leasing, as well as the geographical location when disposed.

   Cash distributions from operations were originally allocated 5% to the
general partners and 95% to the limited partners. Distributions of sales
proceeds are allocated 100% to the limited partners. In 1991, pursuant to
Section 6.1(c) of the Partnership Agreement, the allocations of distributions
from operations among the general partners and limited partners were adjusted to
9% and 91%, respectively. The allocation of distributions of cash from sales
proceeds among the general partners and limited partners remained unchanged.
This sharing arrangement remained in place until the second quarter of 1994, at
which time the limited partners received from the Registrant aggregate
distributions in an amount equal to their adjusted capital contributions plus an
8% cumulative, annual return on their adjusted capital contributions.
Thereafter, all distributions have been allocated 19% to the general partners
and 81% to the limited partners, pursuant to Sections 6.1(b) and (c) of the
Partnership Agreement. Cash distributions from operations to the general
partners in excess of 9% of distributable cash are considered to be an incentive
fee and is compensation to the general partners.



                                       13
<PAGE>   14




   From inception through February 28, 1998, the Registrant has distributed
$8,759,693 in cash from operations and $596,690 in cash from sales proceeds to
its limited partners. This represents total distributions of $9,356,383, or 201%
of the Registrant's original limited partners' investment. Distributions to the
partners are determined and paid quarterly, based primarily on each quarter's
cash flow from operations and cash generated from container sales. Quarterly
distributions are also affected by periodic increases or decreases to working
capital reserves, as deemed appropriate by the managing general partner. The
Registrant's disposal activity should produce lower operating results and
consequently, lower distributions from operations to its partners in subsequent
periods. Cash generated from sales proceeds totaled $240,885, $158,098 and
$83,238 for the years ended December 31, 1997, 1996 and 1995, respectively.
Sales proceeds distributed to its partners may fluctuate in subsequent periods,
reflecting the level of container disposals.

   Market conditions that existed during 1996 persisted throughout 1997. Low
container prices, favorable interest rates and the abundance of available
capital continued to discourage ocean carriers and other transport companies
from leasing containers at levels comparable to previous years. During the first
half of 1997, increasing cargo volumes and continuing equipment imbalances
within the container fleets of shipping lines and transport companies
contributed to a modest recovery in utilization rates. However, by the end of
1997, the volatility of the Hong Kong and other Asian financial markets began to
negatively impact trade, shipping and container leasing. Per-diem rental rates
continued to remain under pressure as a result of the following factors:
start-up leasing companies offering new containers and low rental rates in an
effort to break into the leasing market; established leasing companies reducing
rates to very low levels; and a continuing oversupply of containers. These
leasing market conditions, as well as the Registrant's effort to dispose of its
fleet, may impact the Registrant's financial condition and operating performance
during 1998. Additionally, see the discussion regarding The Cronos Group under
Item 7., Management Discussion and Analysis of Financial Condition and Results
of Operations hereof.

Results of Operations

1997 - 1996

   During 1997, the container leasing industry continued to experience a decline
in the demand for its containers, as conditions existing since 1996 continued to
adversely impact world trade, shipping and container leasing. These conditions
include, but are not limited to, declining container prices, favorable interest
rates and an abundance of capital which resulted in ocean carriers and transport
companies purchasing a larger share of containers for their own account. The
addition of new, larger container ships also contributed to the growth in
container ship capacity. As capacity exceeded the growth rate of world
containerized trade, ocean carriers attempted to reduce operating costs, further
reducing the demand for leased containers.

   As the leasing industry's equipment remained in surplus, ocean carriers and
transport companies continued to be selective about the age and condition of
containers taken on-hire. Many have adopted a policy of only leasing containers
of a certain age or less. It has been the Registrant's experience that in
periods of weak demand, many lessees insist on equipment three to five years of
age. Such criteria currently serves as a barrier to older equipment being taken
on-hire, including those within the Registrant's fleet and contributed to the
decline in the Registrant's results of operations. The primary component of the
Registrant's results of operations is net lease revenue. Net lease revenue is
determined by deducting direct operating expenses, management fees and
reimbursed administrative expenses, from rental revenues billed by the Leasing
Company from the leasing of the Registrant's containers. Net lease revenue is
directly related to the size, utilization and per-diem rental rates of the
Registrant's fleet. Accordingly, net lease revenue declined by approximately 23%
when compared to 1996. The Registrant expects net lease revenue to decline in
subsequent periods as current leasing market conditions continue and it
continues the disposal of its fleet.

   Despite the aforementioned market conditions, the Registrant's utilization
rates averaged 78% during 1997, consistent with the prior year, a direct result
of the Registrant's policy to dispose of its off-hire containers. The
Registrant's average fleet size (as measured in twenty-foot equivalent units
("TEU")) was 2,710 TEU as compared to 2,916 TEU in 1996. This decline, combined
with a 13% reduction in average per-diem rental rates, contributed to a 20%
decline in gross rental revenue (a component of net lease revenue).



                                       14
<PAGE>   15




   At December 31, 1997, 81% of the original equipment remained in the
Registrant's fleet, and was comprised of the following:

<TABLE>
<CAPTION>
                                               20-Foot         40-Foot
                                               -------         -------
      <S>                                        <C>             <C>
      Containers on lease:
         Term leases                              66              94
         Master lease                            611             618
                                                 ---             ---
             Subtotal                            677             712
      Containers off lease                       164             148
                                                 ---             ---
         Total container fleet                   841             860
                                                 ===             ===
</TABLE>

<TABLE>
<CAPTION>
                                                20-Foot         40-Foot
                                             ------------     ------------
                                             Units     %      Units     %
                                             -----    ---     -----    ---
      <S>                                    <C>      <C>     <C>      <C>
      Total purchases                        1,001    100%    1,104    100%
         Less disposals                        160     16%      244     22%
                                             -----    ---     -----    ---
      Remaining fleet at December 31, 1997     841     84%      860     78%
                                             =====    ===     =====    ===
</TABLE>


   Rental equipment operating expenses, when measured as a percentage of rental
revenue, were approximately 27% during 1997, unchanged from the prior year.

   Other general and administrative expenses increased $13,441, or approximately
73% during 1997. Contributing to this change was an increase of approximately
$4,777 associated with the cost of the Registrant's annual audit, as well as an
increase of approximately $12,000 associated with the cost of preparing and
processing the Registrant's regulatory filings.

   The Registrant's aging and declining fleet size contributed to a 7% decline
in depreciation expense during 1997. Base management fees, dependent on the
operating performance of the fleet, declined $14,152, or approximately 18%
during 1997. Incentive fees, which are also based on the operating performance
of the fleet as well as sales proceeds, decreased $6,109, or approximately 7%,
during 1997.

   The Registrant disposed of 66 twenty-foot and 101 forty-foot marine dry cargo
containers during 1997, as compared to 40 twenty-foot and 68 forty-foot marine
dry cargo containers during 1996. As a result, approximately 25% of the
Registrant's net earnings for 1997 were from gain on disposal of equipment, as
compared to 15% for 1996. The decision to repair or dispose of a container is
made when it is returned by a lessee. This decision is influenced by various
factors including the age, condition, suitability for continued leasing as well
as the geographical location of the container when disposed. These factors also
influence the amount of sales proceeds received and the related gain on
container disposals.

1996 - 1995

   The primary component of the Registrant's results of operations is net lease
revenue. Net lease revenue is determined by deducting direct operating expenses,
management fees and reimbursed administrative expenses, from rental revenues
billed by the Leasing Company from the leasing of the Registrant's containers
and is directly related to the size, utilization and per-diem rental rates of
the Registrant's fleet. Accordingly, net lease revenue declined by approximately
28%, when compared to 1995.

   The Registrant's utilization rate averaged 78% during 1996, as compared to
87% in the prior year, while the Registrant's average fleet size (as measured in
twenty-foot equivalent units ("TEU")) declined from 3,042 TEU in 1995, to 2,916
TEU in 1996. These declines, combined with a 4% reduction in average per-diem
rental rates, contributed to a 20% decline in gross rental revenue.



                                       15
<PAGE>   16




   At December 31, 1996, 89% of the original equipment remained in the
Registrant's fleet, and was comprised of the following:

<TABLE>
<CAPTION>
                                               20-Foot         40-Foot
                                                 ---             ---
      <S>                                        <C>             <C>
      Containers on lease:
         Term leases                              62             114
         Master lease                            604             590
                                                 ---             ---
             Subtotal                            666             704
      Containers off lease                       241             257
                                                 ---             ---
         Total container fleet                   907             961
                                                 ===             ===
</TABLE>

<TABLE>
<CAPTION>
                                                20-Foot         40-Foot
                                             ------------     -------------
                                             Units     %      Units      %
                                             -----    ---     -----     ---
      <S>                                    <C>      <C>     <C>       <C>
      Total purchases                        1,001    100%    1,104     100%
         Less disposals                         94      9%      143      13%
                                             -----    ---     -----     ---
      Remaining fleet at December 31, 1996     907     91%      961      87%
                                             =====    ===     =====     ===
</TABLE>


   Rental equipment operating expenses, when measured as a percentage of rental
revenue, were approximately 27% during 1996, as compared to 21% during 1995.
This increase was a result of higher storage and handling costs associated with
lower equipment utilization, as well as an increase in repositioning costs.

   The Registrant's declining fleet size contributed to a 3% decline in
depreciation expense during 1996. Base management fees declined by $19,796, or
approximately 20% during 1996. Incentive fees decreased $18,326, or
approximately 17% during 1996.

   The Registrant disposed of 40 twenty-foot and 68 forty-foot marine dry cargo
containers during 1996, as compared to 20 twenty-foot and 30 forty-foot marine
dry cargo containers during 1995. As a result, approximately 15% of the
Registrant's net earnings for 1996 were from gain on disposal of equipment, as
compared to 6% for 1995. The decision to repair or dispose of a container is
made when it is returned by a lessee. This decision is influenced by various
factors including the age, condition, suitability for continued leasing as well
as the geographical location of the container when disposed. These factors also
influence the amount of sales proceeds received and the related gain on
container disposals.

The Cronos Group

   As reported in the Registrant's Current Report on Form 8-K and Amendment No.
1 to Current Report on Form 8-K, filed with the Commission on February 7, 1997
and February 26, 1997, respectively, Arthur Andersen, London, England, resigned
as auditors of The Cronos Group, a Luxembourg Corporation headquartered in
Orchard Lea, England (the "Parent Company"), on February 3, 1997.

   The Parent Company is the indirect corporate parent of CCC, the General
Partner of the Partnership. In its letter of resignation to the Parent Company,
Arthur Andersen stated that it resigned as auditors of the Parent Company and
all other entities affiliated with the Parent Company. While its letter of
resignation was not addressed to CCC, Arthur Andersen confirmed to CCC that its
resignation as auditors of the entities referred to in its letter of resignation
included its resignation as auditors of CCC and the Registrant.

   CCC does not believe, based upon the information currently available to it,
that Arthur Andersen's resignation was triggered by any concern over the
accounting policies and procedures followed by the Registrant.




                                       16
<PAGE>   17




   Arthur Andersen's report on the financial statements of CCC and the
Registrant, for years preceding 1996, has not contained an adverse opinion or a
disclaimer of opinion, nor was any such report qualified or modified as to
uncertainty, audit scope, or accounting principles.

   During the Registrant's 1995 fiscal year and the subsequent interim period
preceding Arthur Andersen's resignation, there have been no disagreements
between CCC or the Registrant and Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.

   The Registrant retained a new auditor, Moore Stephens, P.C. on April 10,
1997, as reported in its Current Report on Form 8-K, filed April 14, 1997.

   In connection with its resignation, Arthur Andersen also prepared a report
pursuant to the provisions of Section 10A(b)(2) of the Securities Exchange Act
of 1934, as amended, for filing by the Parent Company with the Securities and
Exchange Commission (the "SEC"). Following the report of Arthur Andersen, the
SEC, on February 10, 1997, commenced a private investigation of the Parent
Company for the purpose of investigating the matters discussed in such report
and related matters. The Registrant does not believe that the focus of the SEC's
investigation is upon the Registrant or CCC. CCC is unable to predict the
outcome of the SEC's ongoing private investigation of the Parent Company.

   In 1993, the Parent Company negotiated a credit facility (hereinafter, the
"Credit Facility") with several banks for the use of the Parent Company and its
affiliates, including CCC. At December 31, 1996, approximately $73,500,000 in
principal indebtedness was outstanding under the Credit Facility. As a party to
the Credit Facility, CCC is jointly and severally liable for the repayment of
all principal and interest owed under the Credit Facility. The obligations of
CCC, and the five other subsidiaries of the Parent Company that are borrowers
under the Credit Facility, are guaranteed by the Parent Company.

   Following negotiations in 1997 with the banks providing the Credit Facility,
an Amended and Restated Credit Agreement was executed in June 1997, subject to
various actions being taken by the Parent Company and its subsidiaries,
primarily relating to the provision of additional collateral. This Agreement was
further amended in July 1997 and the provisions of the Agreement and its
Amendment converted the facility to a term loan, payable in installments, with a
final maturity date of May 31, 1998. At December 31, 1997, approximately
$37,600,000 was outstanding under the Credit Facility.

   The terms of the Agreement and its Amendment also provide for additional
security over shares in the subsidiary of the Parent Company that owns the head
office of the Parent Company's container leasing operations. They also provided
for the loans to Stefan M. Palatin, the Chairman of the Parent Company (the
"Chairman") and its Chief Executive Officer (and a Director of CCC), of
approximately $5,990,000 and $3,700,000 (totaling approximately $9,690,000) to
be restructured as obligations of the Chairman to another subsidiary of the
Parent Company. These obligations have been collaterally assigned to the lending
banks, together with the pledge of 1,000,000 shares of the Parent Company's
Common Stock owned by the Chairman. These 1,000,000 shares represent 11% of the
issued and outstanding shares of Common Stock of the Parent Company as of
December 31, 1997. The shares of the Parent Company are traded on NASDAQ
(CRNSF). (The Chairman, including the 1,000,000 shares pledged to the banks,
owns approximately 55% of the issued and outstanding shares of Common Stock of
the Parent Company as of December 31, 1997). Additionally, CCC granted the
lending banks a security interest in the fees to which it is entitled for the
services it renders to the container leasing partnerships of which it acts as
general partner, including its fee income payable by the Partnership.

   The lending banks have indicated that they will not renew the Credit
Facility, and the Parent Company has yet to secure a source for repayment of the
balance due under the Credit Facility at May 31, 1998. CCC is currently in
discussions with the management of the Parent Company to provide assurance that
the management of the container leasing partnerships managed by CCC, including
the Registrant, is not disrupted pending a refinancing or reorganization of the
indebtedness of the Parent Company and its affiliates.

   The Registrant is not a borrower under the Credit Facility, and neither the
containers nor the other assets of the Registrant have been pledged as
collateral under the Credit Facility.




                                       17
<PAGE>   18




   The Registrant is unable to determine the impact, if any, these concerns may
have on the future operating results and financial condition of the Registrant
or CCC and the Leasing Company's ability to manage the Registrant's fleet in
subsequent periods.

Year 2000

   The Registrant relies upon the financial and operational systems provided by
the Leasing Company and its affiliates, as well as the systems provided by other
independent third parties to service the three primary areas of its business:
investor processing/maintenance; container leasing/asset tracking; and
accounting finance. The Registrant has received confirmation from its
third-party investor processing/maintenance vendor that their system is Year
2000 compliant. The Registrant does not expect a material increase in its vendor
servicing fee to reimburse Year 2000 costs. Container leasing/asset tracking and
accounting/finance services are provided to the Registrant by CCC and its
affiliate, Cronos Containers Limited (the "Leasing Company"), pursuant to the
respective Limited Partnership Agreement and Leasing Agent Agreement. In 1998,
CCC and the Leasing Company will initiate a program to prepare their systems and
applications for the Year 2000. Preliminary studies indicate that testing,
conversion and upgrading of system applications is expected to cost CCC and the
Leasing Company less than $500,000. The Registrant may reimburse CCC and the
Leasing Company for certain data processing expenses as outlined in the Limited
Partnership Agreement. The Registrant's reimbursement of data processing costs
associated with Year 2000 compliance are not expected to be material. The
financial impact of making these required system changes is not expected to be
material to the Registrant's financial position, results of operations or cash
flows.

Cautionary Statement

   This Annual Report on Form 10-K contains statements relating to future
results of the Registrant, including certain projections and business trends,
that are "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not
limited to changes in: economic conditions; trade policies; demand for and
market acceptance of leased marine cargo containers; competitive utilization and
per-diem rental rate pressures; as well as other risks and uncertainties,
including but not limited to those described above in the discussion of the
marine container leasing business under Item 7., Management's Discussion and
Analysis of Financial Condition and Results of Operations; and those detailed
from time to time in the filings of the Registrant with the Securities and
Exchange Commission.

Item 8. Financial Statements and Supplementary Data



                                       18
<PAGE>   19





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


The Partners
IEA Income Fund VII,
A California Limited Partnership:

We have audited the accompanying balance sheets of IEA Income Fund VII, A
California Limited Partnership, as of December 31, 1997 and 1996, and the
related statements of operations, partners' capital, and cash flows for the
years then ended. 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 IEA Income Fund VII, A
California Limited Partnership, as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.

As further discussed in Note 10 to the financial statements, The Cronos Group,
which is the indirect corporate parent of Cronos Capital Corp., the general
partner of the Partnership, is subject to an investigation, commenced on
February 10, 1997, by the United States Securities and Exchange Commission.
Furthermore, Cronos Capital Corp. and five other subsidiaries of The Cronos
Group are borrowers under a credit facility with several banks. The credit
facility is guaranteed by The Cronos Group and the entire loan balance is due on
May 31, 1998. The lending banks have indicated that they will not renew the
credit facility, and as of the date of our report, The Cronos Group has yet to
secure a source for repayment of the balance due.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
Schedule 1, for the years ended December 31, 1997 and 1996, is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.

                                       Moore Stephens, P.C.
                                       Certified Public Accountants

New York, New York
February 20, 1998



                                       19
<PAGE>   20





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



The Partners
IEA Income Fund VII,
A California Limited Partnership:


We have audited the accompanying statement of operations of IEA Income Fund VII,
A California Limited Partnership as of December 31, 1995, and the related
statements of partners' capital and cash flows for the year ended December 31,
1995. 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 results of operations of IEA Income Fund VII, A
California Limited Partnership as of December 31, 1995, and its cash flows for
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
Schedule 1 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.

                                       Arthur Andersen LLP


San Francisco, California,
March 15, 1996



                                       20
<PAGE>   21




                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
               Assets                                                   1997           1996
               ------                                                   ----           ----
<S>                                                                  <C>            <C>
Current assets:
   Cash and cash equivalents, includes $347,636 in 1997
      and $330,894 in 1996 in interest-bearing accounts (note 2)     $  347,836     $  331,167
   Net lease receivables due from Leasing Company
      (notes 1 and 3)                                                    56,777        126,589
                                                                     ----------     ----------

         Total current assets                                           404,613        457,756
                                                                     ----------     ----------

Container rental equipment, at cost                                   4,256,153      4,666,319
   Less accumulated depreciation                                      2,434,556      2,414,262
                                                                     ----------     ----------
      Net container rental equipment                                  1,821,597      2,252,057
                                                                     ----------     ----------

                                                                     $2,226,210     $2,709,813
                                                                     ==========     ==========
          Partners' Capital

Partners' capital:
   General partners                                                  $   14,143     $    9,390
   Limited partners (note 7)                                          2,212,067      2,700,423
                                                                     ----------     ----------

         Total partners' capital                                      2,226,210      2,709,813
                                                                     ----------     ----------

                                                                     $2,226,210     $2,709,813
                                                                     ==========     ==========

</TABLE>





   The accompanying notes are an integral part of these financial statements.



                                       21
<PAGE>   22



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>
                                                       1997         1996         1995
                                                       ----         ----         ----
<S>                                                  <C>          <C>          <C>
Net lease revenue (notes 1 and 5)                    $476,181     $619,504     $864,468

Other operating expenses:
   Depreciation (note 1)                              253,090      271,902      281,452
   Other general and administrative expenses           31,840       18,399       25,402
                                                     --------     --------     --------
                                                      284,930      290,301      306,854
                                                     --------     --------     --------

         Earnings from operations                     191,251      329,203      557,614

Other income:
   Interest income                                     13,435       16,518       18,482
   Net gain on disposal of equipment                   68,491       62,816       35,402
                                                     --------     --------     --------
                                                       81,926       79,334       53,884
                                                     --------     --------     --------

         Net earnings                                $273,177     $408,537     $611,498
                                                     ========     ========     ========

Allocation of net earnings:

   General partners                                  $ 80,432     $ 91,361     $ 95,347
   Limited partners                                   192,745      317,176      516,151
                                                     --------     --------     --------

                                                     $273,177     $408,537     $611,498
                                                     ========     ========     ========

Limited partners' per unit share of net earnings     $  20.69     $  34.05     $  55.42
                                                     ========     ========     ========
</TABLE>





   The accompanying notes are an integral part of these financial statements.




                                       22
<PAGE>   23



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                         STATEMENTS OF PARTNERS' CAPITAL

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>
                                   Limited
                                   Partners         General
                                   (Note 7)         Partners           Total
                                  -----------      -----------      -----------
<S>                               <C>              <C>              <C>
Balances at December 31, 1994     $ 3,476,708      $     1,528      $ 3,478,236

Net earnings                          516,151           95,347          611,498

Cash distributions                   (826,636)         (91,850)        (918,486)
                                  -----------      -----------      -----------

Balances at December 31, 1995       3,166,223            5,025        3,171,248

Net earnings                          317,176           91,361          408,537

Cash distributions                   (782,976)         (86,996)        (869,972)
                                  -----------      -----------      -----------

Balances at December 31, 1996       2,700,423            9,390        2,709,813

Net earnings                          192,745           80,432          273,177

Cash distributions                   (681,101)         (75,679)        (756,780)
                                  -----------      -----------      -----------

Balances at December 31, 1997     $ 2,212,067      $    14,143      $ 2,226,210
                                  ===========      ===========      ===========
</TABLE>





   The accompanying notes are an integral part of these financial statements.



                                       23
<PAGE>   24



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>
                                                           1997           1996           1995
                                                           ----           ----           ----
<S>                                                      <C>            <C>            <C>
Cash flows from operating activities:
   Net earnings                                          $ 273,177      $ 408,537      $ 611,498
   Adjustments to reconcile net earnings to net cash
      provided by (used in) operating activities:
         Depreciation                                      253,090        271,902        281,452
         Net gain on disposal of equipment                 (68,491)       (62,816)       (35,402)
         Decrease in net lease receivables due from
           Leasing Company                                  74,788         41,713         66,260
                                                         ---------      ---------      ---------

           Total adjustments                               259,387        250,799        312,310
                                                         ---------      ---------      ---------

           Net cash provided by operating activities       532,564        659,336        923,808
                                                         ---------      ---------      ---------

Cash flows from (used in) investing activities:
   Proceeds from disposal of equipment                     240,885        158,098         83,238
                                                         ---------      ---------      ---------

Cash flows used in financing activities:
   Distributions to partners                              (756,780)      (869,972)      (918,486)
                                                         ---------      ---------      ---------

Net increase (decrease) in cash and cash equivalents        16,669        (52,538)        88,560

Cash and cash equivalents at beginning of year             331,167        383,705        295,145
                                                         ---------      ---------      ---------

Cash and cash equivalents at end of year                 $ 347,836      $ 331,167      $ 383,705
                                                         =========      =========      =========
</TABLE>






   The accompanying notes are an integral part of these financial statements.


                                       24
<PAGE>   25



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                        DECEMBER 31, 1997, 1996 AND 1995


(1)  Summary of Significant Accounting Policies


     (a) Nature of Operations

         IEA Income Fund VII, A California Limited Partnership (the
         "Partnership") was organized under the laws of the State of California
         on June 27, 1985 for the purpose of owning and leasing marine cargo
         containers. The managing general partner is Cronos Capital Corp.
         ("CCC"); the associate general partners include seven individuals, one
         is an officer of CCC. CCC, with its affiliate Cronos Containers Limited
         (the "Leasing Company"), manages the business of the Partnership. The
         Partnership shall continue until December 31, 2007, unless sooner
         terminated upon the occurrence of certain events.

         The Partnership commenced operations on February 2, 1987, when the
         minimum subscription proceeds of $1,000,000 were obtained. The
         Partnership offered 40,000 units of limited partnership interest at
         $500 per unit, or $20,000,000. The offering terminated on August 31,
         1987, at which time 9,314 limited partnership units had been purchased.

         As of December 31, 1997, the Partnership owned and operated 841
         twenty-foot and 860 forty-foot marine dry cargo containers.


     (b) Leasing Company and Leasing Agent Agreement

         Pursuant to the Limited Partnership Agreement of the Partnership, all
         authority to administer the business of the Partnership is vested in
         CCC. CCC has entered into a Leasing Agent Agreement whereby the Leasing
         Company has the responsibility to manage the leasing operations of all
         equipment owned by the Partnership. Pursuant to the Agreement, the
         Leasing Company is responsible for leasing, managing and re-leasing the
         Partnership's containers to ocean carriers and has full discretion over
         which ocean carriers and suppliers of goods and services it may deal
         with. The Leasing Agent Agreement permits the Leasing Company to use
         the containers owned by the Partnership, together with other containers
         owned or managed by the Leasing Company and its affiliates, as part of
         a single fleet operated without regard to ownership. Since the Leasing
         Agent Agreement meets the definition of an operating lease in Statement
         of Financial Accounting Standards (SFAS) No. 13, it is accounted for as
         a lease under which the Partnership is lessor and the Leasing Company
         is lessee.

         The Leasing Agent Agreement generally provides that the Leasing Company
         will make payments to the Partnership based upon rentals collected from
         ocean carriers after deducting direct operating expenses and management
         fees to CCC. The Leasing Company leases containers to ocean carriers,
         generally under operating leases which are either master leases or term
         leases (mostly one to five years). Master leases do not specify the
         exact number of containers to be leased or the term that each container
         will remain on hire but allow the ocean carrier to pick up and drop off
         containers at various locations; rentals are based upon the number of
         containers used and the applicable per-diem rate. Accordingly, rentals
         under master leases are all variable and contingent upon the number of
         containers used. Most containers are leased to ocean carriers under
         master leases; leasing agreements with fixed payment terms are not
         material to the financial statements. Since there are no material
         minimum lease rentals, no disclosure of minimum lease rentals is
         provided in these financial statements.

         See footnote 10 for further discussion regarding CCC and the Leasing
         Company.



                                       25
<PAGE>   26



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


     (c) Concentrations of Credit Risk

         The Partnership's financial instruments that are exposed to
         concentrations of credit risk consist primarily of cash, cash
         equivalents and net lease receivables due from the Leasing Company. See
         note 2 for further discussion regarding the credit risk associated with
         cash and cash equivalents.

         Net lease receivables due from the Leasing Company (see notes 1(b) and
         3 for discussion regarding net lease receivables) subject the
         Partnership to a significant concentration of credit risk. These net
         lease receivables, representing rentals collected from ocean carriers
         after deducting direct operating expenses and management fees to CCC
         and the Leasing Company, are remitted by the Leasing Company to the
         Partnership three to four times per month. The Partnership has
         historically never incurred a loss associated with the collectability
         of unremitted net lease receivables due from the Leasing Company.
         However, CCC and the Partnership are unable to predict the outcome of
         the events discussed in note 10 and their potential impact on the
         credit risk associated with these net lease receivables.

     (d) Basis of Accounting

         The Partnership utilizes the accrual method of accounting. Net lease
         revenue is recorded by the Partnership in each period based upon its
         leasing agent agreement with the Leasing Company. Net lease revenue is
         generally dependent upon operating lease rentals from operating lease
         agreements between the Leasing Company and its various lessees, less
         direct operating expenses and management fees due in respect of the
         containers specified in each operating lease agreement.

         The preparation of financial statements in conformity with generally
         accepted accounting principles (GAAP) requires the Partnership 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.


     (e) Allocation of Net Earnings and Partnership Distributions

         Net earnings have been allocated between general and limited partners
         in accordance with the Partnership Agreement.

         Actual cash distributions differ from the allocations of net earnings
         between the general and limited partners as presented in these
         financial statements. Partnership distributions are based on
         "distributable cash" and are paid to the general and limited partners
         on a quarterly basis, in accordance with the provisions of the
         Partnership Agreement. Partnership distributions from operations are
         allocated 95% to the limited partners and 5% to the general partners.
         Sales proceeds are allocated 100% to the limited partners. However, if
         the amount of the limited partners' capital contributions invested in
         equipment exceeds the minimum percentage required by Section 3.5 of the
         Partnership Agreement, and the limited partners have received
         cumulative distributions equal to their capital contributions, the
         general partners' interest in distributions from operations will be
         increased by one percentage point for each 1% of the limited partners'
         capital contribution invested in equipment in excess of 80%.

         During 1992, this threshold was reached and, accordingly, distributions
         from distributable cash (allocated 91% to the limited partners and 9%
         to the general partners) were adjusted. These allocations will be
         maintained until such time as the limited partners have received from
         the Partnership aggregate distributions in an amount equal to their
         capital contributions plus an 8% cumulative, compounded (daily), annual
         return on their adjusted capital contributions. Thereafter, all
         Partnership distributions will be allocated 81% to the limited partners
         and 19% to the general partners.



                                       26
<PAGE>   27



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


     (f) Container Rental Equipment

         In March 1995, the Financial Accounting Standards Board issued SFAS No.
         121, "Accounting for the Impairment of Long-Lived Assets and for
         Long-Lived Assets to Be Disposed Of." The Statement requires that
         long-lived assets and certain identifiable intangibles to be held and
         used by an entity be reviewed for impairment whenever events or changes
         in circumstances indicate that the carrying amount of an asset may not
         be fully recoverable. The Partnership adopted SFAS No. 121 during 1996.
         Container rental equipment is considered to be impaired if the carrying
         value of the asset exceeds the expected future cash flows from related
         operations (undiscounted and without interest charges). If impairment
         is deemed to exist, the assets are written down to fair value.
         Depreciation policies are also evaluated to determine whether
         subsequent events and circumstances warrant revised estimates of useful
         lives. There were no reductions to the carrying value of container
         rental equipment during 1997 and 1996.

         Container rental equipment is depreciated over a twelve-year life on a
         straight line basis to its salvage value, estimated to be 30%.


     (g) Income Taxes

         The Partnership is not subject to income taxes, consequently no
         provision for income taxes has been made. The Partnership files an
         annual information tax return, prepared on the accrual basis of
         accounting.

     (h) Foreign Operations

         The Partnership's business is not divided between foreign or domestic
         operations. The Partnership's business is the leasing of containers
         worldwide to ocean-going steamship companies and does not fit the
         definition of reportable foreign operations within Financial Accounting
         Standards Board Statement No. 14 "Financial Reporting for Segments of a
         Business Enterprise." Any attempt to separate "foreign" operations from
         "domestic" operations would be dependent on definitions and assumptions
         that are so subjective as to render the information meaningless and
         potentially misleading.

     (i) New Pronouncements

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
         Statement of Financial Accounting Standards ("SFAS") No. 130,
         "Reporting Comprehensive Income". SFAS No. 130 establishes standards
         for reporting and display of comprehensive income and its components in
         the financial statements. SFAS No. 130 is effective for fiscal years
         beginning after December 15, 1997. Reclassification of financial
         statements for earlier periods for comparative purposes is required.
         The Partnership is in the process of determining its preferred format.
         The adoption of SFAS No. 130 will have no impact on the Partnership's
         results of operations, financial position or cash flows.

         The FASB issued SFAS No. 131, "Disclosures about Segments of an
         Enterprise and Related Information", in June 1997. SFAS No. 131
         establishes standards for the way that public business enterprises
         report information about operating segments in annual financial
         statements and requires that those enterprises report selected
         information about operating segments in interim financial reports
         issued to shareholders. It also establishes standards for related
         disclosures about products and services, geographic areas, and major
         customers. SFAS No. 131 is effective for financial statements for
         fiscal years beginning after December 15, 1997. Financial statement
         disclosures for prior years are required to be restated. The
         Partnership is in the process of evaluating the disclosure
         requirements. The adoption of SFAS No. 131 will have no impact on the
         Partnership's financial position, results of operations or cash flows.



                                       27
<PAGE>   28



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


     (j) Financial Statement Presentation

         The Partnership has determined that, for accounting purposes, the
         Leasing Agent Agreement is a lease, and the receivables, payables,
         gross revenues and operating expenses attributable to the containers
         managed by the Leasing Company are, for accounting purposes, those of
         the Leasing Company and not of the Partnership. Consequently, the
         Partnership's balance sheets and statements of operations display the
         payments to be received by the Partnership from the Leasing Company as
         the Partnership's receivables and revenues.

(2)  Cash and Cash Equivalents

     Cash equivalents include highly liquid investments with a maturity of three
     months or less on their acquisition date. Cash equivalents are carried at
     cost which approximates fair value. The Partnership maintains its cash and
     cash equivalents in accounts which, at times, may exceed federally insured
     limits. The Partnership has not experienced any losses in such accounts and
     believes it is not exposed to any significant credit risk. The Partnership
     places its cash equivalents in investment grade, short term debt
     instruments and limits the amount of credit exposure to any one commercial
     issuer.

(3)  Net Lease Receivables Due from Leasing Company

     Net lease receivables due from the Leasing Company are determined by
     deducting direct operating payables and accrued expenses, base management
     fees payable, reimbursed administrative expenses, and incentive fees
     payable to CCC and its affiliates from the rental billings payable by the
     Leasing Company to the Partnership under operating leases to ocean carriers
     for the containers owned by the Partnership. Net lease receivables at
     December 31, 1997 and December 31, 1996 were as follows:

<TABLE>
<CAPTION>
                                                         December 31,   December 31,
                                                             1997           1996
                                                           --------       --------
        <S>                                                <C>            <C>
        Lease receivables, net of  doubtful accounts
           of $22,298 in 1997 and $87,523 in 1996          $214,636       $287,953
        Less:
        Direct operating payables and accrued expenses       79,696         67,041
        Damage protection reserve (note 4)                   23,056         40,733
        Base management fees                                 28,980         26,630
        Reimbursed administrative expenses                    4,207          4,681
        Incentive fees                                       21,920         22,279
                                                           --------       --------
                                                           $ 56,777       $126,589
                                                           ========       ========
</TABLE>


(4)  Damage Protection Plan

     The Leasing Company offers a repair service to several lessees of the
     Partnership's containers, whereby the lessee pays an additional rental fee
     for the convenience of having the Partnership incur the repair expense for
     containers damaged while on lease. This fee is recorded as revenue when
     earned according to the terms of the rental contract. A reserve has been
     established to provide for the estimated costs incurred by this service.
     This reserve is a component of net lease receivables due from the Leasing
     Company (see note 3). The Partnership is not responsible in the event
     repair costs exceed predetermined limits, or for repairs that are required
     for damages not defined by the damage protection plan agreement.



                                       28
<PAGE>   29



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


(5)  Net Lease Revenue

     Net lease revenue is determined by deducting direct operating expenses,
     base management and incentive fees and reimbursed administrative expenses
     to CCC from the rental revenue billed by the Leasing Company under
     operating leases to ocean carriers for the containers owned by the
     Partnership. Net lease revenue for the years ended December 31, 1997, 1996
     and 1995, was as follows:

<TABLE>
<CAPTION>
                                                           1997           1996           1995
                                                           ----           ----           ----
        <S>                                             <C>            <C>            <C>
        Rental revenue (note 9)                         $  931,869     $1,170,639     $1,458,573
        Less:
        Rental equipment operating expenses                256,206        317,404        307,732
        Base management fees (note 6)                       64,513         78,665         98,461
        Reimbursed administrative expenses (note 6)         51,243         65,231         79,751
        Incentive fees (note 6)                             83,726         89,835        108,161
                                                        ----------     ----------     ----------
                                                        $  476,181     $  619,504     $  864,468
                                                        ==========     ==========     ==========
</TABLE>


(6)  Compensation to Managing General Partner

     Base management fees are equal to 7% of gross lease revenues attributable
     to operating leases pursuant to Section 4.3 of the Partnership Agreement.
     Reimbursed administrative expenses are equal to the costs expended by CCC
     and its affiliates for services necessary to the prudent operation of the
     Partnership pursuant to Section 4.4 of the Partnership Agreement. Incentive
     management fees are equal to 10% of cash distributions from operations and
     sales proceeds after the limited partners receive aggregate distributions
     in an amount equal to their adjusted capital contribution plus an 8%
     cumulative, compounded (daily), annual return on their adjusted capital
     contributions pursuant to Section 6.1 of the Partnership Agreement. The
     following compensation was paid or will be paid by the Partnership to CCC:

<TABLE>
<CAPTION>
                                                 1997         1996         1995
                                                 ----         ----         ----
        <S>                                    <C>          <C>          <C>
        Base management fees                   $ 64,513     $ 78,665     $ 98,461
        Reimbursed administrative expenses       51,243       65,231       79,751
        Incentive fees                           83,726       89,835      108,161
                                               --------     --------     --------
                                               $199,482     $233,731     $286,373
                                               ========     ========     ========
</TABLE>


(7)  Limited Partners' Capital

     Cash distributions made to the limited partners during 1997, 1996 and 1995
     included distributions of proceeds from equipment sales in the amount of
     $171,730, $122,249 and $46,571, respectively. These distributions, as well
     as cash distributions from operations, are used in determining "Adjusted
     Capital Contributions" as defined by the Partnership Agreement.

     The limited partners' per unit share of capital at December 31, 1997, 1996
     and 1995 was $237, $290 and $340 respectively. This is calculated by
     dividing the limited partners' capital at the end of the year by 9,314, the
     total number of limited partnership units.




                                       29
<PAGE>   30



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


(8)  Income Taxes

     The reconciliation of net earnings as reported in the statement of
     operations and as would be reported for federal tax purposes for the years
     ended December 31, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                                      1997           1996           1995
                                                                      ----           ----           ----
     <S>                                                            <C>            <C>            <C>
     Net earnings per statement of operations                       $ 273,177      $ 408,537      $ 611,498
     Depreciation for income tax purposes less than
        depreciation for financial statement purposes                 253,090        200,631         98,666
     Gain on disposition of assets for tax purposes in excess
        of gain on disposition for financial statement purposes       177,370        109,356         66,525
     Other expenses not deductible for tax purposes                    16,816         28,466         20,410
     Bad debt expense for tax purposes (in excess of) less than
         bad debt expense for financial statement purposes            (65,225)        (2,068)        14,770
                                                                    ---------      ---------      ---------

     Net earnings for federal tax purposes                          $ 655,228      $ 744,922      $ 811,869
                                                                    =========      =========      =========
</TABLE>

     At December 31, 1997, the tax basis of total partners' capital was
     $1,125,461.

(9)  Major Lessees

     No single lessee contributed more than 10% of the rental revenue earned
     during 1997, 1996 and 1995. The Partnership believes that the profitability
     of, and risks associated with, leases to foreign customers is generally the
     same as those of leases to domestic customers. The operating lease
     agreements generally require all payments to be made in United States
     currency. The Partnership's operations are subject to the fluctuations of
     worldwide economic and political conditions that may affect the pattern and
     levels of world trade.

(10) The Cronos Group

     As reported in the Partnership's Current Report on Form 8-K and Amendment
     No. 1 to Current Report on Form 8-K, filed with the Commission on February
     7, 1997 and February 26, 1997, respectively, Arthur Andersen, London,
     England, resigned as auditors of The Cronos Group (the "Parent Company") on
     February 3, 1997.

     The Parent Company is the indirect corporate parent of CCC, the General
     Partner of the Partnership. In its letter of resignation to The Parent
     Company, Arthur Andersen stated that it resigned as auditors of The Parent
     Company and all other entities affiliated with The Parent Company. While
     its letter of resignation was not addressed to CCC, Arthur Andersen
     confirmed to CCC that its resignation as auditors of the entities referred
     to in its letter of resignation included its resignation as auditors of CCC
     and the Partnership.

     CCC does not believe, based upon the information currently available to it,
     that Arthur Andersen's resignation was triggered by any concern over the
     accounting policies and procedures followed by the Partnership.

     Arthur Andersen's report on the financial statements of CCC and the
     Partnership, for years preceding 1996, has not contained an adverse opinion
     or a disclaimer of opinion, nor was any such report qualified or modified
     as to uncertainty, audit scope, or accounting principles.



                                       30
<PAGE>   31



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


(10) The Cronos Group - (Continued)

     During the Partnership's 1995 fiscal year and the subsequent interim period
     preceding Arthur Andersen's resignation, there have been no disagreements
     between CCC or the Partnership and Arthur Andersen on any matter of
     accounting principles or practices, financial statement disclosure, or
     auditing scope or procedure.

     The Partnership retained a new auditor, Moore Stephens, P.C., on April 10,
     1997, as reported in its current report on Form 8-K, filed April 14, 1997.

     In connection with its resignation, Arthur Andersen also prepared a report
     pursuant to the provisions of Section 10A(b)(2) of the Securities Exchange
     Act of 1934, as amended, for filing by the Parent Company with the
     Securities and Exchange Commission (the "SEC"). Following the report of
     Arthur Andersen, the SEC, on February 10, 1997, commenced a private
     investigation of the Parent Company for the purpose of investigating the
     matters discussed in such report and related matters. The Partnership does
     not believe that the focus of the SEC's investigation is upon the
     Partnership or CCC. CCC is unable to predict the outcome of the SEC's
     ongoing private investigation of the Parent Company.

     In 1993, the Parent Company negotiated a credit facility (hereinafter, the
     "Credit Facility") with several banks for the use of the Parent Company and
     its affiliates, including CCC. At December 31, 1996, approximately
     $73,500,000 in principal indebtedness was outstanding under the Credit
     Facility. As a party to the Credit Facility, CCC is jointly and severally
     liable for the repayment of all principal and interest owed under the
     Credit Facility. The obligations of CCC, and the five other subsidiaries of
     the Parent Company that are borrowers under the Credit Facility, are
     guaranteed by the Parent Company.

     Following negotiations in 1997 with the banks providing the Credit
     Facility, an Amended and Restated Credit Agreement was executed in June
     1997, subject to various actions being taken by the Parent Company and its
     subsidiaries, primarily relating to the provision of additional collateral.
     This Agreement was further amended in July 1997 and the provisions of the
     Agreement and its Amendment converted the facility to a term loan, payable
     in installments, with a final maturity date of May 31, 1998. At December
     31, 1997, approximately $37,600,000 was outstanding under the Credit
     Facility.

     The terms of the Agreement and its Amendment also provide for additional
     security over shares in the subsidiary of the Parent Company that owns the
     head office of the Parent Company's container leasing operations. They also
     provided for the loans to Stefan M. Palatin, the Chairman of the Parent
     Company (the "Chairman") and its Chief Executive Officer (and a Director of
     CCC), of approximately $5,990,000 and $3,700,000 (totaling approximately
     $9,690,000) to be restructured as obligations of the Chairman to another
     subsidiary of the Parent Company. These obligations have been collaterally
     assigned to the lending banks, together with the pledge of 1,000,000 shares
     of the Parent Company's Common Stock owned by the Chairman. These 1,000,000
     shares represent 11% of the issued and outstanding shares of Common Stock
     of the Parent Company as of December 31, 1997. The shares of the Parent
     Company are traded on NASDAQ (CRNSF). (The Chairman, including the
     1,000,000 shares pledged to the banks, owns approximately 55% of the issued
     and outstanding shares of Common Stock of the Parent Company as of
     December 31, 1997). Additionally, CCC granted the lending banks a security
     interest in the fees to which it is entitled for the services it renders to
     the container leasing partnerships of which it acts as general partner,
     including its fee income payable by the Partnership.



                                       31
<PAGE>   32



                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


(10) The Cronos Group - (Continued)

     The lending banks have indicated that they will not renew the Credit
     Facility, and the Parent Company has yet to secure a source for repayment
     of the balance due under the Credit Facility at May 31, 1998. CCC is
     currently in discussions with the management of the Parent Company to
     provide assurance that the management of the container leasing partnerships
     managed by CCC, including the Partnership, is not disrupted pending a
     refinancing or reorganization of the indebtedness of the Parent Company and
     its affiliates.

     The Partnership is not a borrower under the Credit Facility, and neither
     the containers nor the other assets of the Partnership have been pledged as
     collateral under the Credit Facility.

     The Partnership is unable to determine the impact, if any, these concerns
     may have on the future operating results and financial condition of the
     Partnership or CCC and the Leasing Company's ability to manage the
     Partnership's fleet in subsequent periods.











                                       32
<PAGE>   33



                                                                      Schedule 1

                              IEA INCOME FUND VII,
                        A CALIFORNIA LIMITED PARTNERSHIP

                 SCHEDULE OF REIMBURSED ADMINISTRATIVE EXPENSES
                       PURSUANT TO ARTICLE IV SECTION 4.4
                          OF THE PARTNERSHIP AGREEMENT

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                 1997        1996        1995
                                                 ----        ----        ----
<S>                                             <C>         <C>         <C>
Salaries                                        $23,664     $31,122     $40,563
Other payroll related expenses                    4,354       5,386       6,253
General and administrative expenses              23,225      28,723      32,935
                                                -------     -------     -------

   Total reimbursed administrative expenses     $51,243     $65,231     $79,751
                                                =======     =======     =======
</TABLE>








                  See report of independent public accountants


                                       33
<PAGE>   34



Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

   The Registrant's discussion regarding the resignation of its certifying
accountant is included in the Registrant's Report on Form 8-K, dated February 3,
1997 and filed February 7, 1997 and Amendment No. 1 to the Registrant's Report
on Form 8-K, dated February 3, 1997 and filed February 26, 1997, incorporated
herein by reference.

   The Registrant retained a new auditor, Moore Stephens, P.C., on April 10,
1997, as reported in its Current Report on Form 8-K, filed April 14, 1997.


















                                       34
<PAGE>   35



                                    PART III


Item 10. Directors and Executive Officers of the Registrant

   The Registrant, as such, has no officers or directors, but is managed by CCC,
the general partner. The officers and directors of CCC at March 18, 1998, are as
follows:

<TABLE>
<CAPTION>
                Name                                Office
        -----------------      ------------------------------------------------
        <S>                    <C>
        Dennis J. Tietz        President, Chief Executive Officer, and Director
        Elinor Wexler          Vice President/Administration and Secretary,
                                 and Director
        John P. McDonald       Vice President/Sales, and Director
        Stefan M. Palatin      Director
        Peter J. Younger       Director
</TABLE>

   DENNIS J. TIETZ Mr. Tietz, 45, as President and Chief Executive Officer, is
responsible for the general management of CCC. From 1986 until August 1992, Mr.
Tietz was responsible for the organization, marketing and after-market support
of CCC's investment programs. Mr. Tietz is also President and a director of
Cronos Securities Corp. Mr. Tietz was a regional manager for CCC, responsible
for various container leasing activities in the U.S. and Europe from 1981 to
1986. Prior to joining CCC in December 1981, Mr. Tietz was employed by Trans
Ocean Leasing Corporation as Regional Manager based in Houston, with
responsibility for all leasing and operational activities in the U.S. Gulf.

   Mr. Tietz holds a B.S. degree in Business Administration from San Jose State
University and is a Registered Securities Principal with the NASD.

   ELINOR A. WEXLER Ms. Wexler, 49, was elected Vice President - Administration
and Secretary of CCC in August 1992. Ms. Wexler has been employed by the General
Partner since 1987, and is responsible for investor services, compliance and
securities registration. From 1983 to 1987, Ms. Wexler was Manager of Investor
Services for The Robert A. McNeil Corporation, a real estate syndication
company, in San Mateo, California. From 1971 to 1983, Ms. Wexler held various
positions, including securities trader and international research editor, with
Nikko Securities Co., International, based in San Francisco.

   Ms. Wexler attended the University of Oregon, Portland State University and
the Hebrew University of Jerusalem, Israel. Ms. Wexler is also Vice President
and Secretary of Cronos Securities Corp. and a Registered Principal with the
NASD.

   JOHN P. MCDONALD Mr. McDonald, 36, was elected Vice President - National
Sales Manager of CCC in August 1992, with responsibility for marketing CCC's
investment programs. Since 1988, Mr. McDonald had been Regional Marketing
Manager for the Southwestern U.S. From 1983 to 1988, Mr. McDonald held a number
of container leasing positions with CCC, the most recent of which was as Area
Manager for Belgium and the Netherlands, based in Antwerp.

   Mr. McDonald holds a B.S. degree in Business Administration from Bryant
College, Rhode Island. Mr. McDonald is also a Vice President of Cronos
Securities Corp.

   STEFAN M. PALATIN Mr. Palatin, 44, joined the Board of Directors of CCC in
January 1993. Mr. Palatin is Chairman and CEO of The Cronos Group, and was a
founder of LPI in 1983. From 1980 to 1991, Mr. Palatin was an executive director
of the Contrin Group, which has provided financing to the container leasing
industry, as well as other business ventures, and has sponsored limited
partnerships organized in Austria. From 1977 to 1980, Mr. Palatin was a
consultant to a number of companies in Austria, including Contrin. From 1973 to
1977, Mr. Palatin was a sales manager for Generali AG, the largest insurance
group in Austria.

   Mr. Palatin, who is based in Austria, holds a Doctorate in Business
Administration from the University of Economics and World Trade in Vienna. Mr.
Palatin is also a director of The Cronos Group.




                                       35
<PAGE>   36




   PETER J. YOUNGER Mr. Younger, 41, joined the Board of Directors of CCC in
June 1997. See key management personnel of the Leasing Company for further
information.

   JOHN KALLAS Mr. Kallas, 35, was elected Vice President/Treasurer and Chief
Financial Officer of CCC in December 1993 and was directly responsible for CCC's
accounting operations and reporting activities. Mr. Kallas resigned from Cronos
Capital Corp. on March 18, 1998.


   The key management personnel of the Leasing Company at March 18, 1998, were
as follows:

<TABLE>
<CAPTION>
                Name                                   Title
        ----------------            --------------------------------------
        <S>                         <C>
        Steve Brocato               President
        Peter J. Younger            Vice President/Chief Financial Officer
        John M. Foy                 Vice President/Americas
        Nico Sciacovelli            Vice President/Europe, Middle East and
                                      Africa
        Harris H. T. Ho             Vice President/Asia Pacific
        David Heather               Vice President/Technical Services
        John C. Kirby               Vice President/Operations
        J. Gordon Steel             Vice President/Tank Container Division
</TABLE>

   STEVE BROCATO Mr. Brocato, 45, was elected President of the Leasing Company's
container division in June 1997, and is based in the United Kingdom. Mr. Brocato
has held various positions since joining Cronos including, Vice President -
Corporate Affairs and Director of Marketing - Refrigerated Containers for Cronos
in North and South America. Prior to joining Cronos, Mr. Brocato was a Vice
President for ICCU Containers from 1983 to 1985 and was responsible for dry
cargo container marketing and operations for the Americas. From 1981 to 1983, he
was Regional Manager for Trans Ocean Leasing Ltd.

   PETER J. YOUNGER Mr. Younger, 41, was elected Chief Financial Officer of The
Cronos Group in March, 1997, and is based in the United Kingdom. Mr. Younger was
appointed Vice President and Controller of Cronos in 1991. He joined IEA in 1987
and served as Director of Accounting and the Vice President and Controller,
based in San Francisco. Prior to 1987, Mr. Younger was a certified public
accountant and a principal with the accounting firm of Johnson, Glaze and Co. in
Salem, Oregon. Mr. Younger holds a B.S. degree in Business Administration from
Western Baptist College.

   JOHN M. FOY Mr. Foy, 52, is directly responsible for the Leasing Company's
lease marketing and operations in North America, Central America, and South
America, and is based in San Francisco. From 1985 to 1993, Mr. Foy was Vice
President/Pacific with responsibility for dry cargo container lease marketing
and operations in the Pacific Basin. From 1977 to 1985 Mr. Foy was Vice
President of Marketing for Nautilus Leasing Services in San Francisco with
responsibility for worldwide leasing activities. From 1974 to 1977, Mr. Foy was
Regional Manager for Flexi-Van Leasing, a container lessor, with responsibility
for container leasing activities in the Western United States. Mr. Foy holds a
B.A. degree in Political Science from University of the Pacific, and a Bachelor
of Foreign Trade from Thunderbird Graduate School of International Management.

   NICO SCIACOVELLI Mr. Sciacovelli, 48, was elected Vice President - Europe,
Middle East and Africa in June 1997. Mr. Sciacovelli is directly responsible for
the Leasing Company's lease marketing and operations in Europe, the Middle East
and Africa and is based in Italy. Since joining Cronos in 1983, Mr. Sciacovelli
served as Area Director and Area Manager for Southern Europe. Prior to joining
Cronos, Mr. Sciacovelli was a Sales Manager at Interpool Ltd.

   HARRIS H. T. HO Mr. Ho, 39, was elected Vice President - Asia Pacific in June
1997. Mr. Ho is directly responsible for the Leasing Company's lease marketing
and operations in Asia, Australia and the Indian sub-continent and is based in
Hong Kong. Since joining Cronos in 1990, Mr. Ho served as Area Director, Hong
Kong and China. Prior to joining Cronos, Mr. Ho was a Manager at Sea Containers
Pacific Ltd and Sea Containers Hong Kong Limited from 1981 to 1990, responsible
for container marketing within Asia. From 1978 to 1981, Mr. Ho was Senior
Equipment Controller for Hong Kong Container Line. Mr. Ho holds a Diploma of
Management Studies in Marketing from The Hong Kong Polytechnic and The Hong Kong
Management Association.



                                       36
<PAGE>   37




   DAVID HEATHER Mr. Heather, 50, is responsible for all technical and
engineering activities of the fleet managed by the Leasing Company. Mr. Heather
was Technical Director for LPI, based in the United Kingdom, from 1986 to 1991.
From 1980 to 1986, Mr. Heather was employed by ABC Containerline NV as Technical
Manager with technical responsibility for the shipping line's fleet of dry
cargo, refrigerated and other specialized container equipment. From 1974 to
1980, Mr. Heather was Technical Supervisor for ACT Services Ltd., a shipping
line, with responsibility for technical activities related to refrigerated
containers. Mr. Heather holds a Marine Engineering Certificate from Riversdale
Marine Technical College in England.

   JOHN C. KIRBY Mr. Kirby, 44, is responsible for container purchasing,
contract and billing administration, container repairs and leasing-related
systems, and is based in the United Kingdom. Mr. Kirby joined CCC in 1985 as
European Technical Manager and advanced to Director of European Operations in
1986, a position he held with CCC, and later the Leasing Company, until his
promotion to Vice President/Operations of the Leasing Company in 1992. From 1982
to 1985, Mr. Kirby was employed by CLOU Containers, a container leasing company,
as Technical Manager based in Hamburg, Germany. Mr. Kirby acquired a
professional engineering qualification from the Mid-Essex Technical College in
England.

   J. GORDON STEEL Mr. Steel, 65, is directly responsible for the overall lease
marketing activity for the Leasing Company's Tank Container Division. From 1990
to 1992, Mr. Steel held the position of Director/General Manager for Tiphook
Container's Tank Division. From 1977 to 1990, Mr. Steel held various managerial
positions, involving manufacturing and transportation of hazardous materials,
with Laporte Industries and ICI, major chemical distribution companies. Mr.
Steel is a qualified Chemical Engineer and attended the Associate Royal
Technical College in Scotland.








                                       37
<PAGE>   38




Item 11. Executive Compensation

   The Registrant pays a management fee and will reimburse the managing general
partner as set forth in the table below.

   The Registrant also makes quarterly distributions to its partners (general
and limited) from distributable cash from operations (allocated 95% to the
limited partners and 5% to the general partners) or sales proceeds (allocated
100% to the limited partners). However, if the amount of the limited partners'
capital contributions invested in equipment exceeds the minimum percentage
required by Section 3.5 of the Limited Partnership Agreement, and the limited
partners have received cumulative distributions equal to their capital
contributions, the general partners' interest in distributions from operations
will be increased by one percentage point for each 1% of the limited partners'
capital contribution invested in equipment in excess of 80%.

   During 1992, this threshold was reached and, accordingly, distributions from
distributable cash (allocated 91% to the limited partners and 9% to the general
partners) were adjusted. The allocation of sales proceeds remained unchanged.
These allocations remained in effect until 1994, at which time the limited
partners received from the Registrant aggregate distributions in an amount equal
to their adjusted capital contributions plus an 8% cumulative, compounded
(daily), annual return on their adjusted capital contributions; thereafter, all
partnership distributions have been allocated 81% to the limited partners and
19% to the general partners.

   The Registrant does not pay or reimburse CCC or the associate general
partners for any remuneration payable by them to their executive officers,
directors or any other controlling persons. However, the Registrant does
reimburse the managing general partner for certain services pursuant to Section
4.4 of the Partnership Agreement. These services include but are not limited to
(i) salaries and related salary expenses for services which could be performed
directly for the Registrant by independent parties, such as legal, accounting,
transfer agent, data processing, operations, communications, duplicating and
other such services; (ii) performing administrative services necessary to the
prudent operations of the Registrant.








                                       38
<PAGE>   39




   The following table sets forth the fees the Registrant paid (on a cash basis)
to CCC and the associate general partners of the Registrant, for the fiscal year
1997.


<TABLE>
<CAPTION>
                                                                                      Cash Fees and
              Name                              Description                           Distributions
              ----                              -----------                           -------------
       <S>                         <C>                                                   <C>
       1) CCC                      Base management fees - equal to 7% of gross           $62,162
                                   lease revenues attributable to operating
                                   leases pursuant to Section 4.3 of the Limited
                                   Partnership Agreement

       2) CCC                      Reimbursed administrative expenses - equal to         $51,718
                                   the costs expended by CCC and its affiliates for
                                   services necessary to the prudent operation of
                                   the Registrant pursuant to Section 4.4 of the
                                   Limited Partnership Agreement

       3) CCC                      Interest in Fund - percentage of distributable        $45,278
                                   cash for any quarter prior to receipt of the
          Associate General        incentive management fee, pursuant to
            Partners               Section 6.1 of the Limited Partnership                $11,320
                                   Agreement

       4) CCC                      Interest in Fund - percentage of sales proceeds       $15,265
                                   for any quarter pursuant to Section 6.1 of
          Associate General        the Limited Partnership Agreement
            Partners                                                                     $ 3,816

       5) CCC                      Incentive management fee - 10% of cash                $67,269
                                   distributed from operations and sales
          Associate General        proceeds after a cumulative return to the
            Partners               Limited Partners of 8% cumulative, compounded         $16,816
                                   (daily), annual return of their adjusted capital
                                   contributions pursuant to Section 6.1 of the
                                   Limited Partnership Agreement
</TABLE>




                                       39
<PAGE>   40




Item 12. Security Ownership of Certain Beneficial Owners and Management

   (a)   Security Ownership of Certain Beneficial Owners

   There is no person or "group" of persons known to the management of CCC to be
the beneficial owner of more than five percent of the outstanding units of
limited partnership interests of the Registrant.

   (b)   Security Ownership of Management

   The Registrant has no directors or officers. It is managed by CCC. Ownership
of units of limited partnership interests of the Registrant by CCC, its officers
and/or directors of CCC is as follows:

<TABLE>
<CAPTION>
                                                    Number         Percent of
         Name of Beneficial Owner                  of Units        All Units
         ------------------------                  --------        ---------
         <S>                                         <C>              <C>
         Dennis J. Tietz                             20.0             .215%
         John P. McDonald                            80.0             .859%
         Laurence P. Sargent                         10.0             .107%
         Elinor Wexler                               15.0             .161%
         Cronos Capital Corp.                        39.2             .421%
                                                    -----            -----

         Officers, Directors and CCC as a Group     164.2            1.763%
                                                    =====            =====
</TABLE>

   (c)   Changes in Control

   Inapplicable.


Item 13. Certain Relationships and Related Transactions

   (a)   Transactions with Management and Others

   The Registrant's only transactions with management and other related parties
during 1997 were limited to those fees paid or amounts committed to be paid (on
an annual basis) to CCC, the managing general partner, and the associate general
partners. See Item 11, "Executive Compensation," herein.

   (b)   Certain Business Relationships

   Inapplicable.

   (c)   Indebtedness of Management

   Inapplicable.

   (d)   Transactions with Promoters

   Inapplicable.




                                       40
<PAGE>   41



                                             PART IV


Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

   (a)1. Financial Statements

   The following financial statements of the Registrant are included in Part II,
Item 8:

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
         <S>                                                                        <C>
         Reports of Independent Public Accountants............................      19, 20

         Balance sheets - December 31, 1997 and 1996..........................      21

         Statements of operations - for the years ended
            December 31, 1997, 1996 and 1995..................................      22

         Statements of partners' capital - for the years ended
            December 31, 1997, 1996 and 1995..................................      23

         Statements of cash flows - for the years ended
            December 31, 1997, 1996 and 1995..................................      24

         Notes to financial statements........................................      25

         Schedule of Reimbursed Administrative Expenses.......................      33
</TABLE>


   All other schedules are omitted as the information is not required or the
information is included in the financial statements or notes thereto.










                                       41
<PAGE>   42



(a)3. Exhibits


<TABLE>
<CAPTION>
   Exhibit
     No.                          Description                               Method of Filing
   -------                        -----------                               ----------------
     <S>     <C>                                                            <C>
     3(a)    Limited Partnership Agreement of the Registrant,               *
             amended and restated as of December 1, 1986

     3(b)    Certificate of Limited Partnership of the Registrant           **

     27      Financial Data Schedule                                        Filed with this document
</TABLE>



(b)     Reports on Form 8-K

        The Registrant filed a Report on Form 8-K, February 7, 1997 and
        Amendment No. 1 to Report on Form 8-K, February 26, 1997, reporting the
        resignation of the Registrant's certifying accountant.

        The Registrant filed a Report on Form 8-K, April 14, 1997, reporting the
        appointment of the Registrant's successor certifying accountant.















-------------

*   Incorporated by reference to Exhibit "A" to the Prospectus of the Registrant
    dated December 3, 1986, included as part of Registration Statement on Form
    S-1 (No. 33-9351)

**  Incorporated by reference to Exhibit 3.2 to the Registration Statement on
    Form S-1 (No. 33-9351)



                                       42
<PAGE>   43





                                   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.


                                       IEA INCOME FUND VII,
                                       A California Limited Partnership

                                       By  Cronos Capital Corp.
                                           The Managing General Partner



                                       By  /s/  Dennis J. Tietz
                                           ------------------------------------
                                           Dennis J. Tietz
                                           President and Director of
                                           Cronos Capital Corp. ("CCC")
                                           Principal Executive Officer of CCC

Date:  March 31, 1998


   Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Cronos
Capital Corp., the managing general partner of the Registrant, in the capacities
and on the dates indicated:

<TABLE>
<CAPTION>
          Signature                            Title                            Date
          ---------                            -----                            ----
<S>                                  <C>                                   <C>
   /s/  Dennis J. Tietz              President and Director of
----------------------------           Cronos Capital Corp.                March 31, 1998
Dennis J. Tietz                         ("CCC") (Principal
                                             Executive
                                          Officer of CCC)

   /s/  John McDonald                 National Sales Manager
----------------------------              and Director of                  March 31, 1998
John McDonald                          Cronos Capital Corp.

   /s/  Peter Younger                       Director of
----------------------------           Cronos Capital Corp.                March 31, 1998
Peter Younger
</TABLE>



                            SUPPLEMENTAL INFORMATION

   The Registrant's annual report will be furnished to its limited partners on
or about April 30, 1998. Copies of the annual report will be concurrently
furnished to the Commission for information purposes only, and shall not be
deemed to be filed with the Commission.



<PAGE>   44



                                  EXHIBIT INDEX


(a)3.  Exhibits

<TABLE>
<CAPTION>
   Exhibit
     No.                          Description                               Method of Filing
   -------                        -----------                               ----------------
     <S>     <C>                                                            <C>
     3(a)    Limited   Partnership   Agreement  of  the   Registrant,        *
             amended and restated as of December 1, 1986

     3(b)    Certificate of Limited Partnership of the Registrant            **

     27      Financial Data Schedule                                         Filed with this document
</TABLE>












-------------

*   Incorporated by reference to Exhibit "A" to the Prospectus of the Registrant
    dated December 3, 1986, included as part of Registration Statement on Form
    S-1 (No. 33-9351)

**  Incorporated by reference to Exhibit 3.2 to the Registration Statement on
    Form S-1 (No. 33-9351)