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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

Commission File Number: 0-26470

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (502) 719-1600

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

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 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.    Yes  x    No  ¨

The aggregate market value of the voting units held by non-affiliates of the issuer, computed by reference to the price at which units were sold, was $8,858,807 (for purposes of calculating the preceding amount only, all directors, executive officers and shareholders holding 5% or greater of the registrant’s units are assumed to be affiliates). The number of Units outstanding as of March 3, 2004 was 18,666.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  x

The aggregate market value of the voting and non-voting units held by non-affiliates computed by reference to the price, at which the units were last sold, was $8,858,807 as of January 31, 2004.

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

A California Limited Partnership

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

PART I

Overview

American Retirement Villas Properties III, L.P. (“ARVP III” or the “Partnership”), a California limited partnership, was formed in 1989 to develop, finance, acquire and operate senior citizen housing. The Partnership currently owns and operates two assisted living communities (“ALCs”) that house and provide personal care and support services to senior residents. Those communities are located in Camarillo, California and Chandler, Arizona and have an aggregate of 287 units.

ARV Assisted Living, Inc. (“ARVAL” or “General Partner”), a Delaware corporation, is the sole general partner of the Partnership. The General Partner manages the day-to-day operations of the ALCs and makes all decisions concerning property acquisitions and dispositions of the ALCs, subject to the Partnership’s limited partners’ rights to approve or disapprove of the sale of all or substantially all of the Partnership’s assets. ARVAL also owns approximately 52.5% of the limited partnership units of the Partnership.

On April 23, 2003, the General Partner became a wholly owned subsidiary of Prometheus Assisted Living LLC (“Prometheus”) pursuant to an Agreement and Plan of Merger entered into on January 3, 2003, among the General Partner, Prometheus, and Jenny Merger Corp., a wholly-owned subsidiary of Prometheus. Subsequently, as the result of a restructuring among affiliated entities owned by Prometheus, the General Partner became the wholly owned subsidiary of Atria Senior Living Group, Inc., a Delaware Corporation (“Atria”) on October 1, 2003.

As a result of the change in ownership of the General Partner, management of Atria has assumed the oversight responsibility of the management of ARVAL, including the management of the Partnership. Management of the individual properties owned by the Partnership, however, remains unchanged as a result of change in management of ARVAL.

On March 24, 2004 ARVP III Acquisition, L.P., a wholly-owned subsidiary of ARVAL (“Acquisition Sub”), ARVAL and Atria filed with the Securities and Exchange Commission (“SEC”) a Definitive Offer to Purchase and Consent Solicitation Statement (“Offer to Purchase”) on Schedule 14A relating to (i) a tender offer by Acquisition Sub for all of the limited partnership units of the Partnership (“Units”) that ARVAL does not own and (ii) a solicitation of the holders of the Units for consent to a proposal to effect a merger transaction pursuant to which Acquisition Sub would merge with and into the Partnership and ARVAL would acquire the entire equity interest in the Partnership. Because the transactions contemplated by the Offer to Purchase is a Rule 13e-3 “going private” transaction under the Securities Exchange Act of 1934, as amended, the Offer to Purchase was also filed with the SEC in compliance with that rule.

The Assisted Living Market

The senior living industry encompasses a broad spectrum of senior living service and care options, which include independent living, assisted living and skilled nursing care. Independent living is designed to meet the needs of seniors who choose to live in an environment surrounded by their peers where they receive services such as housekeeping, meals and activities, but are not reliant on assistance with activities of daily living (for example, bathing, eating and dressing). Assisted living meets the needs of seniors who seek housing with supportive care and services including assistance with activities of daily living, Alzheimer’s care and other services (for example, housekeeping, meals and activities), but do not need the medical care provided in a skilled nursing facility. Skilled nursing meets the needs of seniors whose care needs require 24-hour skilled nursing services or who are receiving rehabilitative services following an adverse event (for example, broken hip and stroke). In all of these settings, seniors may elect to bring in additional care and services as needed, such as home-health care and end-of-life or hospice care.

Aging Population. The primary consumers of long-term health care services are persons over the age of 65. This group represents one of the fastest growing segments of the population. According to U.S. Bureau of Census data, the segment of the population over 65 years of age is currently 13% of the total population, or 35 million people. That number is projected to grow to 20% of the total population, or 70 million people, by the year 2030. Additionally, the number of people aged 85

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and older, which comprises the largest percentage of residents at long-term care facilities, is currently 4.4 million and is projected to increase to 8.9 million by the year 2030.

The senior living industry is highly fragmented and characterized by numerous senior living operators. Senior living providers may operate freestanding independent living, assisted living or skilled nursing residences, or communities that feature a combination of senior living options such as continuing care retirement communities (“CCRCs”), which typically consist of large independent living campuses with assisted living and skilled nursing sections. The level of care and services offered by providers varies along with the size of communities, number of residents served and design of properties (for example, purpose-built communities or refurbished structures).

The Partnership’s Assisted Living Services

The range of services offered by the Partnership in its assisted living communities is designed to meet the individual needs of the residents and to enhance both the physical and mental well being of seniors in each of its ALCs by promoting their independence and dignity in a home-like setting. The Partnership’s assisted living program includes the following:

Basic Service and Care Package. The basic service and care package at the Partnership’s ALCs generally includes meals in a restaurant-style setting, housekeeping, linen and laundry service, social and recreational programs, utilities, and transportation in a van or minibus.

Personalized Care Plan. The Partnership’s assisted living services program offers additional levels of care beyond what is offered in the basic package. The Community’s staff develops, with the resident and his or her family (and physician, if appropriate), a “personalized” care plan that is customized to satisfy the specific needs of each resident. This care plan is developed in conjunction with an initial assessment of a resident’s physical and mental health. The community performs a reassessment after the initial 30 days and periodically throughout the resident’s stay to ensure that the level of care provided the resident corresponds to the resident’s then current condition. Depending on the assessments, residents are offered and receive some or all of the following services:

In addition to the base rent, the Partnership typically charges between $425 and $1,745 per month plus additional charges for higher levels of assisted living services. Fee levels vary between the two communities and each community may charge additional fees for other customized assisted living services. The Partnership expects that an increasing number of residents will use additional levels of services as they age in its ALCs. The average monthly resident fee, consisting of net resident fees plus additional care fees combined, for the Partnership’s two communities, was approximately $2,245 for 2003, $2,224 for 2002 and $2,060 for 2001. The Partnership’s resident fee revenues are derived almost exclusively from private pay sources.

Wellness Program. The Partnership has implemented a Wellness Program for residents of its communities designed to identify and respond to changes in a resident’s health or condition. Together with the resident and the resident’s family and physician, as appropriate, the Partnership designs a solution to fit that resident’s particular needs. Each community’s staff monitors the physical and mental well being of its residents, usually at meals and other activities, and informally as the staff performs services around the facility. Through the Wellness Program the Communities works with:

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Factors Affecting Future Results and Forward-Looking Statements

The Partnership’s business, results of operations and financial condition are subject to many risks, including those set forth below. Certain statements contained in this report, including, without limitation, statements containing the words “believes,” “anticipates,” “expects,” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, the Partnership’s performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Partnership has made forward-looking statements in this report concerning, among other things, the level of future capital expenditures. These statements are only predictions, however; actual events or results may differ materially as a result of risks facing the Partnership. These risks include, but are not limited to, those items discussed below. Certain of these factors are discussed in more detail elsewhere in this report, including without limitation under the captions “Business”, “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this report. The Partnership disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Certain risks are inherent to the operation of ALCs. These risks include competition, governmental regulation, and risks common to the assisted living industry.

Competition

The Partnership operates in two separate markets. Competition is significant in these markets. The communities compete directly with numerous other nationally, regionally or locally owned companies. No one competitor tends to have a dominant market share within the Partnership’s markets. The Partnership’s management believes its pricing and quality services are competitive.

Some of the Partnership’s present and potential competitors are significantly larger or have, or may obtain, financial resources greater than that available to the Partnership. These forces could limit its ability to attract residents, attract qualified personnel, expand its business, or increase the cost of future acquisitions, each of which could have a material adverse effect on its financial condition, results of operations and prospects.

Government Regulation

Assisted Living. The assisted living industry is subject to extensive state and local regulation. While such regulations vary by state, they typically relate to licensure, staffing, physical design, required services, and resident characteristics. Currently, no federal rules explicitly define or regulate assisted living. However, the Partnership is and will continue to be subject to varying degrees of regulation and licensing by health or social service agencies and other regulatory authorities in California and Arizona. Changes in such laws and regulations, or new interpretations of existing laws and regulations could have a significant effect on methods and costs of doing business. The Partnership cannot assess the ultimate timing and impact that any pending or future healthcare reform proposals may have on the assisted living industry in general. No assurance can be given that any such reform will not have a material adverse effect on the business, financial condition or the Partnership’s results of operations.

The Department of Health and Human Services (“DHHS”) has released final privacy regulations implementing portions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). Compliance with these privacy regulations generally became mandatory April 14, 2003. These privacy regulations restrict how health care providers use and disclose individually identifiable health information and grant patients certain rights related to their health information. Under HIPAA, DHHS also issued final security regulations that become mandatory in April 2005 and govern the security of individually identifiable health information that is electronically maintained or transmitted. Further, DHHS has issued final regulations establishing standards and code sets that healthcare providers must use when conducting certain healthcare transactions electronically. The Partnership believes it is exempt from compliance because the Partnership does not transmit certain healthcare information electronically. Failure to comply with the privacy, security or transaction standard regulations enacted under HIPAA could result in civil and criminal penalties. The Partnership will continue to remain subject to any Federal or state laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could impose additional penalties.

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Risks Common to the Partnership’s Assisted Living Operations

Staffing and Labor Costs. The Partnership competes with other providers of assisted living and senior housing to attract and retain qualified personnel. The Partnership makes a genuine effort to remain competitive with other companies in its industry. Therefore, if it is necessary for the Partnership to increase pay or enhance benefits to maintain its competitive status in its industry, its labor costs could rise. The Partnership cannot provide assurance that if its labor costs do increase, they can be matched by corresponding increases in rental or assisted living.

Obtaining Residents and Maintaining Rates. For the year ended December 31, 2003, the Partnership’s communities had a combined occupancy rate of 94%. Occupancy may drop in its existing communities, primarily due to changes in the health of residents, increased competition from other assisted living providers, particularly those offering newer communities the reassessment of residents’ physical and cognitive state and the availability of residents that can afford the care offered. If the Partnership fails to operate its ALCs effectively, it may have a material adverse effect on the Partnership’s business, financial condition and operating results.

The Partnership cannot assure that, at any time, any ALC will be substantially occupied at assumed rents. In addition, the Partnership may only achieve full occupancy at rental rates below those assumed. If operating expenses increase, local rental market conditions may limit the extent to which the Partnership may increase prices. The implementation of rate increases for residents of new acquisitions may lag behind increases in operating expenses. In addition, if the Partnership fails to generate sufficient revenue, it may be unable to meet minimum rent obligations under the Partnership’s long-term operating leases or to make interest and principal payments on its indebtedness.

General Real Estate Risks. The performance of the Partnership’s ALCs is influenced by factors generally affecting real estate investments, and real estate risks specific to ALCs including:

Real estate investments are also affected by such factors as applicable laws, including tax laws, interest rates and the availability of financing. Real estate investments are relatively illiquid and, therefore, limit the Partnership’s ability to vary its portfolio promptly in response to changes in economic or other conditions.

Requirements Imposed by Laws Benefiting Disabled Persons. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist that also may require us to modify existing and planned properties to allow disabled persons to access the properties. The Partnership believes that its properties are either substantially in compliance with present requirements or are exempt from them. However, if required changes cost more than anticipated, or must be made sooner than anticipated, the Partnership would incur additional costs. Further legislation, or amendments to the current legislation, may impose requirements with respect to ensuring access of disabled persons to its properties and the costs of compliance could be substantial.

Geographic Concentration. One of the Partnership’s ALCs is located in Camarillo, California and the other ALC is located in Chandler, Arizona. The market value of these ALCs and the income generated from the properties could be negatively affected by changes in local and regional economic conditions, specific laws and the regulatory environment in these states, and by acts of nature. The Partnership cannot provide assurance that such geographic concentration will not have an adverse impact on its business, financial condition, operating results or prospects.

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Insurance. The Partnership believes that it maintains adequate insurance coverage, based on the nature and risks of its business, historical experience and industry standards. The Partnership’s business entails an inherent risk of liability. In recent years, the Partnership and other assisted living providers have become subject to an increasing number of lawsuits alleging negligence or related legal theories, which may involve large claims and significant legal costs. From time to time the Partnership is subject to such suits because of the nature of its business. Claims may arise that could exceed the Partnership’s insurance coverage limits or are excluded from the coverage afforded by its policies. A successful claim against the Partnership that is not covered by, or is in excess of its insurance limits, could have a material adverse effect on its financial condition, operating results or liquidity. Claims against the Partnership, regardless of their merit or eventual outcome, may also have a material adverse effect on its ability to attract residents or expand its business and would consume considerable management time. The Partnership must renew its insurance policies annually and can provide no assurance that the Partnership will be able to continue to obtain liability insurance coverage in the future or that it will be available on acceptable terms. As a result of poor loss experience, a number of insurance carriers have stopped providing insurance coverage for the long-term care industry and those remaining have increased premiums and deductibles substantially. As the result of these continuing increases in both deductible amounts and premiums, there can be no assurance that the Partnership will be able to obtain all desired insurance coverage in the future on commercially reasonable terms or at all.

The following table sets forth, as of December 31, 2003 the location of each of the ALCs, the date on which operations commenced at each such ALC, the number of units at each ALC, and the Partnership’s interest in each ALC.

Operating Structure

The Partnership has centralized accounting, finance and other operational functions at the General Partner’s affiliate’s corporate headquarters in order to allow community-based personnel to focus on resident care. The General Partner is responsible for establishing policies and procedures relating to resident care, hiring and training employees, accounting and finance functions including billing and collection, accounts payable, tax planning and compliance, and providing overall strategic direction to the Partnership’s communities. The General Partner also oversees all aspects of community-based operations, including marketing and sales activities, resident care, the hiring of community executives, care managers and other community-based personnel, and compliance with applicable local and state regulatory requirements.

Community Staffing

Each of the Partnership’s communities has an executive director responsible for the day-to-day operations, including quality of care, resident services, sales and marketing, and financial performance. The executive director is supported by a director, who oversee the care and service of the community’s residents, a director of community relations, who is responsible for selling the communities’ services and other key positions, including the dining services coordinator, the program coordinator and the maintenance coordinator.

Care managers, who work on full-time, part-time and flex-time schedules, provide most of the hands-on resident care, such as bathing, dressing and other personalized care services, including housekeeping, meal service and resident activities. As permitted by state law, care managers who complete a special training program supervise the storage and distribution of medications. The use of care managers to provide substantially all services to residents has the benefits of consistency and continuity in resident care. In most cases, the same care manager assists the resident in dressing, dining and coordinating daily activities. The number of care managers working in a community varies according to the level of care required by the residents of the community and the numbers of residents receiving care services, such as Alzheimer’s care.

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The Partnership believes that its communities can be most efficiently managed by maximizing direct resident and staff contact. Employees involved in resident care, including the administrative staff, are trained in the care manager duties and participate in supporting the care needs of the residents.

Other than the ordinary litigation that is incidental to, and arises in the normal course of, the business of the Partnership, there are no material legal proceeding pending against the Partnership. While the Partnership cannot predict the results with certainty, it does not believe that any liability from any such lawsuits or other matters will have a material effect on its financial position, results of operations, or liquidity.

No matters were submitted to Unit Holders in the fourth quarter of the fiscal year.

On March 24, 2004 Acquisition Sub, ARVAL and Atria filed the Offer to Purchase on Schedule 14A relating to (i) a tender offer by Acquisition Sub for all of the limited partnership units of the Partnership (“Units”) that ARVAL does not own and (ii) a solicitation of the holders of the Units for consent to a proposal to effect a merger transaction pursuant to which Acquisition Sub would merge with and into the Partnership and ARVAL would acquire the entire equity interest in the Partnership. Because the transactions contemplated by the Offer to Purchase is a Rule 13e-3 “going private” transaction under the Securities Exchange Act of 1934, as amended, the Offer to Purchase was also filed with the SEC in compliance with that rule.

PART II

There is no formal, established public trading market for the Partnership’s Units, and secondary sales activity for the Units is limited to sporadic sales which occur within an informal secondary market or in connection with third party tender offers for the Units. As of March 22, 2004, ARVAL held approximately 9,808 units or approximately 52.5% of the Units. As of March 22, 2004, there were approximately 985 unitholders of record owning approximately 18,666 Units.

There are no Partnership units (i) that are subject to outstanding options or warrants to purchase, or securities convertible into, Partnership units, (ii) that could be sold pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), or that the Partnership has agreed to register under the Securities Act for sale by unitholders or (iii) that are being, or have been publicly proposed to be, publicly offered by the Partnership, the offering of which could have a material effect on the market price of the Partnership units.

Information appearing under Schedule II and the Sections entitled “Special Factors – Determination of the Offer Price – (B) Prices of Units in Secondary Market Sales Reported to the Partnership” and “– (C) Recent Tender Offers” of the Offer to Purchase is hereby incorporated by reference.

The following table presents selected financial data for each of the last five years. Certain of this financial data has been derived from the Partnership’s audited financial statements included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying notes and with “Management’s Discussion and Analysis of Financial Condition Results of Operations” at Item 7. This table is not covered by the Independent Auditors’ Report.

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Critical Accounting Policies

Principles of Consolidation. The consolidated financial statements of the Partnership include the accounts of the Partnership, Retirement Inns III, LLC, ARV Chandler Villas, L.P and ARV Villa Las Posas, L.P. The Partnership serves as the sole member of Retirement Inns III, LLC, and as the general partner of ARV Chandler Villas L.P. and ARV Villa Las Posas, L.P. All intercompany balances and transactions have been eliminated in consolidation.

Carrying Value of Real Estate. Property, furniture and equipment are stated at cost less accumulated depreciation which is charged to expense on a straight-line basis over the estimated useful lives of the assets as follows:

The Partnership reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, the Partnership estimates the future undiscounted cash flows expected to result from using the assets and eventually disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based upon the asset’s fair value.

Use of Estimates. In the preparation of the Partnership’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management has made estimates and assumptions that affect the following:

Actual results could differ from those estimates.

Impound Accounts. The lenders hold certain Partnership’s funds in impound accounts for payment of property taxes, insurance premiums and future property improvements (replacement reserves) on these properties. The Partnership includes these impound accounts in other assets. At December 31, 2003 and December 31, 2002 the impounds were $407,000 and $352,000, respectively.

Collateral Deposit. The Partnership was required by the lender to deposit $2.0 million dollars into a collateral deposit account held by the lender as part of the modification agreement to extend the maturity date, increase the debt and change the interest rate on one of the Partnership’s loans. The deposit was released in May 2003, as part of the refinancing of this loan on April 10, 2003, to a thirty-five year HUD insured loan.

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Deferred Financing Cost. The Partnership defers and amortizes financing costs using the effective interest method over the term of the respective notes payable and includes them in deferred loan fees.

Revenue Recognition. Residency agreements with residents are on a month-to-month basis. The Partnership applies advance deposits to the first month’s rent. Revenue is recognized in the period in which services are provided. Revenue received in advance of the period the services are performed is recorded in tenant-prepaid rents and services.

General Liability Insurance. The Partnership utilized third-party insurance for losses and liabilities associated with general and professional liability claims subject to established self insured retention levels on a per occurrence basis. Losses up to these deductible levels are accrued based upon the Partnership’s estimates of the aggregate liability for claims incurred based on the Partnership’s experience and appropriate actuarial principles.

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 46 revised, Consolidation of Variable Interest Entities—an interpretation of ARB No. 51, which requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. Prior to FIN 46, a company included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. Application of FIN 46 is required for potential variable interest entities commonly referred to as special purpose entities for periods ending after December 15, 2003. Application of the provisions will be required for all other variable interest entities by the end of the first reporting period that ends after March 15, 2004. The Partnership has not completed their evaluation of the effect of the adoption of the provisions of FIN 46 on the Partnership’s consolidated financial statements.

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The Partnership adopted SFAS No. 145 in 2003 and has classified losses on debt extinguishment as a component of costs and expenses in the consolidated statement of operations.

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosure requirements for the annual and interim financial statements of the guarantor. It also requires that a guarantor recognize a liability at the inception of the guarantee for the fair value of the obligation undertaken. The Partnership adopted the recognition and measurement provision of FIN No. 45 beginning January 1, 2003, while the disclosure provisions became effective at December 31, 2002. Adoption of this interpretation did not have a material effect on the Partnership’s consolidated financial statements.

Liquidity

On a long-term basis, our liquidity is sustained primarily from cash flow provided by operating activities. With respect to distributions of cash flow from operations, the Managing General Partner is currently assessing both the capital improvement and operating needs of the Partnership, particularly the cost of ongoing insurance coverage, and attempting to determine the amount of funds necessary to satisfactorily meet those needs. Consequently, pending that determination, the Partnership’s ability to make future distributions of cash flow to the Partners, if any, will remain uncertain and the amount, if any, that might be distributed cannot be predicted.

Management of the Partnership expects that cash generated from the operations of the ALCs will be adequate to pay operating expenses and current capital requirements for the next 12 months. For the year ended December 31, 2003, net cash provided by operating activities was $1.1 million compared to $0.9 million for the year ended December 31, 2002 and $0.8 million for the year ended December 31, 2001.

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Net cash used in investing activities was $0.4 million for the year ended December 31, 2003 as compared to $0.5 million for the year ended December 31, 2002, and $0.3 million for the year ended December 31, 2001.

Net cash provided by financing activities was $2.1 million for the year ended December 31, 2003 as compared to a use of $1.8 million for the year ended December 31, 2002, and $6.0 million for the year ended December 31, 2001. The increase in 2003 resulted from the return of collateral which occurred when the Partnership closed a new first lien HUD-insured loan on the Villa Las Posas property in the amount of $12.2 million at an interest rate of 6.05% fixed for a term of 35 years.

The General Partner is not aware of any trends, other than national economic conditions, which had or which may be reasonably expected to have a material favorable or unfavorable impact on revenues or income from the operations or sale of properties. We believe that if the inflation rate increases we will be able to pass the subsequent increases in operating expenses onto the residents at the properties by way of higher rental and assisted living rates. The implementation of price increases is intended to lead to an increase in revenue, however; those increases may result in an initial decline in occupancy and/or a delay in increasing occupancy. If this occurs, revenues may remain constant or even decline.

Capital Resources

Management of the Partnership estimates that it will spend approximately $175,000 for capital expenditures during 2004 for physical improvements at the two ALCs. The funds for these improvements should be available from operations. There are no known material trends, favorable or unfavorable, in our capital resources, and there is no expected change in the mix of such resources.

To protect the Partnership against lawsuits and claims relating to general and professional liability, the Partnership currently maintains third party insurance policies in amounts and covering risks that are consistent with industry practice. Under the terms of such insurance policies, its coverage is provided subject to varying deductible levels and liability amounts. As a result of poor industry loss experience, a number of insurance carriers have stopped providing insurance coverage to the assisted living industry, and those remaining have drastically increased premiums and deductible amounts. As a result of these uncertainties in both deductible amounts and premiums, there can be no assurances that Partnership will be able to obtain all desired insurance coverage in the future on commercially reasonable terms if at all.

The following table summarizes the Partnership’s contractual obligations at December 31, 2003:

Results of Operations

The Year Ended December 31, 2003 as compared to the Year Ended December 31, 2002

The following table sets forth a comparison of the year ended December 31, 2003 and the year ended December 31, 2002. The percentage increase (decreases) are based upon actual numbers from the consolidated Statement of Operations, rounded to the nearest thousand.

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The increase in rental revenue of $0.60 million from $6.06 million for the year ended December 31, 2002 to $6.66 million for the year ended December 31, 2003, or 10.0%, is primarily attributable to:

The increase in rental property operations and assisted living operating expenses of $0.23 million from $3.87 million for the year ended December 31, 2002 to $4.10 million for the year ended December 31, 2003, or 5.9%, is primarily attributable to:

The increase in general and administrative expenses of $0.12 million from $0.43 million for the year ended December 31, 2002 to $0.55 million for the year ended December 31, 2003, or 29.2%, is primarily attributable to:

The decrease in interest expense of $0.09 million from $1.47 million for the year ended December 31, 2002 to $1.38 million for the year ended December 31, 2003, or (5.5)%, is due to the weighted average interest rate paid to lenders decline from 8.4% in 2002 to 6.7% in 2003, offset by a slight increase in debt outstanding.

The Year Ended December 31, 2002 as compared to the Year Ended December 31, 2001

The following table sets forth a comparison of the year ended December 31, 2002 and the year ended December 31, 2001. The percentage increase (decreases) are based upon actual numbers from the consolidated Statement of Operations, rounded to the nearest thousand.

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The increase in rental revenue of $0.02 million from $6.04 million for the year ended December 31, 2001 to $6.06 million for the year ended December 31, 2002, or 0.4%, is primarily attributable to:

The decrease in assisted living revenue of $0.13 million from $0.71 million for the year ended December 31, 2001 to $0.58 million for the year ended December 31, 2002, or (19.5)%, is primarily attributable to:

The decrease in rental property operations and assisted living operating expenses of $0.13 million from $4.00 million for the year ended December 31, 2001 to $3.87 million for the year ended December 31, 2002, or (3.2)%, is primarily attributable to:

The decrease in general and administrative expenses of $0.42 million from $0.85 million for the year ended December 31, 2001 to $0.43 million for the year ended December 31, 2002, or (49.5)%, is primarily attributable to:

The increase in interest expense of $0.24 million from $1.23 million for the year ended December 31, 2001 to $1.47 million for the year ended December 31, 2002, or 19.7%, is primarily related to a higher average balance of loans outstanding, partially offset by a lower weighted average interest rate.

Off-Balance Sheet Arrangements

The Partnership has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Partnership’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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The Partnership is exposed to market risks related to fluctuations in the interest rates on the Partnership’s fixed rate notes payable. With respect to the Partnership’s fixed rate notes payable, changes in the interest rates affect the fair market value of the notes payable, but not our earnings or cash flows. The Partnership does not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until the earlier of maturity and any required refinancing of such debt. The Partnership does not currently have any variable interest rate debt and, therefore, is not subject to interest rate risk associated with variable interest rate debt. Currently, the Partnership does not utilize interest rate swap or exchange agreements and, therefore, is not subject to interest rate risk associated with interest rate swaps.

The Consolidated Financial Statements and the Reports of Independent Auditors are listed at Item 15 and are included beginning on Page F-1.

None.

The Partnership’s General Partner, by its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Partnership’s design and operation of disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) as of March 19, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.

PART III

As an entity, the Partnership has no directors or executive officers. ARVAL serves as the Managing General Partner. The Partnership’s General Partner makes all decisions concerning property acquisitions and dispositions of the communities, subject to the limited partners’ rights to approve or disapprove of the sale of substantially all of our assets.

Executive Officers and Directors of our General Partner

The following table sets forth-certain information regarding the executive officers and directors of ARVAL as of December 31, 2003.

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John A. Moore. From November 1996 to March 1998, Mr. Moore was Executive Vice President of Finance for World Financial Properties, a Canadian-based real estate company with global interests, located at One Liberty Plaza, New York, New York 10006. From March 1998 to December 2001, he was a Principal and Chief Financial Officer of Lazard Frères Real Estate Investors L.L.C. (“LFREI”). LFREI’s activities consist principally of acting as a general partner of several real estate investment partnerships. LFREI is the general partner of limited partnerships, which were formed to invest in companies active in the real estate industry and is managing member of Prometheus Senior Quarters LLC. Prometheus Senior Quarters LLC indirectly wholly-owns Atria, which is the sole stockholder of ARVAL. Since January 2002, Mr. Moore has acted as a Managing Principal and the Chief Financial Officer of LFREI. Since October 2003, Mr. Moore has served as Chief Executive Officer of ARVAL and has been a Director since 1999.

Mark D. Jessee. Since October 2003, Mr. Jessee has served as Chief Financial Officer of ARVAL. Since March 2001, Mr. Jessee has served as Chief Financial Officer for Atria Senior Living Group, Inc. (formally Atria, Inc.). From July 1997 until February 2001, Mr. Jessee served as Vice President of Finance for Atria, Inc.

Carmin Grandinetti. Since November 19, 2003, Mr. Grandinetti has served as Senior Vice President, Secretary and General Counsel of ARVAL. Since April 12, 1999, Mr. Grandinetti has served as Senior Vice President and General Counsel for Atria. From January 1, 1989 to April 11, 1999, Mr. Grandinetti was a member of the law firm of Greenebaum Doll & McDonald, PLLC, engaged in the private practice of law.

Douglas Armstrong. Mr. Armstrong was promoted to Senior Vice President, Secretary and General Counsel of ARVAL in January 2002 and on November 19, 2003 became Senior Vice President, Special Counsel and Assistant Secretary. Mr. Armstrong was retained in January 1998 as legal counsel. Subsequently, he was promoted to the position of Vice President, Legal Counsel for ARVAL.

Julie Harding. Since June 2003, Ms. Harding has served as Chief Marketing Officer for Atria. Before that time, she served as the Senior Vice President, Sales/Marketing for Atria Retirement and Assisted Living since June 2000 after working in various senior corporate communications functions since joining the company in April 1998.

Bernard Wheeler-Medley. Mr. Wheeler-Medley joined the legal department of ARVAL in 1996 and served as an officer and Associate General Counsel for ARVAL until 2002. Since 2002, Mr. Wheeler-Medley has served as Chief Quality Officer of ARV.

Matthew J. Lustig. Since 1994, Mr. Lustig has served as Managing Director of Lazard Freres & Co. LLC. From April 1999 to September 1999, Mr. Lustig served as acting Chief Executive Officer of LFREI. Since January 2002, Mr. Lustig has served as Managing Principal of LFREI. Mr. Lustig has been a Director since 2003. Mr. Lustig is also a Director of iStar Financial Inc.

Joseph D. Kasman. Since January 1994, Mr. Kasman has served as President of Kasman Capital, Inc., a real estate firm located at 401 Clairmont Avenue, Suite 3, Thornwood, New York 10594. Since June 2001, Mr. Kasman has served as Managing Member of Katonah Storage Partners, LLC, a storage company located at 401 Clairmont Avenue, Suite 3, Thornwood, New York 10594. Mr. Kasman has been a Director since 2003.

None of the above noted directors or officers is related to any other director or officer by blood or marriage and none of the directors or officers is involved in any legal proceedings as described in Section 401(f) of Regulation S-K.

The board of directors of the General Partner has determined that it has at least one financial expert serving on its board of directors. John Moore is an “audit committee financial expert” as such term is defined in Item 401(h)(2) of Regulation S-K, and is not “independent” as such term is defined in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.

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Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Partnership pursuant to Rule 16a-3(e) during the Partnership’s fiscal year ended December 31, 2003 and Form 5 and amendments thereto furnished to the Partnership with respect to the Partnership’s fiscal year ended December 31, 2003, and any written representation referred to in paragraph (b)(2)(i) of Item 405 of Regulation S-K, the Partnership is not aware of any person who, at any time during the Partnership’s fiscal year ended December 31, 2003, was a beneficial owner of more than 10 percent of the Partnership’s units (or was a director or officer of ARVAL, the Partnership’s general partner), or any other person subject to Section 16 of the Securities Exchange Act of 1934, as amended, with respect to the Partnership because of the requirements of Section 30 of the Investment Company Act of 1940, as amended, or Section 17 of the Public Utility Holding Company Act, as amended, that failed to file on a timely basis, as disclosed in such Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934, as amended, during the Partnership’s fiscal year ended December 31, 2003 or prior fiscal years.

Code of Ethics

Atria has adopted a code of ethics that applies to the officers of Atria and its subsidiaries, including ARVAL, the general partner of the Partnership. The Partnership has no officers; however, because ARVAL is the general partner of the Partnership, the officers of ARVAL function as the principal executive, financial and accounting officers of the Partnership. Therefore, such persons, in performing such functions, are subject to such code of ethics.

The Partnership will provide to any person without charge, upon request, a copy of such code of ethics by contacting the Partnership, c/o ARVAL, Suite 140, 501 South Fourth Avenue, Louisville, Kentucky 40202, Attention: Carmin Grandinetti.

ITEM 11. EXECUTIVE COMPENSATION

As an entity, the Partnership has no officers or directors. The Partnership is managed by its General Partner. The Partnership compensates its General Partner as set forth in the table below:

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There are no equity compensation plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Other than the compensation earned by ARVAL, as set out under item 11 above, no general partner or affiliate receives any direct or indirect compensation from the Partnership. In that ARVAL receives both property management fees and partnership management fees as provided under the ARVP III Limited Partnership Agreement and because these fees are payable without regard to whether particular communities are generating cash flow or otherwise benefiting the Partnership, a conflict of interest could arise in that it might be to the advantage of the Partnership’s General Partner that a community be retained or re-financed rather than sold. On the other hand, an affiliate of the General Partner may earn a real estate commission on sale of a property, creating incentive to sell what might be a profitable property.

The General Partner has authority to invest the Partnership’s funds in properties or entities in which it or any of its affiliates has an interest, provided the Partnership acquires a controlling interest. In any such investment, duplicate property management or other fees will not be permitted. ARVAL or any of its affiliates may, however, purchase property in their own names and temporarily hold title to facilitate acquisition for the Partnership, provided that such property is purchased by the Partnership at cost (including acquisition, closing and carrying costs). ARVAL will not commingle the Partnership’s funds with those of any other person or entity.

Conflicts of interest exist to the extent that communities owned or operated, compete, or are in a position to compete, for residents, general managers or key employees with assisted living facilities owned or operated by ARVAL and any of its affiliates in the same geographic area. ARVAL may seek to reduce any such conflicts by offering such persons their choice of residence or employment on comparable terms in any community.

Further conflicts may exist if and to the extent that other affiliated owners of ALCs seek to refinance or sell at the same time the Partnership does. ARVAL may seek to reduce any such conflicts by making prospective purchasers aware of all properties available for sale.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees. The aggregate fees billed in the last fiscal year for professional services rendered by Deloitte & Touche, LLP, the Partnership’s principal auditor, for the audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’s Form’s 10-Q, or services that are normally provided by the auditor in connection with the statutory and regulatory filings or engagements for such fiscal year, was approximately $56,200. The fees billed for professional services rendered by KPMG, LLP, the Partnership’s predecessor auditor, for the audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’s Form’s 10-Q, or services that are normally provided by the auditor in connection with the statutory and regulatory filings or engagements for the fiscal year ended December 31, 2002, was $46,775.

Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by KPMG LLP for tax compliance and tax planning were $15,000 for each of the two years ended December 31, 2003 and 2002. Tax-related services primarily related to review and preparation of federal and state tax returns and partnership K-1 reports.

All Other Fees. There were no fees billed in either of the last two fiscal years for products or services provided by Deloitte & Touche, LLP or KPMG, LLP other than the services reported in the two preceding paragraphs.

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General Partner’s Board of Directors Pre-Approval Policies. In accordance with established practice and procedure, the Board of Directors of ARVAL is required to approve in advance any and all audit services and permitted non-audit services provided to the Partnership by its independent auditors (subject to the de minimus exception of Section 10A(i)(1)(B) of the Exchange Act), all as required by applicable law. On May 5, 2003 the Board of Directors of ARVAL approved the engagement Deloitte & Touche, LLP to do the Partnership’s audited financial statements for fiscal 2003. On November 13, 2003, the Chief Financial Officer, who is also a director of ARVAL, approved and signed the engagement letter for audit services to be rendered by Deloitte & Touche, LLP. All of the audit and non-audit services performed by the independent auditor in fiscal 2003 were pre-approved by the Board of Directors of ARVAL. For the fiscal years ended December 31, 2003 and 2002, none of the services described above under the captions “Audit- Related Fees,” “Tax Fees” or “All Other Fees” was covered by the de minimus exception. The independent auditors did not perform any nonaudit services in 2003 or 2002.

PART IV

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

(1) Financial Statements:

(2) Financial Statement Schedule:

All other financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.

(3) Exhibits

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SIGNATURES

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

Date: March 30, 2004

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

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AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

Annual Report – Form 10-K

Consolidated Financial Statements and Schedule

Items 8 and 15(a)

December 31, 2003, 2002 and 2001

(With Independent Auditors’ Reports Thereon)

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

Annual Report – Form 10-K

Items 8 and 15(a)

Index to Consolidated Financial Statements and Schedule

All other schedules are omitted, as the required information is not applicable or the information is presented in the consolidated financial statements or related notes.

Independent Auditors’ Report

To ARV Assisted Living, Inc.

as the Managing General Partner

of American Retirement Villas Properties III, L.P.:

We have audited the consolidated balance sheet of American Retirement Villas Properties III, L.P., a California limited partnership, and subsidiaries (the “Partnership”) as of December 31, 2003 and the related consolidated statements of operations, partners’ deficit, and cash flows for the year then ended. Our audit also included the 2003 financial statement schedule listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Retirement Villas Properties III, L.P. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2003 financial statement schedule, when considered in relation to the basic 2003 consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/    Deloitte & Touche, LLP

Costa Mesa, California

March 23, 2004

F-1

Independent Auditors’ Report

To ARV Assisted Living, Inc.

as the Managing General Partner

of American Retirement Villas Properties III, L.P.:

We have audited the consolidated balance sheet of American Retirement Villas Properties III, L.P., a California limited partnership, and subsidiaries as of December 31, 2002 and the related consolidated statements of operations, partners’ capital (deficit), and cash flows for the years ended December 31, 2002 and 2001. In connection with our audits of the consolidated financial statements, we have also audited the 2002 and 2001 information included in the financial statement schedule of real estate and related accumulated depreciation and amortization. These consolidated financial statements and financial statement schedule are the responsibility of management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Retirement Villas Properties III, L.P. and subsidiaries as of December 31, 2002 and the results of their operations and their cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2002 and 2001 information included in the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/     KPMG LLP

Orange County, California

February 28, 2003

F-2

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

Consolidated Balance Sheets

December 31, 2003 and 2002

(In thousands, except units)

See accompanying notes to the consolidated financial statements.

F-3

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

Consolidated Statements of Operations

Years ended December 31, 2003, 2002 and 2001

(In thousands, except per unit data)

See accompanying notes to the consolidated financial statements

F-4

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

Consolidated Statements of Partners’ Capital (Deficit)

Years ended December 31, 2003, 2002 and 2001

See accompanying notes to consolidated financial statements.

F-5

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002 and 2001