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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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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



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AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 33-0365417                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|501 S. Fourth Avenue, Suite 140                                |  |                                     
|Louisville, KY                                                 |  | 40202                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



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



|                            
|----------------------------
|Title of Class              
|Units of Limited Partnership



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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.



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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



|         |  |                                                                                                |  |     
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                |  | Page
|PART I   |  |                                                                                                |  |     
|         |  |                                                                                               
|Item 1:  |  | Business                                                                                       |  | 1   
|Item 2:  |  | Properties                                                                                     |  | 5   
|Item 3:  |  | Legal Proceedings                                                                              |  | 6   
|Item 4:  |  | Submission of Matters to a Vote of Unit Holders                                                |  | 6   
|         |  |                                                                                               
|PART II  |  |                                                                                                |  |     
|         |  |                                                                                               
|Item 5:  |  | Market for Registrants Common Equity and Related Unit Holders Matters                         |  | 6   
|Item 6:  |  | Selected Financial Data                                                                        |  | 6   
|Item 7:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 7   
|Item 7A: |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 12  
|Item 8:  |  | Financial Statements and Supplementary Data                                                    |  | 12  
|Item 9:  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 12  
|Item 9A: |  | Controls and Procedures                                                                        |  | 12  
|         |  |                                                                                               
|PART III |  |                                                                                                |  |     
|         |  |                                                                                               
|Item 10: |  | Directors and Executive Officers of the Registrant                                             |  | 12  
|Item 11: |  | Executive Compensation                                                                         |  | 14  
|Item 12: |  | Security Ownership of Certain Beneficial Owners and Management and Related Unit Holder Matters |  | 16  
|Item 13: |  | Certain Relationships and Related Transactions                                                 |  | 16  
|Item 14: |  | Principal Accounting Fees and Services                                                         |  | 16  
|         |  |                                                                                               
|PART IV  |  |                                                                                                |  |     
|         |  |                                                                                               
|Item 15: |  | Exhibits and Financial Statement Schedules and Reports on Form 8-K                             |  | 17  



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PART I



|ITEM 1. |  | BUSINESS
|------- |  | --------



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:



|                                                                                        
|----------------------------------------------------------------------------------------
|- Medication management;                                                                
|                                                                                        
|- Assistance with dressing and grooming;                                                
|                                                                                        
|- Assistance with showering;                                                            
|                                                                                        
|- Assistance with continence;                                                           
|                                                                                        
|- Escort services;                                                                      
|                                                                                        
|- Status checks related to a recent hospitalization, illness, history of falls, etc. and
|                                                                                        
|- Special nutritional needs and assistance with eating.                                 



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:



| |  | home healthcare agencies to provide services the communities cannot provide
| | - | ---------------------------------------------------------------------------



| |  | physical and occupational therapists to provide services to residents in need of such therapy; and
| | - | --------------------------------------------------------------------------------------------------



| |  | long-term care pharmacies to facilitate cost-effective and reliable ordering and distribution of medications
| | - | ------------------------------------------------------------------------------------------------------------



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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:



| |  | an oversupply of, or a reduction in demand for, ALCs in a particular market;
| | - | ----------------------------------------------------------------------------



| |  | the attractiveness of properties to residents;
| | - | ----------------------------------------------



| |  | zoning, rent control, environmental quality regulations or other regulatory restrictions;
| | - | -----------------------------------------------------------------------------------------



| |  | competition from other forms of housing;
| | - | ----------------------------------------



| |  | its ability to provide adequate maintenance and insurance;
| | - | ----------------------------------------------------------



| |  | general economic climates; and
| | - | ------------------------------



| |  | its ability to control operating costs, including maintenance, insurance premiums and real estate taxes.
| | - | --------------------------------------------------------------------------------------------------------



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.



|ITEM 2. |  | PROPERTIES
|------- |  | ----------



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.



|                |  |               |  |                      |  |       |  |          
|--------------- |  | ------------- |  | -------------------- |  | ----- |  | ---------
|Community       |  | Location      |  | Commenced Operations |  | Units |  | Interest 
|Chandler Villas |  | Chandler, AZ  |  | September 1992       |  | 164   |  | Fee Owned
|Villa Las Posas |  | Camarillo, CA |  | December 1997        |  | 123   |  | Fee Owned



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.



|ITEM 3. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



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.



|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS
|------- |  | -----------------------------------------------



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



|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED UNITHOLDER MATTERS
|------- |  | --------------------------------------------------------------------



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.



|ITEM 6. |  | SELECTED FINANCIAL DATA
|------- |  | -----------------------



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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|                                             |  |                                   |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|-------------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - | ---- | - | ------ |  | - | ------
|                                             |  | 2003                              |        |   | 2002 |   |        | 2001 |  |   | 2000   |   | 1999
|                                             |  | ( In thousands, except unit data)
|Revenues                                     |  | $                                 | 7,493  |   |      | $ | 6,901  |      |  | $ | 7,036  |   |      | $ | 8,994  |  | $ | 8,645 
|Net income (loss)                            |  |                                   | 558    |   |      |   | 122    |      |  |   | (81    | ) |      |   | 4,111  |  |   | 4,767 
|Net income (loss) (per limited partner unit) |  |                                   | 29.59  |   |      |   | 6.47   |      |  |   | (4.30  | ) |      |   | 218.04 |  |   | 252.83
|Total assets                                 |  |                                   | 16,927 |   |      |   | 15,898 |      |  |   | 15,881 |   |      |   | 21,315 |  |   | 18,786
|Partners capital (deficit)                  |  |                                   | (1,922 | ) |      |   | (2,480 | )    |  |   | 1,201  |   |      |   | 1,832  |  |   | 2,000 
|Long-term obligations                        |  |                                   | 17,868 |   |      |   | 17,570 |      |  |   | 13,736 |   |      |   | 13,177 |  |   | 15,665
|Per limited partner unit:                    |  |                                   |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|Distributions of earnings                    |  |                                   |       |   |      |   | 72.62  |      |  |   | 29.33  |   |      |   | 218.07 |  |   | 252.81
|Distributions  return of capital            |  |                                   |       |   |      |   | 128.98 |      |  |   |       |   |      |   | 8.92   |  |   | 258.43
|Total distributions                          |  |                                   |       |   |      |   | 201.60 |      |  |   | 29.33  |   |      |   | 226.99 |  |   | 511.24





|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



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:



|                                  |  |                 
|--------------------------------- |  | ----------------
|Buildings and improvements        |  | 27.5 to 35 years
|Furniture, fixtures and equipment |  | 3 to 7 years    



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:



| |  | reported amounts of assets and liabilities at the date of the financial statements;
| | - | -----------------------------------------------------------------------------------



| |  | disclosure of contingent assets and liabilities at the date of the financial statements; and
| | - | --------------------------------------------------------------------------------------------



| |  | reported amounts of expenses during the reporting period.
| | - | ---------------------------------------------------------



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.



-7-



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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.



-8-



---

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:



|               |  |                |     |      |   |      |  |      |     |      |   |            |  |   |     |  |   |       
|-------------- |  | -------------- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ---------- |  | - | --- |  | - | ------
|               |  | 2004           |     | 2005 |   | 2006 |  | 2007 |     | 2008 |   | Thereafter
|               |  | (In Thousands)
|Long Term Debt |  | $              | 147 |      | $ | 157  |  | $    | 168 |      | $ | 179        |  | $ | 192 |  | $ | 17,025



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.



-9-



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|                              |  |                       |      |      |   |                      |  |       |   
|----------------------------- |  | --------------------- | ---- | ---- | - | -------------------- |  | ----- | --
|                              |  | 2003                  |      | 2002 |   | Increase/ (decrease) | 
|                              |  | (Dollars In Millions) |     
|Revenues:                     |  |                       |      |     
|Rent                          |  | $                     | 6.66 |      | $ | 6.06                 |  | 10.0  | % 
|Assisted living               |  |                       | 0.58 |      |   | 0.58                 |  | 0.3   | % 
|Interest and other            |  |                       | 0.25 |      |   | 0.26                 |  | (5.3  | )%
|                              |  |                       |      |      |   |                      |  |       |   
|Total revenue                 |  |                       | 7.49 |      |   | 6.90                 |  | 8.6   | % 
|                              |  |                       |      |      |   |                      |  |       |   
|Costs and expenses:           |  |                       |      |      |   |                      |  |       |   
|Rental property operations    |  |                       | 3.67 |      |   | 3.42                 |  | 7.5   | % 
|Assisted living               |  |                       | 0.43 |      |   | 0.45                 |  | (5.7  | )%
|General and administrative    |  |                       | 0.55 |      |   | 0.43                 |  | 29.2  | % 
|Depreciation and amortization |  |                       | 0.69 |      |   | 0.81                 |  | (15.6 | )%
|Property taxes                |  |                       | 0.20 |      |   | 0.19                 |  | 4.3   | % 
|Interest                      |  |                       | 1.38 |      |   | 1.47                 |  | (5.5  | )%
|                              |  |                       |      |      |   |                      |  |       |   
|Total costs and expenses      |  |                       | 6.92 |      |   | 6.77                 |  | 2.3   | % 
|                              |  |                       |      |      |   |                      |  |       |   
|Operating income              |  |                       | 0.57 |      |   | 0.13                 |  | 328.6 | % 
|Franchise taxes               |  |                       | 0.01 |      |   | 0.01                 |  | 9.1   | % 
|                              |  |                       |      |      |   |                      |  |       |   
|Net income                    |  | $                     | 0.56 |      | $ | 0.12                 |  | 357.4 | % 
|                              |  |                       |      |      |   |                      |  |       |   



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:



| |  | an increase in an average rental rate per occupied unit to $2,087 for the year ended December 31, 2003 as compared with $2,039 for the year ended December 31, 2002; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | average occupancy increased to 94% for the year ended December 31, 2003 from 86% for the year ended December 31, 2002.
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | Assisted living revenues are relatively equal in both periods ended December 31, 2003, and 2002.
| | - | ------------------------------------------------------------------------------------------------



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:



| |  | increase in variable expenses related to higher occupancy of $.08 million;
| | - | --------------------------------------------------------------------------



| |  | increase in payroll costs, including incentive programs, medical insurance and workers compensation of $.12 million;
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  | increase in property management fees resulting from increased revenue of $.03 million;
| | - | --------------------------------------------------------------------------------------



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:



| |  | increase in accounting fees;
| | - | ----------------------------



| |  | increase in bad debt expense as the result of raising minimum reserve balance;
| | - | ------------------------------------------------------------------------------



| |  | increase in the partnership management fees resulting from increased revenue; and
| | - | ---------------------------------------------------------------------------------



| |  | increase in property general liability insurance.
| | - | -------------------------------------------------



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.



-10-



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|                                     |  |                       |      |      |   |       |            |  |        |   
|------------------------------------ |  | --------------------- | ---- | ---- | - | ----- | ---------- |  | ------ | --
|                                     |  |                       |      |      |   |       | Increase/  | 
|                                     |  | 2002                  |      | 2001 |   |       | (decrease) | 
|                                     |  | (Dollars In Millions) |     
|Revenues:                            |  |                       |      |      |   |       |            |  |        |   
|Rent                                 |  | $                     | 6.06 |      | $ | 6.04  |            |  | 0.4    | % 
|Assisted living                      |  |                       | 0.58 |      |   | 0.71  |            |  | (19.5  | )%
|Interest and other                   |  |                       | 0.26 |      |   | 0.29  |            |  | (7.0   | )%
|                                     |  |                       |      |      |   |       |            |  |        |   
|Total revenue                        |  |                       | 6.90 |      |   | 7.04  |            |  | (1.9   | )%
|                                     |  |                       |      |      |   |       |            |  |        |   
|Costs and expenses:                  |  |                       |      |      |   |       |            |  |        |   
|Rental property operations           |  |                       | 3.42 |      |   | 3.48  |            |  | (1.6   | )%
|Assisted living                      |  |                       | 0.45 |      |   | 0.52  |            |  | (13.2  | )%
|General and administrative           |  |                       | 0.43 |      |   | 0.85  |            |  | (49.5  | )%
|Depreciation and amortization        |  |                       | 0.81 |      |   | 0.77  |            |  | 5.6    | % 
|Property taxes                       |  |                       | 0.19 |      |   | 0.18  |            |  | 1.6    | % 
|Interest                             |  |                       | 1.47 |      |   | 1.23  |            |  | 19.7   | % 
|Loss on debt extinguishment          |  |                       |     |      |   | 0.06  |            |  | (100.0 | )%
|Loss on sale of properties           |  |                       |     |      |   | 0.02  |            |  | (100.0 | )%
|                                     |  |                       |      |      |   |       |            |  |        |   
|Total costs and expenses             |  |                       | 6.77 |      |   | 7.11  |            |  | (4.8   | )%
|                                     |  |                       |      |      |   |       |            |  |        |   
|Income (loss) before franchise taxes |  |                       | 0.13 |      |   | (0.07 | )          |  | 287.3  | % 
|Franchise taxes                      |  |                       | 0.01 |      |   | 0.01  |            |  | 10.0   | % 
|                                     |  |                       |      |      |   |       |            |  |        |   
|Net income (loss)                    |  | $                     | 0.12 |      | $ | (0.08 | )          |  | 250.6  | % 
|                                     |  |                       |      |      |   |       |            |  |        |   



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:



| |  | an increase in an average rental rate per occupied unit to $2,039 for the year ended December 31, 2002 as compared with $1,842 for the year ended December 31, 2001; partially offset
by
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | an average occupancy decrease to 86% for the year ended December 31, 2002 as compared with 95% for the year ended December 31, 2001.
| | - | ------------------------------------------------------------------------------------------------------------------------------------



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 average assisted living residents decrease from 92 residents for the year ended December 31, 2001 to 70 residents for the year ended December 31, 2002; partially offset by
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | an increase in the average assisted living rate from $644 per month for the year ended December 31, 2001 compared to $683 per month for the year ended December 31, 2002.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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:



| |  | a decrease in variable expenses related to lower occupancy;
| | - | -----------------------------------------------------------



| |  | a decrease in bonus incentive; and
| | - | ----------------------------------



| |  | a decrease in purchased services and office supplies; partially offset by
| | - | -------------------------------------------------------------------------



| |  | an increase in utilities cost; and
| | - | ----------------------------------



| |  | an increase in repair and maintenance and rental and lease expense.
| | - | -------------------------------------------------------------------



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:



| |  | a lawsuit settlement at one of our ALCs in 2001;
| | - | ------------------------------------------------



| |  | a decrease in bad debt expense and professional fees; and
| | - | ---------------------------------------------------------



| |  | a decrease in the partnership administration fee; partially offset by
| | - | ---------------------------------------------------------------------



| |  | an increase in property general liability insurance.
| | - | ----------------------------------------------------



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.



-11-



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|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------



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.



|ITEM 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------



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



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



None.



|ITEM 9A. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



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



|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- |  | --------------------------------------------------



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.



|                       |  |                                                                |  |    
|---------------------- |  | -------------------------------------------------------------- |  | ---
|Name                   |  | Position with the Company                                      |  | Age
|John A. Moore          |  | Chief Executive Officer and Director                           |  | 42 
|Mark Jessee            |  | Chief Financial Officer                                        |  | 43 
|Carmin Grandinetti     |  | Senior Vice President, General Counsel and Secretary           |  | 46 
|Douglas Armstrong      |  | Senior Vice President, Special Counsel and Assistant Secretary |  | 50 
|Julie Harding          |  | Chief Marketing and Sales Officer                              |  | 37 
|Bernard Wheeler-Medley |  | Senior Vice President and Chief Quality Officer                |  | 48 
|Matthew J. Lustig      |  | Chairman of the Board of Directors                             |  | 43 
|Joseph D. Kasman       |  | Director                                                       |  | 46 



-12-



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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.



-13-



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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:



|                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Acquisition Fees                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(ARV Assisted Living, Inc.)     |  | A property acquisition fee of 2% of Gross Offering Proceeds as defined in the ARVP III Limited Partnership Agreement to be paid for services in connection with the selection and purchase of
ALCs and related negotiations. In addition, a development, processing and renovation fee of 3.5% of Gross Offering Proceeds to be paid for services in connection with negotiations for or the renovation or improvement of existing communities and the
development, processing or construction of ALCs developed by us. There were no property acquisition, development, and renovation fees for the years ending December 31, 2003, 2002 and 2001.
|                                | 
|Rent-Up and Staff Training Fees |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(ARV Assisted Living, Inc.)     |  | Rent-up and staff training fees of 4.5% of the Gross Offering Proceeds allocated to each specific acquired or developed ALCs. Such fees will be paid for services in connection with the
opening and initial operations of the ALCs including, without limitation, design and implementation of the advertising, direct solicitation and other campaigns to attract residents and the initial hiring and training of managers, food service
specialists, activities directors and other personnel employed in the individual communities. There were no rent-up and staff training fees for the years ending December 31, 2003, 2002 and 2001.     
|Property Management Fees        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(ARV Assisted Living, Inc.)     |  | A property management fee of 5% of gross revenues paid for managerial services including general supervision, hiring of onsite management personnel employed by ARVP III, renting of units,
installation and provision of food service, maintenance, and other operations. Property management fees for the years ending December 31, 2003, 2002 and 2001 were $371,000 $338,000, and $345,000, respectively.                                                                                                                                                                                                                                      



-14-



---

|                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                    | 
|Partnership Management Fees         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(ARV Assisted Living, Inc.)         |  | A partnership management fee of 10% of cash flow before distributions is paid for implementing the Partnership business plan, supervising and management of our affairs including general
administration, coordination of legal, audit, tax, and insurance matters. Partnership management fees for the years ending December 31, 2003, 2002 and 2001 were $104,000, $59,000, and $92,000 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                    | 
|Sale of Partnership Projects        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(ARV Assisted Living, Inc.)         |  | The ARVP III Limited Partnership Agreement neither specifically authorizes nor prohibits payment or compensation in the form of real estate commissions to the General Partners or its
affiliates. Any such payments or compensation are subordinated to a return to ARVP IIIs limited partners of their capital contributions plus an 8% per annum, cumulative, but not compounded, return thereon from all sources, including prior
distribution of cash flow. Any such compensation shall not exceed 3% of the gross sales price or 50% of the standard real estate brokerage commission, whichever is less. Upon the sale of small piece of land at Bradford Square on October 9, 2001,
$3,150 real estate selling commission was paid to ARVAL. In the years ended December 31, 2003 and 2002 no real estate selling commissions were paid to ARVAL.
|                                    | 
|Subordinated Incentive Compensation |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(ARV Assisted Living, Inc.)         |  | ARVAL is entitled to receive 15% of the proceeds of sale or refinancing subordinated to a return of initial Capital Contributions (as defined in ARVP III Limited Partnership Agreement) plus
cumulative, but not compounded return on capital contributions varying from 8% to 10% per annum. In 2003, 2002 and 2001, no incentive compensation was paid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                    | 
|Partnership Interest                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(General Partners)                  |  | 1% of all items of capital, profit or loss, and liquidating distributions, subject to a capital account adjustment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                    | 
|Reimbursed Expenses & Credit        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Enhancement (General Partners)      |  | ARVAL may receive fees for personal guarantees of loans made to the Partnership. All of the Partnerships expenses shall be billed directly to and paid by the Partnership. ARVAL may be
reimbursed for the actual cost of goods and materials obtained from unaffiliated entities and used for or by the Partnership. ARVAL will be reimbursed for administrative services necessary to the Partnerships prudent operation, provided that
such reimbursement is at the lower of its actual cost or the amount which the Partnership would be required to pay to independent parties for comparable administrative services in the same geographic location. The total reimbursements to ARVAL
amounted to $2.4 million, $2.6 million, and $2.5 million for the years ending December 31, 2003, 2002 and 2001, respectively.                             



-15-



---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



|                          |  |                                      |  |                                           |  |                 
|------------------------- |  | ------------------------------------ |  | ----------------------------------------- |  | ----------------
|Title of Class            |  | Name and Address of Beneficial Owner |  | Amount and Nature of Beneficial Ownership |  | Percent of Class
|Limited Partnership Units |  | ARV Assisted Living, Inc.            |  | 9,808 units                               |  | 52.5%           
|                          |  | 501 S. Fourth Avenue, Ste. 140       |  | Direct ownership                          |  |                 
|                          |  | Louisville, KY 40202                 |  |                                           |  |                 



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.



-16-



---

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



|(a) | The following documents are filed as a part of this Report:
|--- | -----------------------------------------------------------



(1) Financial Statements:



| |  | Independent Auditors Report  Deloitte & Touche, LLP;
| | - | ------------------------------------------------------



| |  | Independent Auditors Report  KPMG LLP;
| | - | ----------------------------------------



| |  | Consolidated Balance Sheets - December 31, 2003 and 2002;
| | - | ---------------------------------------------------------



| |  | Consolidated Statements of Operations - Years ended December 31, 2003, 2002 and 2001;
| | - | -------------------------------------------------------------------------------------



| |  | Consolidated Statements of Partners Capital (Deficit) - Years ended December 31, 2003, 2002 and 2001;
| | - | ------------------------------------------------------------------------------------------------------



| |  | Consolidated Statements of Cash Flows - Years ended December 31, 2003, 2002 and 2001;
| | - | -------------------------------------------------------------------------------------



| |  | Notes to Consolidated Financial Statements;
| | - | -------------------------------------------



(2) Financial Statement Schedule:



| |  | Financial Statement Schedule - Schedule III - Real Estate and Related Accumulated Depreciation and Amortization  December 31, 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------



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



|              |  |                                                                                                                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                  
|              | 
|2.1           |  | Offer to Purchase and Consent Solicitation Statement, dated March 24, 2004 (filed as the definitive Schedule 14A, filed with the SEC on March 24, 2004 by ARVAL, Atria and ARVP III
Acquisition, L.P. (File No. 33-30084).                                                   
|              | 
|3.1           |  | The Limited Partnership Agreement of American Retirement Villas Properties III, L.P., effective as of June 28, 1989 (filed as an exhibit to Post-Effective Amendment No. 8 to Form S-1 of the
Partnership, filed with the SEC on August 5, 1992 (Registration No. 33-30084)).
|              | 
|31.1          |  | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as revised by Section 404, dated March
30, 2004.                                                                      
|              | 
|31.2          |  | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as revised by Section 404, dated March
30, 2004.                                                                      
|              | 
|32.1          |  | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 30, 2004.                                                                                                 
|              | 
|32.2          |  | Certification of the Chief Financial Office Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 30, 2004.                                                                                                  



-17-



---

|(b) | Reports on Form 8-K.
|--- | --------------------



| |  | The Partnership filed an 8-K report regarding a proposed merger agreement between the General Partner (ARV Assisted Living, Inc.) and Prometheus Assisted Living, LLC on January 13,
2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On May 9, 2003 the Partnership filed an 8-K report regarding the change in independent accountants.
| | - | ---------------------------------------------------------------------------------------------------



| |  | On October 1, 2003 the Partnership filed an 8-K report regarding change of the chief executive officer of the Managing General Partner.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | On December 15, 2003 the Partnership filed an 8-K report responding to a mini-tender offer and noting its filing with the SEC of a Preliminary Offer to Purchase and
Consent Solicitation Statement.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-18-



---

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.



AMERICAN RETIREMENT VILLAS     PROPERTIES III, L.P.By:

ARV ASSISTED LIVING, INC., the Partnerships General PartnerBy:

/s/  John A. MooreJohn A. Moore, Chief Executive Officer




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.



|                     |  |                                                                    |  |               
|-------------------- |  | ------------------------------------------------------------------ |  | --------------
|SIGNATURE            |  | TITLE                                                              |  | DATE          
|/s/ JOHN A. MOORE    |  | Chief Executive Officer and Director(Principal Executive Officer)  |  | March 30, 2004
|John A. Moore        |  |                                                                    |  |               
|                     |  |                                                                   
|/s/ MARK JESSEE      |  | Chief Financial Officer (Principal Financial & Accounting Officer) |  | March 30, 2004
|Mark Jessee          |  |                                                                    |  |               
|                     |  |                                                                   
|/s/ MATHEW J. LUSTIG |  | Chairman of the Board of Directors                                 |  | March 30, 2004
|Mathew J. Lustig     |  |                                                                    |  |               
|                     |  |                                                                   
|/s/ JOSEPH D. KASMAN |  | Director                                                           |  | March 30, 2004
|Joseph D. Kasman     |  |                                                                    |  |               



-19-



---

|(3) | Exhibits
|--- | --------



|              |  |                                                                                                                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                  
|              | 
|2.1           |  | Offer to Purchase and Consent Solicitation Statement, dated March 24, 2004 (filed as the definitive Schedule 14A, filed with the SEC on March 24, 2004 by ARVAL, Atria and ARVP III
Acquisition, L.P. (File No. 33-30084).                                                   
|              | 
|3.1           |  | The Limited Partnership Agreement of American Retirement Villas Properties III, L.P., effective as of June 28, 1989 (filed as an exhibit to Post-Effective Amendment No. 8 to Form S-1 of the
Partnership, filed with the SEC on August 5, 1992 (Registration No. 33-30084)).
|              | 
|31.1          |  | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as revised by Section 404, dated March
30, 2004.                                                                      
|              | 
|31.2          |  | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as revised by Section 404, dated March
30, 2004.                                                                      
|              | 
|32.1          |  | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 30, 2004.                                                                                                 
|              | 
|32.2          |  | Certification of the Chief Financial Office Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 30, 2004.                                                                                                  



-20-



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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



|                                                                                                      |  |             
|----------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                      |  | Page        
|                                                                                                      | 
|Independent Auditors Report  Deloitte & Touche, LLP                                                 |  | F-1         
|                                                                                                      | 
|Independent Auditors Report  KPMG, LLP                                                              |  | F-2         
|                                                                                                      | 
|Consolidated Balance Sheets  December 31, 2003 and 2002                                              |  | F-3         
|                                                                                                      | 
|Consolidated Statements of Operations  Years ended December 31, 2003, 2002 and 2001                  |  | F-4         
|                                                                                                      | 
|Consolidated Statements of Partners Capital (Deficit)  Years ended December 31, 2003, 2002 and 2001 |  | F-5         
|                                                                                                      | 
|Consolidated Statements of Cash Flows  Years ended December 31, 2003, 2002 and 2001                  |  | F-6         
|                                                                                                      | 
|Notes to Consolidated Financial Statements                                                            |  | F-7         
|                                                                                                      | 
|Schedule                                                                                              |  |             
|                                                                                                      | 
|Real Estate and Related Accumulated Depreciation and Amortization  December 31, 2003                 |  | Schedule III



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)



|                                                                                                                   |  |      |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                   |  | 2003 |        |   | 2002 |  
|Assets                                                                                                             |  |      |        |   |      |   |        |  
|                                                                                                                   |  |     
|Properties, at cost:                                                                                               |  |      |        |   |      |   |        |  
|Land                                                                                                               |  | $    | 1,549  |   |      | $ | 1,549  |  
|Building and improvements, less accumulated depreciation of $3,557 and $3,088 in 2003 and 2002, respectively       |  |      | 9,403  |   |      |   | 9,701  |  
|Furniture, fixtures and equipment, less accumulated depreciation of $346 and $1,034 in 2003 and 2002, respectively |  |      | 530    |   |      |   | 371    |  
|Construction in progress                                                                                           |  |      | 20     |   |      |   | 93     |  
|                                                                                                                   |  |      |        |   |      |   |        |  
|Net properties                                                                                                     |  |      | 11,502 |   |      |   | 11,714 |  
|                                                                                                                   |  |     
|Cash and cash equivalents                                                                                          |  |      | 4,228  |   |      |   | 1,411  |  
|Deferred loan costs, less accumulated amortization of $16 and $91 in 2003 And 2002, respectively                   |  |      | 317    |   |      |   | 265    |  
|Collateral deposit                                                                                                 |  |      |       |   |      |   | 2,000  |  
|Other assets, including impound accounts of $407 and $352 in 2003 and 2002, respectively                           |  |      | 880    |   |      |   | 508    |  
|                                                                                                                   |  |      |        |   |      |   |        |  
|                                                                                                                   |  | $    | 16,927 |   |      | $ | 15,898 |  
|                                                                                                                   |  |      |        |   |      |   |        |  
|Liabilities and Partners Deficit                                                                                  |  |      |        |   |      |   |        |  
|                                                                                                                   |  |     
|Notes payable to banks                                                                                             |  | $    | 17,868 |   |      | $ | 17,570 |  
|Accounts payable                                                                                                   |  |      | 51     |   |      |   | 167    |  
|Accrued expenses                                                                                                   |  |      | 694    |   |      |   | 489    |  
|Tenant prepaid rent and assisted living services                                                                   |  |      | 177    |   |      |   | 35     |  
|Amounts payable to affiliates                                                                                      |  |      | 11     |   |      |   | 68     |  
|Distributions payable to Partners                                                                                  |  |      | 48     |   |      |   | 49     |  
|                                                                                                                   |  |      |        |   |      |   |        |  
|Total liabilities                                                                                                  |  |      | 18,849 |   |      |   | 18,378 |  
|                                                                                                                   |  |      |        |   |      |   |        |  
|Partners deficit:                                                                                                 |  |      |        |   |      |   |        |  
|General Partner                                                                                                    |  |      | (2     | ) |      |   | (2     | )
|Special Limited Partners                                                                                           |  |      | (176   | ) |      |   | (181   | )
|Limited Partners, 18,666 units outstanding at December 31, 2003 and 2002                                           |  |      | (1,744 | ) |      |   | (2,297 | )
|                                                                                                                   |  |      |        |   |      |   |        |  
|Total Partners deficit                                                                                            |  |      | (1,922 | ) |      |   | (2,480 | )
|                                                                                                                   |  |      |        |   |      |   |        |  
|                                                                                                                   |  | $    | 16,927 |   |      | $ | 15,898 |  
|                                                                                                                   |  |      |        |   |      |   |        |  



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)



|                                                                                                                            |  |      |       |      |   |       |  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | -
|                                                                                                                            |  | 2003 |       | 2002 |   | 2001  | 
|Revenues:                                                                                                                   |  |      |       |      |   |       |  |   |       |  
|Rent                                                                                                                        |  | $    | 6,665 |      | $ | 6,061 |  | $ | 6,037 |  
|Assisted living                                                                                                             |  |      | 577   |      |   | 575   |  |   | 714   |  
|Interest                                                                                                                    |  |      | 72    |      |   | 135   |  |   | 148   |  
|Other                                                                                                                       |  |      | 179   |      |   | 130   |  |   | 137   |  
|                                                                                                                            |  |      |       |      |   |       |  |   |       |  
|Total revenues                                                                                                              |  |      | 7,493 |      |   | 6,901 |  |   | 7,036 |  
|                                                                                                                            |  |      |       |      |   |       |  |   |       |  
|Costs and expenses:                                                                                                         |  |      |       |      |   |       |  |   |       |  
|Rental property operations (including $2,160, $2,312 and $2,212 related to affiliates in 2003, 2002 and 2001, respectively) |  |      | 3,675 |      |   | 3,419 |  |   | 3,476 |  
|Assisted living (including $423, $449 and $516 related to affiliates in 2003, 2002 and 2001, respectively)                  |  |      | 427   |      |   | 453   |  |   | 522   |  
|General and administrative (including $273, $217, and $238 related to affiliates in 2003, 2002 and 2001, respectively)      |  |      | 471   |      |   | 344   |  |   | 771   |  
|Depreciation and amortization                                                                                               |  |      | 687   |      |   | 814   |  |   | 771   |  
|Property taxes                                                                                                              |  |      | 196   |      |   | 188   |  |   | 185   |  
|Advertising                                                                                                                 |  |      | 82    |      |   | 84    |  |   | 76    |  
|Interest                                                                                                                    |  |      | 1,385 |      |   | 1,466 |  |   | 1,225 |  
|Loss on sale of properties                                                                                                  |  |      |      |      |   |      |  |   | 15    |  
|Loss from extinguishment of debt                                                                                            |  |      |      |      |   |      |  |   | 66    |  
|                                                                                                                            |  |      |       |      |   |       |  |   |       |  
|Total costs and expenses                                                                                                    |  |      | 6,923 |      |   | 6,768 |  |   | 7,107 |  
|                                                                                                                            |  |      |       |      |   |       |  |   |       |  
|Income (loss) before franchise taxes                                                                                        |  |      | 570   |      |   | 133   |  |   | (71   | )
|Franchise taxes                                                                                                             |  |      | 12    |      |   | 11    |  |   | 10    |  
|                                                                                                                            |  |      |       |      |   |       |  |   |       |  
|Net income (loss)                                                                                                           |  | $    | 558   |      | $ | 122   |  | $ | (81   | )
|                                                                                                                            |  |      |       |      |   |       |  |   |       |  
|Net income (loss) per limited partner unit                                                                                  |  | $    | 29.59 |      | $ | 6.47  |  | $ | (4.30 | )
|                                                                                                                            |  |      |       |      |   |       |  |   |       |  



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



|                                                            |  |                                     |    |   |                        |   |      |                 |  |   |                                |   |  |   |        |  
|----------------------------------------------------------- |  | ----------------------------------- | -- | - | ---------------------- | - | ---- | --------------- |  | - | ------------------------------ | - |  | - | ------ | -
|                                                            |  | GeneralPartner                      |    |   | SpecialLimitedPartners |   |      | LimitedPartners |  |   | TotalPartnersCapital(Deficit) |  
|                                                            |  | (in thousands except per unit data) |   
|Balance (deficit) at December 31, 2000                      |  |                                     | (2 | ) |                        |   | (138 | )               |  |   | 1,972                          |   |  |   | 1,832  |  
|Distribution to partners ($29.33 per limited partner unit)  |  |                                     |   |   |                        |   | (2   | )               |  |   | (548                           | ) |  |   | (550   | )
|Net loss                                                    |  |                                     |   |   |                        |   | (2   | )               |  |   | (79                            | ) |  |   | (81    | )
|                                                            |  |                                     |    |   |                        |   |      |                 |  |   |                                |   |  |   |        |  
|Balance (deficit) at December 31, 2001                      |  |                                     | (2 | ) |                        |   | (142 | )               |  |   | 1,345                          |   |  |   | 1,201  |  
|Distribution to partners ($201.60 per limited partner unit) |  |                                     |   |   |                        |   | (40  | )               |  |   | (3,763                         | ) |  |   | (3,803 | )
|Net income                                                  |  |                                     |   |   |                        |   | 1    |                 |  |   | 121                            |   |  |   | 122    |  
|                                                            |  |                                     |    |   |                        |   |      |                 |  |   |                                |   |  |   |        |  
|Balance (deficit) at December 31, 2002                      |  |                                     | (2 | ) |                        |   | (181 | )               |  |   | (2,297                         | ) |  |   | (2,480 | )
|Net income                                                  |  |                                     |   |   |                        |   | 5    |                 |  |   | 553                            |   |  |   | 558    |  
|                                                            |  |                                     |    |   |                        |   |      |                 |  |   |                                |   |  |   |        |  
|Balance (deficit) at December 31, 2003                      |  | $                                   | (2 | ) |                        | $ | (176 | )               |  | $ | (1,744                         | ) |  | $ | (1,922 | )
|                                                            |  |                                     |    |   |                        |   |      |                 |  |   |                                |   |  |   |        |  



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



|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ----------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                           |  | 2003                                |         |   | 2002 |   |        | 2001 | 
|                                                                                           |  | (In thousands except per unit data) |        
|Cash flows from operating activities:                                                      |  |                                     |         |   |      |   |        |      |  |   |        |  
|Net income (loss)                                                                          |  | $                                   | 558     |   |      | $ | 122    |      |  | $ | (81    | )
|                                                                                           |  |                                     |        
|Adjustment to reconcile net income (loss) to net cash provided by operating activities:    |  |                                     |         |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                              |  |                                     | 687     |   |      |   | 814    |      |  |   | 771    |  
|Loss from extinguishment of debt                                                           |  |                                     |        |   |      |   |       |      |  |   | 66     |  
|Change in assets and liabilities:                                                          |  |                                     |         |   |      |   |        |      |  |   |        |  
|Other assets                                                                               |  |                                     | (294    | ) |      |   | 41     |      |  |   | 41     |  
|Accounts payable and accrued expenses                                                      |  |                                     | 89      |   |      |   | (106   | )    |  |   | 157    |  
|Tenant prepaid rent and assisted living services                                           |  |                                     | 142     |   |      |   | (30    | )    |  |   | 55     |  
|Amounts payable to affiliates                                                              |  |                                     | (57     | ) |      |   | 25     |      |  |   | (201   | )
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                                  |  |                                     | 1,125   |   |      |   | 866    |      |  |   | 808    |  
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|Cash flows from investing activities:                                                      |  |                                     |         |   |      |   |        |      |  |   |        |  
|Additions to properties, net                                                               |  |                                     | (426    | ) |      |   | (535   | )    |  |   | (332   | )
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|Net cash used in investing activities                                                      |  |                                     | (426    | ) |      |   | (535   | )    |  |   | (332   | )
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|Cash flows from financing activities:                                                      |  |                                     |         |   |      |   |        |      |  |   |        |  
|Borrowing under refinancing                                                                |  |                                     | 12,240  |   |      |   | 4,000  |      |  |   | 5,783  |  
|Principal repayments on notes payable to banks and others                                  |  |                                     | (11,942 | ) |      |   | (166   | )    |  |   | (5,223 | )
|Capital expenditure replacement reserve                                                    |  |                                     | (78     | ) |      |   | 378    |      |  |   | (549   | )
|Deferred financing cost                                                                    |  |                                     | (102    | ) |      |   | (207   | )    |  |   | (89    | )
|Mortgage insurance                                                                         |  |                                     |        |   |      |   |       |      |  |   | (29    | )
|Collateral deposit under refinancing                                                       |  |                                     | 2,000   |   |      |   | (2,000 | )    |  |   |       |  
|Distributions paid                                                                         |  |                                     |        |   |      |   | (3,828 | )    |  |   | (5,924 | )
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) financing activities                                        |  |                                     | 2,118   |   |      |   | (1,823 | )    |  |   | (6,031 | )
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|                                                                                           |  |                                     |        
|Net increase (decrease) in cash and cash equivalents                                       |  |                                     | 2,817   |   |      |   | (1,492 | )    |  |   | (5,555 | )
|                                                                                           |  |                                     |        
|Cash and cash equivalents at beginning of year                                             |  |                                     | 1,411   |   |      |   | 2,903  |      |  |   | 8,458  |  
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|                                                                                           |  |                                     |        
|Cash and cash equivalents at end of year                                                   |  | $                                   | 4,228   |   |      | $ | 1,411  |      |  | $ | 2,903  |  
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|                                                                                           |  |                                     |        
|Supplemental cash flow information  cash paid during the year for interest                |  | $                                   | 1,295   |   |      | $ | 1,415  |      |  | $ | 1,241  |  
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  
|                                                                                           |  |                                     |        
|Supplemental disclosure of noncash financing activities  distribution accrued to partners |  | $                                   |        |   |      | $ | 49     |      |  | $ | 74     |  
|                                                                                           |  |                                     |         |   |      |   |        |      |  |   |        |  



See accompanying notes
to the consolidated financial statements.





F-6



---

AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.



Notes to Consolidated Financial Statements



December 31, 2003, 2002 and 2001



(1) Summary of Significant Accounting Policies



Principles of Consolidation



The consolidated financial statements of American Retirement
Villas Properties III, L.P. (the Partnership or ARVP III) include the accounts of the Partnership, Retirement Inns III, LLC, ARV Chandler Villas, L.P., and ARV Las Posas, L.P. THE PARTNERSHIP is the sole member of Retirement
Inns III, LLC and the sole general partner of ARV Chandler Villas L.P., and ARV Las Posas, L.P. and, therefore, those accounts are consolidated into the Partnership. All intercompany balances and transactions have been eliminated in the
consolidation.



Basis of Accounting



The Partnerships financial statements are prepared in
accordance with accounting principles generally accepted in the United States of America.



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:



|                                  |  |                 
|--------------------------------- |  | ----------------
|Buildings and improvements        |  | 27.5 to 35 years
|Furniture, fixtures and equipment |  | 3 to 7 years    



Properties consist of the following as of December 31 (in thousands):



|                                  |  |      |        |   |      |   |        |  
|--------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                  |  | 2003 |        |   | 2002 |  
|Land                              |  | $    | 1,549  |   |      | $ | 1,549  |  
|Buildings and improvements        |  |      | 12,960 |   |      |   | 12,789 |  
|Furniture, fixtures and equipment |  |      | 876    |   |      |   | 1,405  |  
|Construction in progress          |  |      | 20     |   |      |   | 93     |  
|                                  |  |      |        |   |      |   |        |  
|                                  |  |      | 15,405 |   |      |   | 15,836 |  
|Accumulated depreciation          |  |      | (3,903 | ) |      |   | (4,122 | )
|                                  |  |      |        |   |      |   |        |  
|                                  |  |     
|Total properties, net             |  | $    | 11,502 |   |      | $ | 11,714 |  
|                                  |  |      |        |   |      |   |        |  



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. At December 31, 2003, the Partnership does not believe that the carrying value or the depreciation periods of its long-lived assets requires any adjustment.



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:



| |  | reported amounts of assets and liabilities at the date of the financial statements;
| | - | -----------------------------------------------------------------------------------



F-7



---

| |  | disclosure of contingent assets and liabilities at the date of the financial statements; and
| | - | --------------------------------------------------------------------------------------------



| |  | reported amounts of expenses during the reporting period.
| | - | ---------------------------------------------------------



Actual results could differ from those estimates.



Cash and Cash Equivalents



For purpose of the statements of cash flows, the Partnership considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents.



Impound
Accounts



The lenders holds certain of the
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.



Collateral Deposit



With respect to the Villa Las Posas property loan, 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.



Deferred Financing Costs



The Partnership defers and amortizes financing costs using the effective interest method over the term of the respective note payable.



Revenue Recognition



ARVP III enters into residency agreements with residents
that are on a month-to-month basis. ARVP III applies advance deposits to the first months rent. Revenue is recognized in the period in which the services are provided. Revenue received in advance of the period the services are performed is
recorded in the tenant-prepaid rent and assisted living services in the consolidated balance sheet.



General Liability Insurance



The Partnership utilizes third-party insurance for losses and liabilities associated with general and professional liability claims
subject to established deductible 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.



Advertising Costs



The
Partnership expenses all advertising costs as they are incurred.



Reclassification



The
Partnership has reclassified certain prior amounts to conform to the December 31, 2003 presentation.



Income Taxes



Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are generally not subject to
income taxes. For tax purposes, any income or losses realized are those of the individual partners, not the Partnership.



The Partnership has not requested a ruling from the Internal Revenue Service to the effect that it will be treated as a partnership and
not an association taxable as a corporation for federal income tax purposes. The Partnership received an opinion of counsel as to its tax status prior to the offering of limited partnership units, but such opinion is not binding upon the Internal
Revenue Service.



F-8



---

Following are the Partnerships assets and liabilities as determined in accordance
with generally accepted accounting principles in the United States of America (GAAP) and for Federal income tax reporting purposes at December 31 (in thousands):



|                  |  |            |        |              |   |            |  |              |        |  |   |       
|----------------- |  | ---------- | ------ | ------------ | - | ---------- |  | ------------ | ------ |  | - | ------
|                  |  | 2003       |        | 2002        
|                  |  | GAAP Basis |        | TaxBasis (1) |   | GAAP Basis |  | TaxBasis (1)
|Total assets      |  | $          | 16,927 |              | $ | 20,772     |  | $            | 15,898 |  | $ | 19,931
|                  |  |            |        |              |   |            |  |              |        |  |   |       
|Total liabilities |  | $          | 18,849 |              | $ | 18,849     |  | $            | 18,378 |  | $ | 18,378
|                  |  |            |        |              |   |            |  |              |        |  |   |       



Following are the
differences between the financial statement and tax return income (in thousands):



|                                                  |  |      |       |   |      |   |     |      |  |   |     |  
|------------------------------------------------- |  | ---- | ----- | - | ---- | - | --- | ---- |  | - | --- | -
|                                                  |  | 2003 |       |   | 2002 |   |     | 2001 | 
|Net income (loss) per financial statements        |  | $    | 558   |   |      | $ | 122 |      |  | $ | (81 | )
|Guaranteed payments (1)                           |  |      | 475   |   |      |   | 397 |      |  |   | 436 |  
|Depreciation differences on properties (1)        |  |      | (71   | ) |      |   | 197 |      |  |   | 4   |  
|Amortization differences on intangible assets (1) |  |      | 4     |   |      |   | 4   |      |  |   | 99  |  
|Deferred income (1)                               |  |      |      |   |      |   | (30 | )    |  |   | 55  |  
|Gain on sale of assets (1)                        |  |      |      |   |      |   |    |      |  |   | 1   |  
|Other (1)                                         |  |      | 163   |   |      |   | 28  |      |  |   | 70  |  
|                                                  |  |      |       |   |      |   |     |      |  |   |     |  
|Total income per federal tax return (1)           |  | $    | 1,129 |   |      | $ | 718 |      |  | $ | 584 |  
|                                                  |  |      |       |   |      |   |     |      |  |   |     |  

---

|(1) | Unaudited.
|--- | ----------



Net Income (Loss) per Limited Partner Unit



Net income (loss) per limited partner unit was calculated based on the weighted-average number of limited partner units outstanding of 18,666 in 2003, 2002 and 2001. Special Limited Partners (SLPs) and the
General Partners share of earnings or loss, 1% for both, is deducted from earnings or loss before computing earnings or loss per limited partners unit, summarized as follows:



|                                                             |  |      |         |      |   |         |  |   |         |  
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|                                                             |  | 2003 |         | 2002 |   | 2001    | 
|Net income (loss) as reported                                |  | $    | 557,880 |      | $ | 122,042 |  | $ | (80,981 | )
|Less: Net income (loss) attributable to SLPs and GP         |  |      | 5,579   |      |   | 1,220   |  |   | (810    | )
|                                                             |  |      |         |      |   |         |  |   |         |  
|Net income (loss) attributable to Limited Partners           |  | $    | 552,301 |      | $ | 120,822 |  | $ | (80,171 | )
|                                                             |  |      |         |      |   |         |  |   |         |  
|Weighted average number of Limited Partner units outstanding |  |      | 18,666  |      |   | 18,666  |  |   | 18,666  |  
|Net income (loss) per Limited Partner unit                   |  | $    | 29.59   |      | $ | 6.47    |  | $ | (4.30   | )
|                                                             |  |      |         |      |   |         |  |   |         |  



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



F-9



---

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. The Partnership adopted SFAS No. 145 in 2003 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.



(2) Organization and Partnership Agreement



ARVP III is a California limited partnership formed in June, 1989 to acquire, develop and operate assisted living and senior apartment
communities. The term of the Partnership is 60 years and may be dissolved earlier under certain circumstances. The Partnership commenced operations on December 28, 1989 when the minimum number of limited partner units (1,250) had been sold.



Limited partner units (minimum of two units
per investor for Individual Retirement Accounts, KEOGHs and pension plans and five units for all other investors) were offered for sale to the general public. Each limited partner unit represents a $1,000 capital contribution. There were 18,666
Limited Partner units sold through the end of the offering in October, 1992 which represented a cumulative capital investment of $18,666,000, net of units repurchased and resold. Under the Partnership Agreement, the maximum liability of the Limited
Partners is the amount of their capital contributions.



The Partnerships General Partner is ARV Assisted Living, Inc. (ARVAL), a Delaware corporation, and the individual Special Limited Partners are John A. Booty, John S. Jason, Gary L. Davidson, Tony Rota and David P. Collins.
The Special Limited Partners are not required to make capital contributions to the Partnership.



Profits and losses for financial and income tax reporting purposes shall generally be allocated, other than cost recovery deductions (as
defined in the Partnership Agreement), 0.01% to the General Partner, 0.99% to Special Limited Partners and 99% to the Limited Partners. Cost recovery deductions for each year are allocated 0.01% to the General Partner, 0.99% to Special Limited
Partners and 99% to the Limited Partners who are taxable investors. Negative balances in the Special Limited Partners and Limited Partners capital accounts result primarily from excess distributions of the Partnership. Special Limited Partners and
Limited Partners are not required to repay negative capital balances to the Partnership.



Cash available for distribution from operations, which is determined at the sole discretion of the General Partner, is to be distributed
0.01% to the General Partner, 0.99% to Special Limited Partners and 99% to the Limited Partners.



Upon any sale, refinancing or other disposition of its real properties, distributions are to be made 0.01% to the General Partner, 0.99%
to the Special Limited Partners and 99% to the Limited Partners until the Limited Partners have



F-10



---

received an amount equal to 100% of their capital contributions plus an amount ranging from 8% to 10%
(depending upon the timing of the Limited Partners investment) of their capital contributions per annum, cumulative but not compounded, from the date of each Partners investment. The cumulative return is to be reduced, but not below
zero, by the aggregate amount of prior distributions from all sources. Thereafter, distributions are 15% to the General Partner and Special Limited Partners, and 85% to the Limited Partners, except that after the sale of the properties, the proceeds
of sale of any last remaining assets owned by the Partnership are to be distributed in accordance with positive capital account balances.



In response to a hostile tender offer to purchase the limited partner units of the Partnership, the General Partner, through its
wholly-owned affiliate, ARVP Acquisition, L.P., a California limited partnership, commenced a tender offer on October 18, 2001 to purchase 10,000 outstanding limited partner units of ARVP III for $360 per unit. The General Partner amended its tender
offer on October 31, 2001 and increased the offer price to $400 per unit, increased the number of units it was seeking to purchase from 10,000 units to all outstanding units, and reduced the minimum number of units that must be tendered before it is
required to purchase any units to 30% of the outstanding units (the Amended Offer).



Prior to the 2001 tender offer, ARVAL owned approximately 58 units. At the close of the tender offer on December 14, 2001, ARVAL had
acquired 9,667 units or 51.8% of all outstanding units. As of December 31, 2003, ARVAL owned 9,808 units or approximately 52.5% of the limited partnership units. As such, ARVAL has a controlling interest in the Partnership.



(3) Transactions with Affiliates



ARVP IIIs properties are managed by ARVAL. For this
service the Partnership incurs a property management fee of 5% of gross revenues totaling $371,000, $338,000 and $345,000, for the years ended December 31, 2003, 2002 and 2001, respectively, and is included in rental property operations expenses.
Additionally, the Partnership incurs a partnership management fee of 10% of cash flow before distributions, as defined in the Partnership Agreement, amounting to $104,000, $59,000, and $92,000 for the years ended December 31, 2003, 2002 and 2001,
respectively, and is included in general and administrative expenses.



Payment of the partnership management fee out of cash flow is subordinated to a quarterly non-cumulative distribution from each property to the Limited Partners of an amount equal to an annualized return, per quarter,
of 7.5% of Capital Contributions allocated to each property.



The cash reimbursements from the Partnership to ARVAL for certain expenses, such as payroll and retirement benefit expenses, repairs and maintenance, and supplies expenses paid on the Partnerships behalf. The
total reimbursements to ARVAL, are included in rental property operations, assisted living expenses and general and administrative expenses in the accompanying statements of operations and amounted to $2,382,000, $2,601,000, and $2,530,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.



In consideration for services rendered with respect to property acquisitions, the Managing General Partner is paid a property acquisition fee of a maximum of 2% of the gross offering proceeds. In addition, the
Managing General Partner is entitled to a development, processing and renovation fee of a maximum of 3.5% of gross offering proceeds allocated to a particular project. The Managing General Partner is also entitled to a maximum fee of 4.5% of gross
offering proceeds for rent-up and staff training services. There were no property acquisition and development or processing and renovation fees paid during the three years ended December 31, 2003.



The Partnership paid ARVAL $3,150 in real estate selling
commission fees upon the sale of remaining land at Bradford Square on October 9, 2001.



Amounts payable to affiliates at December 31, 2003, 2002 and 2001 include expense reimbursements and accrued property management and
partnership management fees.



(4) Properties



The following table sets forth, as of December 31, 2003 the
location of each the Partnerships assisted living communities (ALCs), the date on which operations commenced at each such ALC, the number of units at each ALC, and our interest in each ALC.



F-11



---

|                |  |               |  |                      |  |      
|--------------- |  | ------------- |  | -------------------- |  | -----
|Community       |  | Location      |  | Commenced Operations |  | Units
|Chandler Villas |  | Chandler, AZ  |  | September 1992       |  | 164  
|Villa Las Posas |  | Camarillo, CA |  | December 1997        |  | 123  



(5) Notes Payable to Banks



At December 31, 2003 and 2002, notes payable to banks
included the following (in thousands):



|                                                                                                                                                                    |  |      |        |      |   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                                                                                                                                    |  | 2003 |        | 2002
|HUD insured note payable, bearing interest at 6.05%. Monthly principal and interest payments of $70; due through May 2038; collateralized by
an ALC.                |  | $    | 12,180 |      | $ |      
|Note payable to the bank, bearing interest at 8.50%; monthly principal and interest payment of $96; due January 2004; collateralized by an
ALC, as described below. |  |      |       |      |   | 11,846
|HUD insured note payable, bearing interest at 8.06%. Monthly principal and interest payment of $41; due February 2036; collateralized by an
ALC.                    |  |      | 5,688  |      |   | 5,724 
|                                                                                                                                                                    |  |      |        |      |   |       
|                                                                                                                                                                    |  | $    | 17,868 |      | $ | 17,570
|                                                                                                                                                                    |  |      |        |      |   |       



The annual principal
payments of notes payable as of December 31, 2003 are as follows (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31: |  |  
|2004                     |  | $ | 147   
|2005                     |  |   | 157   
|2006                     |  |   | 168   
|2007                     |  |   | 179   
|2008                     |  |   | 192   
|Thereafter               |  |   | 17,025
|                         |  |   |       
|                         |  | $ | 17,868
|                         |  |   |       



The
Partnership is subject to normal HUD requirements that include following various operational and financial guidelines.



On January 9, 2001, ARVP III refinanced one of the two ALCs with a thirty-five year HUD insured loan, bearing interest at 8.06%. The prior
debt was extinguished, resulting in a loss due to the remaining costs, which were written off at the time of the refinancing. With respect to the loan on the other ALC, on February 1, 2002, the lender agreed to increase the principal sum of the loan
to $11,980,000, the maturity date was extended, and the interest rate was changed to 8.50% per annum. As a condition to the extension, the principal increase and the rate change, the lender required a $2.0 million cash collateral deposit, and the
Partnerships Managing General Partner to guaranty $1.0 million of the loan. On April 10, 2003, the Partnership completed its refinancing for $12,240,000 which primarily paid off the remaining loan balance of $11,846,000; with a 35 year HUD
insured loan, bearing interest at 6.05% per annum, with interest and principal payable monthly, secured by an ALC.



F-12



---

(6) Employee Benefit Plans



Effective January 1, 1997, ARVAL established a savings plan (the Savings Plan) that qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees who are at least 21 years of age may defer a portion of their pretax earnings, up to the Internal Revenue Service annual
contribution limit. ARVAL matches 25% of each employees contributions up to a maximum of 6% of the employees earnings. Employees are eligible to enroll at the first enrollment date following the start of their employment (July 1 or
January1). ARVAL matches employees contributions beginning on the first enrollment date following one year of service or 1,000 hours of service. The Partnerships Savings Plan expense was $5,000, $6,000 and $6,000 (as a reimbursement to
ARVAL) for the years ended December 31, 2003, 2002 and 2001.



(7)
Disclosures about the Fair Value of Financial Instruments



The estimated fair value of the Partnerships financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.



The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, collateral deposit, restricted cash, other assets, accounts payable, accrued expenses and, amount payable to affiliates
approximate fair value due to the short-term nature of these instruments. The notes payable terms and rates approximate those currently available in the market. Therefore, the Partnership believes that the carrying value of notes payable
approximates fair value.



(8) Quarterly Financial Information (Unaudited)



|                                           |  |                                      |       |              |   |         |  |   |          |   |  |   |      
|------------------------------------------ |  | ------------------------------------ | ----- | ------------ | - | ------- |  | - | -------- | - |  | - | -----
|                                           |  | For the Quarter Ended               
|                                           |  | December 31                          |       | September 30 |   | June 30 |  |   | March 31
|                                           |  | (In thousands, except per unit data)
|2003                                       |  |                                      |      
|Total revenue                              |  | $                                    | 2,019 |              | $ | 1,875   |  | $ | 1,796    |   |  | $ | 1,803
|Net income                                 |  |                                      | 173   |              |   | 172     |  |   | 87       |   |  |   | 126  
|Net income per limited partner unit        |  | $                                    | 9.21  |              | $ | 9.09    |  | $ | 4.61     |   |  | $ | 6.68 
|                                           |  |                                      |       |             
|2002                                       |  |                                      |       |              |   |         |  |   |          |   |  |   |      
|Total revenue                              |  | $                                    | 1,717 |              | $ | 1,715   |  | $ | 1,726    |   |  | $ | 1,743
|Net income (loss)                          |  |                                      | 33    |              |   | 23      |  |   | (17      | ) |  |   | 83   
|Net income (loss) per limited partner unit |  | $                                    | 1.74  |              | $ | 1.22    |  | $ | (0.90    | ) |  | $ | 4.41 



F-13



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Schedule III



AMERICAN RETIREMENT
VILLAS PROPERTIES III, L.P.

(A California Limited Partnership)



Real Estate and Related Accumulated Depreciation and Amortization



December 31, 2003

(In thousands)



|                |  |              |        |                            |                                          |                           |  |                                                  |       |  |                           |       |           |   |                         |  |                     |        |                          |   |        |  |   |       |  |                |  |           
|--------------- |  | ------------ | ------ | -------------------------- | ---------------------------------------- | ------------------------- |  | ------------------------------------------------ | ----- |  | ------------------------- | ----- | --------- | - | ----------------------- |  | ------------------- | ------ | ------------------------ | - | ------ |  | - | ----- |  | -------------- |  | ----------
|                |  |              |        | Initial cost toPartnership |                                          |                           |  | Gross amount at which carried at close of period |       |  |                           |       |           |  
|                |  |              |        |                            | Costs Capitalizedsubsequenttoacquisition |                           |  |                                                  |       |  |                           |      
|Description     |  | Encumbrances |        | Land                       |                                          | Buildings andimprovements |  |                                                  | Land  |  | Buildings andimprovements |       | Total (1) |   | Accumulateddepreciation |  | Date of acquisition |        | Depreciablelives (years)
|Villa Las Posas |  | $            | 12,180 |                            | $                                        | 1,210                     |  | $                                                | 572   |  | $                         | 8,573 |           | $ | 1,249                   |  | $                   | 9,106  |                          | $ | 10,355 |  | $ | 2,006 |  | December 1987  |  | 271/2years
|Chandler Villas |  |              | 5,688  |                            |                                          | 300                       |  |                                                  | 2,902 |  |                           | 952   |           |   | 300                     |  |                     | 3,854  |                          |   | 4,154  |  |   | 1,551 |  | September 1990 |  | 271/2years
|                |  |              |        |                            |                                          |                           |  |                                                  |       |  |                           |       |           |   |                         |  |                     |        |                          |   |        |  |   |       |  |                |  |           
|                |  | $            | 17,868 |                            | $                                        | 1,510                     |  | $                                                | 3,474 |  | $                         | 9,525 |           | $ | 1,549                   |  | $                   | 12,960 |                          | $ | 14,509 |  | $ | 3,557 |  |                |  |           
|                |  |              |        |                            |                                          |                           |  |                                                  |       |  |                           |       |           |   |                         |  |                     |        |                          |   |        |  |   |       |  |                |  |           

---

|(1) | The aggregate cost for Federal Income Tax purposes is $13,020 as of December 31, 2003
|--- | -------------------------------------------------------------------------------------



Following is a summary of investment in properties for the years ended December 31, 2003, 2002 and 2001:



|                                         |  |      |        |      |   |        |      |  |   |       
|---------------------------------------- |  | ---- | ------ | ---- | - | ------ | ---- |  | - | ------
|                                         |  | 2003 |        | 2002 |   |        | 2001
|Balance at beginning of year             |  | $    | 14,338 |      | $ | 14,182 |      |  | $ | 14,031
|Transfer of cost from other fixed assets |  |      |       |      |   |       |      |  |   |      
|Improvements/construction                |  |      | 171    |      |   | 346    |      |  |   | 151   
|Write off /disposals                     |  |      |       |      |   | (190   | )    |  |   |      
|                                         |  |      |        |      |   |        |      |  |   |       
|Balance at end of year                   |  | $    | 14,509 |      | $ | 14,338 |      |  | $ | 14,182
|                                         |  |      |        |      |   |        |      |  |   |       



Following is a summary
of accumulated depreciation and amortization of investment in properties for the years ended December 31, 2003, 2002, and 2001:



|                                                             |  |      |       |      |   |       |      |  |   |      
|------------------------------------------------------------ |  | ---- | ----- | ---- | - | ----- | ---- |  | - | -----
|                                                             |  | 2003 |       | 2002 |   |       | 2001
|Balance at beginning of year                                 |  | $    | 3,088 |      | $ | 2,822 |      |  | $ | 2,371
|Transfer of accumulated depreciation from other fixed assets |  |      |      |      |   |      |      |  |   |     
|Additions charged to expense                                 |  |      | 469   |      |   | 456   |      |  |   | 451  
|Write off /disposals                                         |  |      |      |      |   | (190  | )    |  |   |     
|                                                             |  |      |       |      |   |       |      |  |   |      
|Balance at end of year                                       |  | $    | 3,557 |      | $ | 3,088 |      |  | $ | 2,822
|                                                             |  |      |       |      |   |       |      |  |   |      



See accompanying
independent auditors report.



F-14