S/M REAL ESTATE FUND VII LTD/TX - 10-K Annual Report

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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

For the fiscal year ended December 31, 2002
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OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number: 0-11779
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S/M REAL ESTATE FUND VII, LTD.
Exact name of registrant as specified in its charter

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

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

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

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

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

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 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 is not contained herein, and will not be contained, to the
best of the 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]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes No X
---- ----

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

Documents Incorporated by Reference: Prospectus dated June 10, 1983, contained
in Amendment No. 3 to Registrant's Registration Statement on Form S-11 filed
with the Securities and Exchange Commission on June 10, 1983. (Parts I, II,III &
IV).

Page 1

TABLE OF CONTENTS

Page 2

PART I

ITEM 1. BUSINESS

S/M Real Estate Fund VII, Ltd. (the "Partnership"), formerly Shearson-Murray
Real Estate Fund VII, Ltd., was formed November 4, 1982 to acquire existing
garden apartment complexes. The general partners of the Partnership are SM7
Apartment Investors Inc., a Texas corporation (formerly known as Shearson
Apartment Investors XIV, Inc.) ("SM7"), Murray Realty Investors VII, Inc., a
Texas corporation ("Murray"), and Crozier Partners VII, Ltd., a Texas limited
partnership ("Crozier"). SM7, Murray and Crozier are hereinafter referred to
collectively as the "General Partners." See Item 10. "Directors and Executive
Officers of the Partnership."

The Partnership offered, on June 10, 1983, a minimum of 6,250 and a maximum of
14,000 limited partnership interests (the "Interests") in the Partnership at
$1,000 per Interest with a minimum required purchase of two Interests for
purchases made on behalf of Individual Retirement Accounts and five Interests
for all other purchasers. Additionally, the General Partners were given the
right to sell an additional 10,000 Interests in connection with the offering.
The offering of Interests was terminated on April 30, 1984, and the Partnership
accepted subscriptions for 11,080 Interests, for aggregate offering proceeds of
$11,080,000.

On July 29, 1983, the Partnership acquired Fifth Avenue Apartments ("Fifth
Avenue"), a 198-unit apartment complex located in San Antonio, Texas, for a
purchase price of $8,474,925. On August 31, 1983, the Partnership acquired
Rockcreek Apartments ("Rockcreek"), a 314-unit apartment complex located in
Austin, Texas, for a purchase price of $10,948,228. The two properties are
referred to collectively herein as the "Properties."

The San Antonio and Austin apartment markets deteriorated in the mid-1980s due
to overbuilding and the general economic decline of the Southwest economy.
Rental concessions and a decline in the Properties' operating results led to the
depletion of the Partnership's working capital reserve. In July 1986, the
General Partners suspended mortgage payments on the Partnership's two Properties
and commenced negotiations with the lenders in an effort to restructure the
terms of their respective mortgage loan agreements. Subsequently, in November
1986 and March 1987, the Partnership executed letters of intent with the holders
of the Rockcreek and Fifth Avenue notes, respectively, to modify certain
conditions and terms of the mortgage obligations. The Partnership resumed
payments to both lenders in March 1987 in accordance with the proposed
modifications.

Adverse market conditions continued to hamper the ability of the Properties to
generate sufficient cash flow to meet debt service payments and operating
expenses. Given the diminishing balance of the Partnership's cash and the
capital improvement requirements at Rockcreek, in April 1989, the General
Partners commenced renegotiations and suspended debt service payments on the
mortgages secured by both Rockcreek and Fifth Avenue. The objective of these
negotiations was to reduce the debt service payments required under the mortgage
notes to a level that could be paid out of cash flow generated by the
Properties. Under the terms of these loan agreements, non-payment of debt
service represented an event of default.

In May 1989, two of the lenders for Rockcreek posted that property for
foreclosure on June 7, 1989. As the Partnership was unable to reach an agreement
with one of these lenders to forbear prior to foreclosure date, the Partnership
commenced a voluntary case under Chapter 11 of the Federal Bankruptcy Code on
June 6, 1989, in an attempt to protect its Limited Partners from the effects of
foreclosure and to reorganize the Partnership's finances.

On October 4, 1989, the Partnership filed a plan of reorganization ("The Plan")
together with a disclosure statement with the Bankruptcy Court. The Plan was not
approved, and the Partnership filed its modified plan of reorganization (the
"Modified Plan") and disclosure statement, which was confirmed on February 20,
1990, and became effective on March 1, 1990. The Modified Plan restructured the
liabilities of the Partnership in a manner which was intended to permit such
liabilities to be serviced by the Partnership's anticipated cash flow.
Additionally, the Modified Plan required the Partnership to issue reorganization
notes to holders of mortgage notes payable.

The first mortgage note secured by Phase I of the Rockcreek Apartments and the
wraparound mortgage note secured by a third mortgage on Rockcreek were scheduled
to mature on December 31, 1993. The General Partners had attempted to either
restructure the debt or sell the property (both Phases I and II) for an amount
greater than the outstanding debt. As a result of the General Partners' efforts
to sell the property, the General Partners secured an offer to purchase the
property in the amount of $8,521,055. Such offer was accepted and the property
was sold on December 17, 1993. Concurrently with their sales efforts, the
General Partners successfully negotiated an agreement with the holder of the
wraparound mortgage on Rockcreek, whereby the Partnership received a release of
all the mortgage liens on the property by paying a discounted amount of the
total outstanding debt of $8,082,311.

Page 3

The General Partners commenced discussions in 1995 with the lender of the
mortgage secured by Fifth Avenue as a result of the scheduled debt maturity on
December 31, 1995. Such discussions continued past the December 31, 1995
maturity date, and on May 30, 1996, the General Partners of the Partnership
executed a modification and extension agreement (the "Modification Agreement")
with the lender, to modify the mortgage and extend its maturity for five years.
At the time the Modification Agreement was executed, the previous first mortgage
had an aggregate balance of $7,111,142, representing $5,830,000 in original
principal and $1,281,142 in accrued interest. The accrued interest on the first
mortgage was converted into a second mortgage which was coterminous with the
original principal of $5,830,000. In accordance with the Modification Agreement,
the first mortgage of $5,830,000 had a fixed interest rate of 9.875% with fixed
monthly payments of principal and interest and the maturity date was June 1,
2001.

In order to improve the financial condition of the Partnership and provide much
needed funds for exterior improvements on Fifth Avenue, on December 3, 1998, the
General Partners of the Partnership refinanced the mortgage note payable on
Fifth Avenue. In accordance with the terms of the Loan Agreement executed in
connection with the refinancing (the "Agreement"), the principal balance of the
original mortgage totaling $6,400,000 is due January 1, 2009 and bears interest
at a fixed rate of 7.16%. The previous first and second mortgages had a combined
balance of $6,259,810 at an average interest rate of 8.97%. See more details of
the Agreement in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Form 10-K and Note 6 "Mortgage
Notes Payable" of the Notes to the Financial Statements contained herein.

Competition

Fifth Avenue competes for tenants with other apartment complexes in San Antonio.
When evaluating a particular location to lease, a tenant may consider many
factors, including, but not limited to, space availability, rental rates, lease
terms, access, parking, quality of construction and quality of management. While
the General Partners believe that Fifth Avenue is generally competitive in these
factors, there can be no assurance that, in the view of a prospective tenant,
other properties may not be more attractive.

Fifth Avenue directly competes with the following similar five apartment
complexes in San Antonio:

* This information has been obtained from sources believed to be reliable
by the Partnership, but the Partnership has not verified the accuracy of
such information.

Employees

The Partnership has no employees. Fifth Avenue is managed by Anterra Management
Corporation which provides certain administrative and management services. See
Item 13. "Certain Relationships and Related Transactions."

ITEM 2. PROPERTIES

As of December 31, 2002, the Partnership owned Fifth Avenue Apartments, a
198-unit apartment complex located in San Antonio, Texas and situated on
approximately 8.45 acres with 169,270 square feet of net leaseable space.
Occupancy at Fifth Avenue Apartments averaged 94% and 95% for the years ended
December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, Fifth
Avenue Apartments was 94% and 92% occupied, respectively.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the General Partners or
the Partnership is a party or to which Fifth Avenue is subject.

Page 4

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report through solicitation of
proxies or otherwise.

PART II

ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP INTERESTS AND RELATED
SECURITY HOLDER MATTERS

A public market for the Partnership's Limited Partnership Interests does not
exist and is not likely to develop. Consequently, a Limited Partner may not be
able to liquidate its investment in the event of emergency or for any other
reason, and Interests may not be readily accepted as collateral for a loan.
Furthermore, the transfer of Interests is subject to certain limitations,
including approval of the General Partners. At December 31, 2002, there were 954
Limited Partners of record, owning an aggregate of 11,080 Interests.

There have been no cash distributions to the Limited Partners since the
inception of the Partnership.

ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands except per Interest data)

(1) Based on the Units outstanding during the year and net loss allocated
to the Limited Partners.

The above selected financial data should be read in conjunction with the
Financial Statements and related notes incorporated by reference to Item 8 of
this report.

Page 5

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

Liquidity and Capital Resources

In order to improve the financial condition of the Partnership and provide much
needed funds for exterior improvements on Fifth Avenue, on December 3, 1998, the
Partnership refinanced the mortgage note payable on Fifth Avenue, (the
"Refinancing"). In accordance with the terms of the Loan Agreement (the "Loan
Agreement"), the principal balance of the original mortgage totaling $6,400,000
is due January 1, 2009 and bears interest at a fixed rate of 7.16%.

Under the terms of the Loan Agreement with General Electric Capital Corporation
(the "Lender"), the Partnership is required to make fixed monthly payments of
principal and interest in the amount of $43,269 commencing on February 1, 1999
until maturity on January 1, 2009, at which time the entire outstanding
principal balance and accrued interest is due. Under the terms of the Loan
Agreement, the Partnership is required to make monthly contributions of $3,905
which are held by the Lender pending application for the completion of certain
required repairs to the Fifth Avenue property. At December 31, 2002, the balance
in this replacement reserve account was $24,156.

Cash and cash equivalents totaled $259,663 at December 31, 2002, compared to
$216,234 at December 31, 2001. The $43,429 increase is primarily attributable to
cash provided by the release of funds from the replacement reserve account and
cash provided by operations offset by debt service payments and payments made to
the replacement reserve account.

Cash held in escrow increased to $82,565 at December 31, 2002, from $53,049 at
December 31, 2001. The $29,516 increase is primarily attributable to
contributions to the insurance and real estate tax escrow, as required in the
Loan Agreement, offset in part by increases in real estate taxes and property
insurance.

Restricted cash replacement reserve decreased to $24,156, at December 31, 2002,
from $106,371 at December 31, 2001. The $82,215 decrease is attributable to the
release of $129,622 of funds from the replacement reserve account offset in part
by monthly contributions to the replacements reserve account.

Other assets totaled $89,380 at December 31, 2002, compared to $57,859 at
December 31, 2001. The $31,521 increase in other assets is primarily
attributable to payment of a retainer for legal services anticipated to be
provided in 2003.

Accounts payable totaled $61,759 at December 31, 2002, compared to $54,135 at
December 31, 2001. The increase is primarily attributable to the timing of
payments associated with repairs and maintenance for apartment preparation.

Accrued expenses and other liabilities totaled $43,405 at December 31, 2002,
compared to $39,991 at December 31, 2001. The change is primarily attributable
to the timing of payments for partnership administrative costs.

The Partnership's General Partners currently expect funds from operations to be
sufficient to pay all obligations for 2003, including debt service. In the event
of any cash flow deficits, it is expected that such deficits will be funded by
the Partnership's existing cash balances. However, there can be no assurance
that the Partnership will have sufficient cash to fund such deficits.

Results of Operations

2002 Compared With 2001

Operations resulted in net losses of $300,276 for the year ended December 31,
2002, and $206,394 for the year ended December 31, 2001. The increased net loss
from 2001 to 2002 is primarily attributable to a decrease in rental income and
an increase in property operating expenses.

Rental income at Fifth Avenue totaled $1,402,338 for the year ended December 31,
2002, compared to $1,448,295 for the year ended December 31, 2001. Occupancy at
Fifth Avenue averaged approximately 94% during 2002 and 95% during 2001. The
average rental income per occupied square foot at Fifth Avenue was $8.77 in
2002, compared to $9.00 in 2001. At December 31, 2002, Fifth Avenue was 94%
occupied. The decrease in the average rental income per occupied square foot in
2002 is primarily attributable to increases in vacancy and rental concessions
being offered.

Total expenses for the year ended December 31, 2002 were $1,708,640 compared to
$1,669,167 for the year ended December 31, 2001. The increase is primarily
attributable to an increase in property operating expenses.

Page 6

Property operating expenses consist primarily of on-site personnel expenses,
utility costs, repair and maintenance costs, property management fees,
advertising costs, insurance and real estate taxes. Property operating expenses
for the year ended December 31, 2002 were $754,234, compared to $707,917 for the
year ended December 31, 2001. The increase in property operating expenses is
primarily attributable to increases in repairs and maintenance for apartment
preparation, utility costs, and property insurance costs.

2001 Compared With 2000

Operations resulted in net losses of $206,394 for the year ended December 31,
2001, and $256,037 for the year ended December 31, 2000. The decreased net loss
from 2000 to 2001 is primarily attributable to an increase in rental income
offset in part by slight increases in general and administrative expenses and
depreciation and amortization.

Rental income at Fifth Avenue totaled $1,448,295 for the year ended December 31,
2001, compared to $1,380,401 for the year ended December 31, 2000. Occupancy at
Fifth Avenue averaged approximately 95% during 2001 and 94% during 2000. The
average rental income per occupied square foot at Fifth Avenue was $9.00 in
2001, compared to $8.76 in 2000. At December 31, 2001, Fifth Avenue was 92%
occupied. The increase in the average rental income per occupied square foot in
2001 is primarily attributable to an increase in rental rates.

Total expenses for the year ended December 31, 2001 were $1,669,167 compared to
$1,654,394 for the year ended December 31, 2000. The increase is primarily
attributable to increases in general and administrative expenses, and
depreciation and amortization.

Property operating expenses consist primarily of on-site personnel expenses,
utility costs, repair and maintenance costs, property management fees,
advertising costs, insurance and real estate taxes. Property operating expenses
for the year ended December 31, 2001 were $707,917, compared to $704,176 for the
year ended December 31, 2000.

Depreciation and amortization expense totaled $432,138 for the year ended
December 31, 2001, compared to $426,124 for the year ended December 31, 2000.
The increase is attributable to additions to buildings and improvements.

General and administrative expenses for the year ended December 31, 2001 were
$75,158 compared to $64,336 for the year ended December 31, 2000. The increase
is primarily attributable to higher legal fees and other professional expenses.

General

The effect of inflation on the results of operations for the years ended
December 31, 2002, 2001 and 2000 was not significant.

Over the past several years the real estate market has gotten stronger and this
improvement has resulted in an increase in the number of potential buyers as
well as the number of parties interested in purchasing limited partnership units
on the secondary market. Some of these groups have solicited the Partnership's
Limited Partners directly with offers to buy their units. The General Partners
are constantly analyzing market conditions, comparable sales, and economic
trends in order to evaluate their impact on the value of the Partnership's
property, and intend to consider the sale of Fifth Avenue at the time when such
sale will maximize the property's value and otherwise be in the best interests
of the Limited Partners.

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. It is our opinion that we
fully disclose our significant accounting policies in the Notes to the Financial
Statements. Consistent with our disclosure policies we include the following
discussion related to what we believe to be our most critical accounting
policies that require our most difficult, subjective or complex judgment:

Revenue Recognition - Rental income is the primary source of income for the
Partnership. Rental income is recorded over the term of the lease as the income
is earned.

Page 7

Valuation of Real Estate - Real estate investments have been accounted for under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of which has been superceded by SFAS 144 effective January 1, 2002
(see below). At December 31, 2002, the Partnership's property was classified as
held for use. Accordingly, management reviews for impairment whenever events or
circumstances indicate that the carrying value of the real estate investment may
not be fully recoverable. The review of recoverability is based on the
undiscounted cash flows, excluding interest charges, that are expected to result
from the real estate investment's use and eventual disposition. Impairment is
determined if the expected future cash flows do not recover the value of the
real estate. In such an instance, an impairment loss is recorded to the extent
that the carrying value of the real estate investment exceeds the estimated fair
value.

New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), establishing financial
accounting and reporting for the impairment or disposal of long-lived assets.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The implementation of SFAS 144 on January 1, 2002 had no
effect on the Partnership's financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
The main provisions of this statement address the classification of debt
extinguishments and accounting for certain lease transactions. Upon adoption,
early extinguishments will not continue to qualify for extraordinary item
treatment and the Partnership does not anticipate that the adoption of SFAS No.
145 will have a material impact on the Partnership's financial position, net
earnings or cash flow.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The main provisions of this statement address
the recognition of liabilities associated with an exit or disposal activity.
Implementation of this statement is expected to have no impact on the financial
statements of the Partnership.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of this Interpretation are
applicable to guarantees issued or modified after December 31, 2002.
Implementation of these provisions of this statement is expected to have no
effect on the Partnership's financial position or results of operations. The
disclosure requirements in this Interpretation are effective for interim and
annual periods ending after December 15, 2002. The Partnership has no additional
items to disclose in connection with this Interpretation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Partnership's primary market risk exposure relates to changes in interest
rates related to its long-term debt. To limit the impact of interest rate
changes, the Partnership has entered into fixed rate debt of 7.16% that expires
in 2009. As a result, the Partnership's only interest rate risk is the
opportunity loss should interest rates decline which did occur during 2002. The
following table summarizes the expected maturities of the Partnership's
long-term debt. Based on the borrowing rates currently available to the
Partnership for mortgage loans with similar terms and average maturities, the
fair value of long-term debt is $6,382,000 at December 31, 2002. As of December
31, 2002, the long-term debt carrying value approximated fair value.

Year ending December 31,
2003 $ 75,444
2004 81,107
2005 87,195
2006 93,740
2007 100,776
Thereafter 5,710,243
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$ 6,148,505
===========

The fair value of the Partnership's remaining financial instruments, consisting
of cash and cash equivalents, cash held in escrow, restricted cash replacement
reserves, accounts receivable and accounts payable, approximate fair value due
to the short-term nature of these instruments and are relatively unaffected by
interest rate changes or other market risks.

Page 8

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are filed as part of this report:

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

Page 9

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP

Murray Realty Investors VII, Inc., a Texas corporation, SM7 Apartment Investors
Inc., a Texas corporation ("SM7"), and Crozier Partners VII, Ltd., a Texas
limited partnership, are the General Partners of the Partnership. On June 16,
1998, DA Group Holdings, Inc., a Delaware corporation and the parent company of
SM7 ("DA"), and Anterra Property Investors VIII, Inc., a Texas corporation
("Anterra"), entered into a Stock Purchase Agreement. Pursuant to this Stock
Purchase Agreement, Anterra purchased from DA all of the issued and outstanding
shares of common stock, $1.00 par value per share, of SM7. Anterra is an
affiliate of Anterra Property Investors VII, Inc. which is the general partner
of Crozier Partners VII, Ltd. The following is a summary of certain information
concerning the directors and executive officers of Anterra Property Investors
VII, Inc., Murray Realty Investors VII, Inc. and SM7 Apartment Investors Inc.,
as of December 31, 2002.

Anterra Property Investors VII, Inc., general partner of Crozier Partners VII,
Ltd.

Richard E. Hoffmann, 48, President, Treasurer and Director. For more than five
years prior to July 15, 1990, Mr. Hoffmann was a Vice President and Treasurer of
Murray Properties Company and various other affiliated companies. He resigned
his position with substantially all Murray Properties Company affiliates on July
15, 1990. Mr. Hoffmann was elected Senior Vice President, Treasurer and a
Director of Anterra Realty Corporation in June of 1990, and was elected
President of Anterra Realty Corporation in July of 1994. He is President,
Treasurer and a Director of all other subsidiary corporations of Anterra Realty
Corporation, including Anterra Property Investors VII, Inc. Mr. Hoffmann
received a Master of Business Administration degree from the University of Texas
at Austin in 1979 and a B.S. from Tulane University in 1977.

Lynn D. Maynard, 50, Executive Vice President and Director. For more than five
years prior to December 26, 1989, Ms. Maynard was an officer of Murray
Properties Company and various other affiliated companies. She was elected Vice
President of Murray Properties Company and Murray Realty Investors, Inc. in
December of 1986. Ms. Maynard resigned her positions with substantially all
Murray Properties Company affiliates on December 26, 1989. Ms. Maynard was
elected Senior Vice President and a Director of Anterra Realty Corporation in
November 1989, and is Executive Vice President and a Director of all other
subsidiary corporations of Anterra Realty Corporation, including Anterra
Property Investors VII, Inc. Ms. Maynard received a Bachelor of Science Degree
in Accounting from the University of Texas at Dallas.

Sandy Robison, 47, Vice President and Secretary. Ms. Robison joined Anterra
Realty Corporation's predecessor company in 1983 and has served in all areas of
the Accounting Department, including the positions of Staff Accountant, Systems
Manager and Assistant Controller. Ms. Robison became Secretary of Anterra Realty
Corporation in December 1997 and became Vice President and Controller of Anterra
Realty Corporation in December 1998. She is Vice President, Secretary and
Controller of Anterra Realty Corporation and all other subsidiary corporations
of Anterra Realty Corporation, including Anterra Property Investors VII, Inc.
Ms. Robison received a Bachelor of Science Degree in Finance from the University
of Texas at Dallas.

Murray Realty Investors VII, Inc., Corporate General Partner

Fulton Murray, 62, President, Chairman of the Board and Director. Mr. Murray has
been Chairman of the Board and Chief Executive Officer of Murray Properties
Company and Murray Financial Corporation for more than five years prior to the
date of this report. In addition, he is a director or officer of substantially
all affiliates of Murray Properties Company. His family, or trusts for their
benefit, own approximately 64% of the outstanding stock of Murray Financial
Corporation, which is the parent corporation of Murray Properties Company and
most of its affiliates, including Murray Realty Investors VII, Inc. He holds a
Bachelor of Business Administration degree in Finance from Southern Methodist
University.

Page 10

SM7 Apartment Investors Inc., Corporate General Partner

Richard E. Hoffmann, 48, President, Treasurer and Director. For more than five
years prior to July 15, 1990, Mr. Hoffmann was a Vice President and Treasurer of
Murray Properties Company and various other affiliated companies. He resigned
his position with substantially all Murray Properties Company affiliates on July
15, 1990. Mr. Hoffmann was elected Senior Vice President, Treasurer and a
Director of Anterra Realty Corporation in June of 1990, and was elected
President of Anterra Realty Corporation in July of 1994. He is President,
Treasurer and a Director of all other subsidiary corporations of Anterra Realty
Corporation, including SM7 Apartment Investors Inc. Mr. Hoffmann received a
Master of Business Administration degree from the University of Texas at Austin
in 1979 and a B.S. from Tulane University in 1977.

Lynn D. Maynard, 50, Executive Vice President and Director. For more than five
years prior to December 26, 1989, Ms. Maynard was an officer of Murray
Properties Company and various other affiliated companies. She was elected Vice
President of Murray Properties Company and Murray Realty Investors, Inc. in
December of 1986. Ms. Maynard resigned her positions with substantially all
Murray Properties Company affiliates on December 26, 1989. Ms. Maynard was
elected Senior Vice President and a Director of Anterra Realty Corporation in
November 1989, and is Executive Vice President and a Director of all other
subsidiary corporations of Anterra Realty Corporation, including SM7 Apartment
Investors Inc. Ms. Maynard received a Bachelor of Science Degree in Accounting
from the University of Texas at Dallas.

Sandy Robison, 47, Vice President and Secretary. Ms. Robison joined Anterra
Realty Corporation's predecessor company in 1983 and has served in all areas of
the Accounting Department, including the positions of Staff Accountant, Systems
Manager and Assistant Controller. Ms. Robison became Secretary of Anterra Realty
Corporation in December 1997 and became Vice President and Controller of Anterra
Realty Corporation in December 1998. She is Vice President, Secretary and
Controller of Anterra Realty Corporation and all other subsidiary corporations
of Anterra Realty Corporation, including SM7 Apartment Investors Inc. Ms.
Robison received a Bachelor of Science Degree in Finance from the University of
Texas at Dallas.

ITEM 11. EXECUTIVE COMPENSATION

The Partnership has not paid and does not propose to pay any cash compensation,
bonuses or deferred compensation, compensation pursuant to retirement or other
plans, or other compensation to the officers, directors, or partners of the
General Partners. The General Partners and their affiliates receive various fees
and distributions. See Item 13. "Certain Relationships and Related Transactions"
for information on the fees and other compensation or reimbursements paid to the
General Partners or their affiliates during the year ended December 31, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SECURITY HOLDER MATTERS

(a) Beneficial owners of 5% or more of Registrant's Securities

(b) No General Partner or any officer or director of a General Partner
beneficially owned or owned of record directly or indirectly any
Interests as of December 31, 2002.

Page 11

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(a) During the years ended December 31, 2002, 2001 and 2000, the General
Partners or their affiliates were reimbursed for Partnership
administrative and operating expenses, excluding property and
construction management fees, in the amounts of $11,641, $11,681 and
$11,050, respectively.

On January 1, 1990, Murray Management Corporation retained Anterra
Management Corporation, an affiliate of the general partners, to
provide certain administrative and management services with respect to
the Partnership and its Properties. Anterra Management Corporation is a
real estate related service company formed by former executive officers
of Murray Properties Company and its affiliates, and earned property
and construction management fees of $56,205, $57,867 and $61,528 for
the years ended December 31, 2002, 2001 and 2000, respectively.

(b) None.

(c) No management person is indebted to the Partnership.

(d) Not applicable.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of the chief
executive officer and chief financial officer of our general partner, of
the effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Rule 13a-14(c) under the Securities and
Exchange Act of 1934). Based on this evaluation, the chief executive
officer and chief financial officer concluded that our disclosure controls
and procedures are effective in timely alerting them to material
information required to be included in our periodic SEC reports.

In addition, we reviewed our internal controls, and there has been no
significant changes in our internal controls or in other factors, including
any corrective actions with regard to significant deficiencies and material
weaknesses, that could significantly affect those controls subsequent to
the date of their last evaluation.

Page 12

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements - see Index to Financial
Statements in Item 8 of this Form 10-K.

2. Financial Statement Schedule - see Index to Financial
Statements in Item 8 of this Form 10-K.

All other schedules have been omitted because they
are not required or the required information is
shown in the financial statements or notes thereto.

(b) Reports on Form 8-K filed during the last quarter of the
fiscal year:

None

(c) Exhibits:

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

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

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

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

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

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

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

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

Page 13

99.4 $5,830,000 Multifamily Note and Addendum, dated May
30, 1996. Reference is made to Exhibit 99.2 to the
Partnership's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 filed with the
Securities and Exchange Commission.

99.5 $681,142 Subordinate Multifamily Note and Addendum,
dated May 30, 1996. Reference is made to Exhibit
99.3 to the Partnership's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 filed with
the Securities and Exchange Commission.

99.6 $6,400,000 Promissory Note, dated December 3, 1998.
Reference is made to Exhibit 99.1 of the
Partnership's Form 8-K filed with the Securities and
Exchange Commission on December 14, 1998.

99.7 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.8 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

Page 14

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.

S/M REAL ESTATE FUND VII, LTD.

BY: SM7 APARTMENT INVESTORS INC.
A General Partner

Date: March 28, 2003
BY: /s/ Richard E. Hoffmann
--------------------------------------
Richard E. Hoffmann
Chief Executive Officer,
Director, President and Treasurer

Page 15

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following members of the Board of Directors and
officers of SM7 Apartment Investors Inc., a corporate general partner of the
Registrant, on behalf of the Registrant in the capacities and on the dates
indicated.

Date: March 28, 2003
BY: /s/ Richard E. Hoffmann
--------------------------------------------
Richard E. Hoffmann
Chief Executive Officer, President,
Director and Treasurer

Date: March 28, 2003
BY: /s/ Lynn D. Maynard
--------------------------------------------
Lynn D. Maynard
Executive Vice President and Director

Date: March 28, 2003
BY: /s/ Sandy Robison
--------------------------------------------
Chief Financial Officer, Vice President,
Secretary and Controller

Page 16

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following members of the Board of Directors and
officers of Anterra Property Investors VII, Inc., a corporate general partner of
the Registrant, on behalf of the Registrant in the capacities and on the dates
indicated.

BY: CROZIER PARTNERS VII, LTD.
A general partner

BY: ANTERRA PROPERTY INVESTORS VII, INC.,
General Partner of Crozier Partners VII, Ltd.

Date: March 28, 2003
BY: /s/ Richard E. Hoffmann
---------------------------------------------
Richard E. Hoffmann
President, Director and Treasurer

Date: March 28, 2003
BY: /s/ Lynn D. Maynard
---------------------------------------------
Lynn D. Maynard
Executive Vice President and Director

Page 17

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following members of the Board of Directors and
officers of Murray Realty Investors VII, Inc., a corporate general partner of
the Registrant, on behalf of the Registrant in the capacities and on the dates
indicated.

MURRAY REALTY INVESTORS VII, INC.
A General Partner

Date: March 28, 2003
BY: /s/ Fulton Murray
-------------------------------------------------
Fulton Murray
President, Chairman of the Board and Director

Page 18

CERTIFICATIONS

I, Richard E. Hoffmann, certify that:

1. I have reviewed this annual report on Form 10-K of S/M Real Estate Fund
VII, Ltd.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect our ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in our internal
controls;

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: March 28, 2003 BY: /s/ Richard E. Hoffmann
----------------------------------------
Name: Richard E. Hoffmann
Title: Chief Executive Officer, Director,
President and Treasurer of
SM7 Apartment Investors Inc.,
a general partner

Page 19

CERTIFICATIONS

I, Sandy Robison, certify that:

1. I have reviewed this annual report on Form 10-K of S/M Real Estate Fund
VII, Ltd.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect our ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in our internal
controls;

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: March 28, 2003 BY: /s/ Sandy Robison
---------------------------------------------------
Name: Sandy Robison
Title: Chief Financial Officer,
Vice President, Secretary and
Controller of SM7 Apartment Investors Inc.,
a general partner

Page 20

INDEX TO EXHIBITS

Document
Number Description

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

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

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

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

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

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

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

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

99.4 $5,830,000 Multifamily Note and Addendum, dated May 30, 1996.
Reference is made to Exhibit 99.2 to the Partnership's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 filed with the Securities and Exchange Commission.

99.5 $681,142 Subordinate Multifamily Note and Addendum, dated May
30, 1996. Reference is made to Exhibit 99.3 to the
Partnership's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 filed with the Securities and Exchange
Commission.

99.6 $6,400,000 Promissory Note, dated December 3, 1998. Reference
is made to Exhibit 99.1 to the Partnership's Form 8-K filed
with the Securities and Exchange Commission on December 14,
1998.

Page 21

INDEX TO EXHIBITS (continued)

Document
Number Description

99.7 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.8 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Page 22

- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

The Partners
S/M Real Estate Fund VII, Ltd.:

We have audited the financial statements of S/M Real Estate Fund VII, Ltd. (a
Texas Limited Partnership), as listed in the accompanying index at Item 8. In
connection with our audits of the financial statements, we also have audited the
financial statement schedule as listed in the accompanying index at Item 8.
These financial statements and the financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 S/M Real Estate Fund VII, Ltd.
as of December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG LLP

Dallas, Texas
February 14, 2003

F-1

S/M REAL ESTATE FUND VII, LTD.

BALANCE SHEETS

STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying notes to the financial statements.

F-2

S/M REAL ESTATE FUND VII, LTD.

STATEMENTS OF OPERATIONS

See accompanying notes to the financial statements.

F-3

S/M REAL ESTATE FUND VII, LTD.

STATEMENTS OF CASH FLOWS

See accompanying notes to the financial statements.

F-4

S/M REAL ESTATE FUND VII, LTD.

NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000

1. ORGANIZATION

S/M Real Estate Fund VII, Ltd. (the "Partnership") (see below) was organized on
November 4, 1982 pursuant to the filing of a Certificate of Limited Partnership
with the Secretary of State of the State of Texas. The Partnership was formed
for the purpose of acquiring existing garden style apartment complexes. The
general partners of the Partnership are SM7 Apartment Investors Inc. (see
below), a Texas corporation, Murray Realty Investors VII, Inc., a Texas
corporation ("Murray") and Crozier Partners VII, Ltd., a Texas limited
partnership (collectively referred to as the "General Partners"). The
Partnership will continue until January 31, 2012, unless sooner terminated in
accordance with the terms of the Partnership Agreement.

On June 16, 1998, DA Group Holdings, Inc., a Delaware corporation ("DA"), and
Anterra Property Investors VIII, Inc., a Texas corporation ("Anterra"), entered
into a Stock Purchase Agreement (the "Stock Agreement"). Pursuant to the Stock
Agreement, Anterra purchased from DA all of the issued and outstanding shares of
common stock, $1.00 par value per share, of SM7 Apartment Investors, Inc.
Anterra is an affiliate of Anterra Property Investors VII, Inc., which is a
general partner of Crozier Partners VII, Ltd.

2. LIQUIDITY

The General Partners currently expect funds from operations to pay all
obligations for 2003, including debt service. In the event of any cash flow
deficits, it is expected that such deficits will be funded by the Partnership's
existing cash balances. However, there can be no assurance that the Partnership
will have sufficient cash to fund such deficits.

3. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING The accompanying financial statements have been prepared on
the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America. Income is recognized as
earned and expenses are recorded as obligations are incurred.

REAL ESTATE INVESTMENT The real estate investment, which consists of land,
apartment buildings, building improvements and furniture, fixtures and
equipment, is recorded at cost less accumulated depreciation. Cost includes the
initial purchase price of the property plus acquisition costs. Depreciation is
computed using the straight-line method based on estimated useful lives of the
related assets ranging from three to twenty-one years.

IMPAIRMENT OF LONG-LIVED ASSETS The Partnership property is classified as held
for use. The Partnership assesses its real estate investment for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the real estate may not be recoverable. Recoverability of real estate to be held
and used is measured by a comparison of the carrying amount of the real estate
to future net cash flows (undiscounted and without interest) expected to be
generated by the real estate. If the real estate is considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the real estate exceeds the fair value of the real estate.

NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
establishing financial accounting and reporting for the impairment or disposal
of long-lived assets. The provisions of SFAS 144 are effective for fiscal years
beginning after December 15, 2001. The implementation of SFAS 144 on January 1,
2002 had no effect on the Partnership's financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
The main provisions of this statement address the classification of debt
extinguishments and accounting for certain lease transactions. Upon adoption,
early extinguishments will not continue to qualify for extraordinary item

F-5

S/M REAL ESTATE FUND VII, LTD.

treatment and the Partnership does not anticipate that the adoption of SFAS No.
145 will have a material impact the Partnership's financial position, net
earnings or cash flow.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The main provisions of this statement address
the recognition of liabilities associated with an exit or disposal activity.
Implementation of this statement is expected to have no impact on the financial
statements of the Partnership.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of this Interpretation are
applicable to guarantees issued or modified after December 31, 2002.
Implementation of these provisions of this statement is expected to have no
effect on the Partnership's financial position or results of operations. The
disclosure requirements in this Interpretation are effective for interim and
annual periods ending after December 15, 2002. The Partnership has no additional
items to disclose in connection with this Interpretation.

LEASE REVENUE The Partnership has determined that all leases associated with the
rental of space at the investment property are operating leases. Leases on the
Partnership's property typically have a term of eighteen months or less.

CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term highly
liquid investments which have maturities of three months or less from the date
of issuance. The carrying value approximates fair value because of the short
maturity of these instruments.

INCOME TAXES The Partnership distributes all profits, losses and other taxable
items to the individual partners. No income taxes are reflected in the financial
statements of the Partnership since such taxes are the responsibility of the
partners rather than the Partnership.

NET LOSS PER LIMITED PARTNERSHIP UNIT Net loss per limited partnership unit is
based upon the limited partnership interests outstanding during the year and the
net loss allocated to the limited partners (the "Limited Partners").

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

FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards
No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"),
requires that the Partnership disclose the estimated fair values of its
financial instruments. Fair values generally represent estimates of amounts at
which a financial instrument could be exchanged between willing parties in a
current transaction other than in forced liquidation.

Fair value estimates are subjective and are dependent on a number of significant
assumptions based on management's judgment regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. In addition, FAS 107 allows a wide
range of valuation techniques, therefore, comparisons between entities, however
similar, may be difficult.

4. PARTNERSHIP AGREEMENT

Pursuant to the terms of the Partnership Agreement, all items of income, gain,
loss, deduction and credit are generally allocated 1% to Crozier Partners VII,
Ltd. and 99% to the Limited Partners except that: (a) first, income and net gain
shall be allocated to the General Partners and the Limited Partners pro rata

F-6

S/M REAL ESTATE FUND VII, LTD.

based on and to the extent of their respective deficit balances in their capital
accounts in an amount sufficient to cause the aggregate deficits in the
Partners' capital accounts to not exceed the Minimum Gain (as defined), (b) net
gain shall then be allocated: (i) to the Limited Partners in an amount
sufficient to cause each Limited Partner's capital account to equal its
unreturned Original Invested Capital plus any unpaid Preferred Return (as
defined); and (ii) then, to the Limited Partners and the General Partners in the
proportion between them of 85% to the Limited Partners and 15% to the General
Partners.

Cash distributions from operations, as defined, will be allocated 1% to Crozier
Partners VII, Ltd. and 99% to the Limited Partners. Cash distributions from
sales or refinancings of property will be allocated 99% to the Limited Partners
and 1% to Crozier Partners VII, Ltd. until the Limited Partners have received an
amount from cash distributions from sales or refinancings or property equal to
their Original Invested Capital plus their Preferred Return (as defined). Next,
cash distributions from the sale or refinancing of property will be allocated 1%
to Crozier Partners VII, Ltd., and 99% to the Limited Partners and the General
Partners in the proportions between them of 85% to the Limited Partners and 15%
to the General Partners.

5. REAL ESTATE INVESTMENTS

On July 29, 1983, the Partnership acquired Fifth Avenue Apartments ("Fifth
Avenue"), a 198-unit apartment complex located in San Antonio, Texas. As of
December 31, 2002 and 2001, Fifth Avenue was 94% and 92% occupied, respectively.

6. MORTGAGE NOTES PAYABLE

Under the terms of the Partnership's loan agreement with General Electric
Capital Corporation (the "Loan Agreement"), the Partnership is required to make
fixed monthly payments of principal and interest in the amount of $43,269 until
maturity on January 1, 2009, at which time the entire outstanding principal
balance and accrued interest is due. Interest accrues at an annual fixed
interest rate of 7.16%. Under the terms of the Loan Agreement, the Partnership
is required to make monthly contributions of $3,905 which are held by the lender
pending application for the completion of certain required repairs to the Fifth
Avenue property. At December 31, 2002, the balance in this replacement reserve
account was $24,156.

The following represents principal payments required under the Loan Agreement
subsequent to December 31, 2002:

Year ending December 31,
2003 $ 75,444
2004 81,107
2005 87,195
2006 93,740
2007 100,776
2008 108,340
2009 5,601,903
-----------
$ 6,148,505
===========

Based on the borrowing rates currently available to the Partnership for mortgage
loans with similar terms and average maturities, the fair value of long-term
debt is $6,382,000 at December 31, 2002. As of December 31, 2001, the long-term
debt carrying value approximated fair value.

7. TRANSACTIONS WITH RELATED PARTIES

During the years ended December 31, 2002, 2001 and 2000, the General Partners or
their affiliates were reimbursed for Partnership administrative and operating
expenses, excluding property and construction management fees, in the amounts of
$11,641, $11,681 and $11,050, respectively.

On January 1, 1990, Murray Management Corporation subcontracted Anterra
Management Corporation to provide certain administrative and management services
with respect to the Partnership. Anterra Management Corporation is a real estate
management company and an affiliate of the general partners, and earned property
and construction management fees of $56,205, $57,867 and $61,528 for the years
ended December 31, 2002, 2001 and 2000, respectively.

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S/M REAL ESTATE FUND VII, LTD.

8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations. Selected quarterly
financial data are summarized as follows (dollars in thousands, except per
Interest data):

9. RECONCILIATION OF FINANCIAL STATEMENT NET LOSS AND PARTNERS' DEFICIT TO
FEDERAL INCOME TAX BASIS NET INCOME AND PARTNERS' DEFICIT

The following is a reconciliation of the net loss for financial statement
purposes to federal income tax basis net income for the years ended December 31,
2002, 2001 and 2000:

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S/M REAL ESTATE FUND VII, LTD.

Reconciliation of financial statement partners' deficit to federal income tax
basis partners' deficit for the years ended December 31, 2002, 2001 and 2000:

Because many types of transactions are susceptible to varying interpretations
under federal and state income tax laws and regulations, the amounts reported
above may be subject to change at a later date upon final determination by the
taxing authorities.

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S/M REAL ESTATE FUND VII, LTD.

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002

(1) The initial cost to the Partnership represents the original purchase
price of the property.

(2) The aggregate cost of real estate at December 31, 2002 and 2001 and
2000, for Federal income tax purposes is $9,134,988, $9,142,503 and
$9,115,315, respectively.

A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 2002, 2001, and 2000 follows:

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