UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the Quarterly Period Ended March 31, 2004

          or

For the Transition period from                     to                    

Commission File Number: 0-11779

S/M REAL ESTATE FUND VII, LTD.

(972) 404-7100

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.

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

Yes [  ] No [X]

S/M Real Estate Fund VII Ltd.

Table of Contents

Balance Sheets

Statement of Partners’ Deficit (unaudited)

See accompanying notes to the financial statements.

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Statements of Operations (unaudited)

See accompanying notes to the financial statements.

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Statements of Cash Flows (unaudited)

See accompanying notes to the financial statements.

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Notes to the Financial Statements

The quarterly unaudited financial statements for S/M Real Estate Fund VII, Ltd. (the “Partnership”) include all normal and recurring adjustments which are, in the opinion of the general partners, necessary to present a fair statement of financial position as of March 31, 2004, the results of operations for the three months ended March 31, 2004 and 2003, the change in partners’ deficit for the three months ended March 31, 2004, and the cash flows for the three months ended March 31, 2004 and 2003. Results of operations for the period are not necessarily indicative of the results to be expected for the full year.

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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

During the three months ended March 31, 2004 and 2003, the general partners or their affiliates were reimbursed for Partnership administrative and operating expenses, excluding property management fees, in the amounts of $5,578 and $3,025, respectively. Property management fees earned by an affiliate of the Partnership’s general partners were $14,849 and $14,002 for the three months ended March 31, 2004 and 2003, respectively.

The financial information included in this interim report as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 has been prepared by management without audit by independent certified public accountants. The Partnership’s 2003 annual report contains audited financial statements including the notes to the financial statements and should be read in conjunction with the financial information contained in this interim report.

No significant events other than mentioned below have occurred subsequent to fiscal year 2003, and no material contingencies exist which would require disclosure in this interim report per Regulation S-X, Rule 10-01, Paragraph (a)(5).

On February 20, 2004, the Partnership entered into a Purchase and Sale Agreement with a third party to sell the Fifth Avenue Apartments (the “Property”). The initial purchase price for the Property was $8,150,000. The buyer’s inspection period ended March 22, 2004, and the parties executed a First Amendment to the Purchase and Sale Agreement which reduced the purchase price to $8,065,000. The only remaining condition to closing the sale of the Property is the receipt of approval from the lender for the assumption by buyer of the loan secured by the Property. Though there can be no assurance that the sale will be consummated, the General Partners are anticipating that the sale will close on or before May 31, 2004. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the Partnership property is classified as held for sale. In accordance with SFAS No. 144, assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Therefore, the Partnership ceased depreciation of the asset as of October 23, 2003, the date the asset was determined to be held for sale.

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Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

Under the terms of the Partnership’s 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. 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 Fifth Avenue. At March 31, 2004, the balance in this replacement reserve account was $12,294.

Cash and cash equivalents totaled $93,577 at March 31, 2004, compared to $117,502 at December 31, 2003. The $23,925 decrease is primarily attributable to debt service payments and payments made to the replacement reserve account and escrow account, partially offset by the release of restricted cash (see below).

Cash held in escrow increased to $175,980 at March 31, 2004 from $108,506 at December 31, 2003. The $67,474 increase is attributable to contributions to the insurance and real estate tax escrow, as required by the Partnership’s loan agreement.

Restricted cash replacement reserve decreased to $12,294 at March 31, 2004, from $23,689 at December 31, 2003. The $11,395 decrease is attributable to the release of $23,176 for replacements, offset in part by monthly contributions to the replacements reserve in accordance with the terms of the loan agreement.

Other assets decreased to $48,174 at March 31, 2004, from $61,407 at December 31, 2003. The decrease is primarily due to decreases in prepaid insurance and the amortization of loan costs.

Accounts receivable totaled $6,847 at March 31, 2004, compared to $8,711 at December 31, 2003. The decrease is primarily attributable to the timing of tenant rental receipts.

Accrued expenses and other liabilities totaled $106,831 at March 31, 2004, compared to $57,625 at December 31, 2003. The change is primarily attributable to the timing of payments for real estate taxes.

The Partnership’s general partners currently expect funds from operations to be sufficient to pay all obligations for 2004, 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 any such deficits.

Results of Operations

Operations resulted in net income of $6,572 for the three-month period ended March 31, 2004, and net loss of $124,566 for the three-month period ended March 31, 2003. The increase in net income for the three months ended March 31, 2004 from the net loss in the corresponding period in 2003 is primarily attributable to decreases in depreciation expense and partnership administrative costs.

Rental income totaled $363,030 for the three-month period ended March 31, 2004, compared with $343,997 for the three-month period ended March 31, 2003. Occupancy at Fifth Avenue averaged approximately 94% and 91% for the three-month periods ended March 31, 2004 and 2003, respectively. The average rental income per occupied square foot at Fifth Avenue was $9.21 for the three-month period ended March 31, 2004, compared to $8.91 for the corresponding period in 2003.

Total expenses for the three-month period ended March 31, 2004 were $357,163 compared to $469,703 for the three-month period ended March 31, 2003. The decrease is primarily attributable to decreases in depreciation expense and general and administrative expenses.

Property operating expenses consist primarily of on-site personnel expenses, utility costs, repair and maintenance costs, property management fees, advertising costs, insurance and real estate taxes. Property operating expenses for the three-month period ended March 31, 2004 were $214,499 compared to $202,586 for the three-month period ended March 31, 2003. The increase is primarily attributable to higher utility costs, apartment major appliance replacements and office/administrative costs.

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General and administrative expenses for the three-month period ended March 31, 2004 were $31,341 compared to $50,589 for the three-month period ended March 31, 2003. The decrease is due primarily to lower legal fees offset in part by increases in audit and other accounting fees.

On February 20, 2004, the Partnership entered into a Purchase and Sale Agreement with a third party to sell the Property. The initial purchase price for the Property was $8,150,000. The buyer’s inspection period ended March 22, 2004, and the parties executed a First Amendment to the Purchase and Sale Agreement which reduced the purchase price to $8,065,000. The only remaining condition to closing the sale of the Property is the receipt of approval from the lender for the assumption by buyer of the loan secured by the Property. Though there can be no assurance that the sale will be consummated, the General Partners are anticipating that the sale will close on or before May 31, 2004. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the Partnership property is classified as held for sale. In accordance with SFAS No. 144, assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Therefore, the Partnership ceased depreciation of the asset as of October 23, 2003, the date the asset was determined to be held for sale.

General

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

Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information related to the market risk of the Partnership since December 31, 2003.

Part I, Item 4. Controls and Procedures

As of March 31, 2004, 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-15(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 as of March 31, 2004 to provide reasonable assurance that information required to be disclosed by us in our periodic SEC Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by us is accumulated and communicated to our management, including the chief executive officer and chief financial officer or our general partners, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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Part II            Other Information

Items 1-5       Not applicable.

Item 6            Exhibits and reports on Form 8-K.

                        (a) Exhibits -

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INDEX TO EXHIBITS

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INDEX TO EXHIBITS (continued)

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