<PAGE>

================================================================================

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

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

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                         COMMISSION FILE NUMBER: 0-26470

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

                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                        A CALIFORNIA LIMITED PARTNERSHIP

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           CALIFORNIA                                 33-0365417
(STATE OR OTHER JURISDICTION OF         (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

     245 FISCHER AVENUE, SUITE D-1                     92626
        COSTA MESA, CALIFORNIA                       (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                 TITLE OF CLASS
                                 --------------
                          UNITS OF LIMITED PARTNERSHIP

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

     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
registrant, computed by reference to the price at which units were sold, was
$18,666,480 (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 20, 2002 was 18,666.

================================================================================


                                       1

<PAGE>


                 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, 2001

<TABLE>
<CAPTION>
                                                                               PAGE
                                                                               ----
<S>        <C>                                                                <C>
PART I

Item 1:    Business.......................................................       3
Item 2:    Properties.....................................................       9
Item 3:    Legal Proceedings..............................................      10
Item 4:    Submission of Matters to a Vote of Unit Holders................      10

PART II

Item 5:    Market for Registrant's Common Equity and Related Unit
           Holders Matters................................................      11
Item 6:    Selected Financial Data........................................      11
Item 7:    Management's Discussion and Analysis of
           Financial Condition and Results of Operations..................      11

Item 7A:   Quantitative and Qualitative Disclosures About Market Risk.....      16
Item 8:    Financial Statements and Supplementary Data....................      16
Item 9:    Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure............................      16

PART III

Item 10:   Directors and Executive Officers of the Registrant.............      17
Item 11:   Executive Compensation.........................................      18
Item 12:   Security Ownership of Certain Beneficial Owners
           and Management.................................................      19
Item 13:   Certain Relationships and Related Transactions.................      19

PART IV

Item 14:   Exhibits and Financial Statement Schedules,
           and Reports on Form 8-K........................................      21
</TABLE>



                                       2




<PAGE>



                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     American Retirement Villas Properties III, L.P. ("ARVP III" or, the
"Partnership"), is the owner and operator of two assisted living communities
that house and provide personal care and support services to senior residents.
The two assisted living communities currently in operation are located in
Camarillo, California and Chandler, Arizona and contain an aggregate of 287
units. On February 19, 1999, we sold three senior apartment complexes we
previously owned for approximately $17.9 million. On December 21, 2000, we sold
a community that we owned in partnership with Bradford Square L.P. for $8.0
million.

     ARVP III is a California limited partnership that was formed in June of
1989 to develop, finance, acquire and operate senior citizen housing. The
general partner of ARVP III is ARV Assisted Living, Inc. ("ARVAL" or "General
Partner"). During fiscal year 2000, Gary L. Davidson, John A. Booty, John S.
Jason, Tony Rota, and David P. Collins (collectively known as "Special Limited
Partners") elected to become special limited partners of ARVP III. Therefore, as
of March 7, 2001 an amendment to our Certificate of Limited Partnership was
filed with the State of California indicating that ARVAL is our only general
partner. Our General Partner makes all decisions concerning property
acquisitions and dispositions of the communities, subject to ARVP III limited
partners' rights to approve or disapprove of the sale of substantially all of
our assets.

     On October 4, 2001, C3 Capital, LLC, a California limited liability company
("C3 Capital"), commenced a hostile tender offer, which was later withdrawn, to
purchase up to 10,000 ARVP III limited partnership units ("units") at a net cash
purchase price of $300 per unit (the "Hostile Offer"), and also filed with the
SEC a preliminary consent solicitation pursuant to which C3 Capital sought to
remove our general partner and elect C3 Capital as the general partner of
ARVP III.

     In response to the Hostile Offer and the consent solicitation, our General
Partner, through ARVP Acquisition, L.P., a California limited partnership
wholly-owned by our General Partner, commenced a tender offer on October 18,
2001 for 10,000 outstanding partnership units of ARVP III for $360 per unit. Our
General Partner amended the tender offer on October 31, 2001 and increased the
offer price to $400 per unit from $360 per unit, increased the number of Units
we were 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"). The
amendment to the original offer was in response to C3 Capital's withdrawal of
its tender offer and receipt of a highly conditional offer from Vintage Senior
Housing, LLC ("Vintage"), an affiliate of C3 Capital, to purchase all of ARVP
III's non-cash assets for $19.5 million. Vintage's offer was subject to, among
other things, significant due diligence and financing contingencies. In
addition, on November 9, 2001, we received a revised offer from Vintage
increasing the purchase price for the assets of ARVP III to $20 million. In
December 2001, ARVP Acquisition, L.P., had acquired an additional 51.8% for a
total of 52.1% of the partnership units. As such, ARVP Acquisition, L.P. had a
controlling interest in the Partnership.

     On September 15, 1989, we began offering a total of 35,000 units at $1,000
per unit. The offering terminated on October 31, 1992 and we realized gross
offering proceeds of $18,665,000. In January and March of 1993, we repurchased
10 units for $8,500 and 3 units for $2,550, from certain of our limited
partners. In the same period we resold 13 units for $14,000. During 1993, we
applied for and earned block grants totaling a gross amount of approximately
$1,081,000 allocated to two of our senior apartment complexes that were sold in
1999. Total grant funds received amounted to approximately $1,059,000. All of
the proceeds from the offering and a portion of the proceeds from the block
grants were allocated to, and spent on properties, which we own or owned either
directly or through our interest as managing general partner that holds title to
the respective property.

     Although the offering memorandum contained no definite plan to sell any
Assisted Living Communities ("ALCs") in accordance with a timetable, our general
partner projected that ARVP III might sell or refinance an ALC after operating
that ALC for a five to seven years period. We have no definite plans to sell our
remaining ALCs at this time. Any future decision regarding sale of our ALCs will
be dependent upon the current and projected operating performance, our needs,
the availability of buyers and buyers' financing and, in general, the relative
merits of continued operation as opposed to sale. On any sale, we may accept
purchase money obligations, unsecured or secured by mortgages as payment,
depending upon then prevailing economic conditions that are customary in the
area in which the property is located, credit of the buyer and available
financing alternatives. In such event, distribution of the sale proceeds to our
partners may be delayed until the notes are paid at maturity, sold, refinanced
or otherwise liquidated.


                                       3

<PAGE>


THE ASSISTED LIVING MARKET

     Assisted Living. Assisted living is a stage in the elder care continuum,
midway between home-based care for lower acuity residents and the more acute
level of care provided by skilled nursing facilities and acute care hospitals.
Assisted living represents a combination of housing, personalized support
services, and healthcare designed to respond to the individual needs of the
senior population who need help in activities of daily living, but do not need
the medical care provided in a skilled nursing facility.

     We believe our assisted living business benefits from significant trends
affecting the long-term care industry. The first is an increase in the demand
for elder care resulting from the continued aging of the U.S. population, with
the average age of our residents falling within the fastest growing segment of
the U.S. population. While increasing numbers of Americans are living longer and
healthier lives, many gradually require increasing assistance with activities of
daily living, and are not able to continue to age in place at home. The second
trend is the effort to contain healthcare costs by the government, private
insurers and managed care organizations by limiting lengths of stay, services,
and reimbursement to patients in acute care hospitals and skilled nursing
facilities. Assisted living offers a cost-effective, long-term care alternative
while preserving a more independent lifestyle for seniors who do not need the
broader array of medical services that acute care hospitals and skilled nursing
facilities are required to provide. Other beneficial trends include increases in
the financial net worth of the elderly population, the number of individuals
living alone, and the number of women who work outside the home who are less
able to care for their elderly relatives. We believe these trends will result in
a growing demand for assisted living services and communities to fill the gap
between aging at home and aging in more expensive skilled nursing facilities.

     Aging Population. The primary consumers of long-term healthcare services
are persons over the age of 65. This group represents one of the fastest growing
segments of the population. According to the 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 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.

     We believe that growth in the assisted living industry is being driven by
several factors. Advances in the medical and nutrition fields have increased
life expectancy, resulting in larger numbers of elderly people. Greater numbers
of women in the labor force have reduced the supply of caregivers. Historically,
unpaid women (mostly daughters or daughters-in-law) represented a large portion
of the caregivers for the non-institutionalized elderly. The population of
individuals living alone has increased significantly since 1960, largely as a
result of an aging population in which women outlive men by an average of 6.8
years, rising divorce rates, and an increase in the number of unmarried
individuals.

     Limitation on the Supply of Long-Term Care Facilities. The majority of
states in the U.S. have enacted Certificate of Need or similar legislation,
which generally limits the construction of skilled nursing facilities and the
addition of beds or services in existing skilled nursing facilities. High
construction costs, limitations on government reimbursement for the full cost of
construction, and start-up expenses also constrain growth in the supply of such
facilities. Such legislation benefits the assisted living industry by limiting
the supply of skilled nursing beds for the elderly. Cost factors are placing
pressure on skilled nursing facilities to shift their focus toward higher acuity
care, which enables them to charge more. This contributes to a shortage of lower
acuity care and thereby increases the pool of potential assisted living
residents.

     While Certificates of Need generally are not required for ALCs, except in a
few states, most states do require assisted living providers to license their
communities and comply with various regulations regarding building requirements
and operating procedures and regulations. States typically impose additional
requirements on ALCs over and above the standard congregate care requirements.
Further, the limited pool of experienced assisted living staff and management,
as well as the costs and start-up expenses to construct an ALC, provide an
additional barrier to entry into the assisted living business.

     Cost Containment Pressures of Health Reform. In response to rapidly rising
healthcare costs, both government and private pay sources have adopted cost
containment measures that encourage reduced lengths of stay in hospitals and
skilled nursing facilities. The federal government has acted to curtail
increases in healthcare costs under Medicare by limiting acute care hospital and
skilled nursing facility reimbursement to pre-established fixed amounts. Private
insurers have also begun to limit reimbursement for medical services in general
to predetermined "reasonable" charges. Managed care organizations, such as
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs") are reducing hospitalization costs by negotiating discounted rates for
hospital services and by monitoring and decreasing hospitalization. We
anticipate that both HMOs and PPOs increasingly may direct patients away from
higher cost nursing care facilities into less expensive ALCs.


                                       4

<PAGE>


     These cost containment measures have produced a "push-down" effect. As the
number of patients being "pushed down" from acute care hospitals to skilled
nursing facilities increases, the demand for residential options such as ALCs to
serve patients who historically have been served by skilled nursing facilities
will also increase. In addition, skilled nursing facility operators are
continuing to focus on improving occupancy and expanding services (and fees) to
subacute patients requiring very high levels of nursing care. As the acuity
level of skilled nursing facility patients rises, the supply of nursing facility
beds will be filled by patients with higher acuity needs who pay higher fees.
This will provide opportunities for ALCs to increase their occupancy and
services to residents requiring lower levels of care than patients in skilled
nursing facilities generally receive.

OUR ASSISTED LIVING SERVICES

     We provide services and care that are designed to meet the individual needs
of our residents. The services provided are designed to enhance both the
physical and mental wellbeing of seniors in each of our ALCs by promoting their
independence and dignity in a home-like setting. Our assisted living program
includes the following:

o    Personalized Care Plan. The focus of our strategy is to meet the specific
     needs of each resident. We customize our services beginning with the
     admissions process when the ALC's management staff, the resident, the
     resident's family, and the resident's physician discuss the resident's
     needs and develop a "personalized" care plan. If recommended by the
     resident's physician, additional healthcare or medical services may be
     provided at the community by a third party home healthcare agency or other
     medical provider. The care plan is reviewed and modified on a regular
     basis.

o    Basic Service and Care Package. The basic service and care package at our
     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.

          Other care services can be provided under the basic package based upon
     the individual's personalized healthcare plan. Our policy is to charge base
     rents that are competitive with similar ALCs in the local market.

o    Additional Services. Our assisted living services program offers additional
     levels of care beyond what is offered in the basic package. The level of
     care a resident receives is determined through an assessment of a
     resident's physical and mental health that is conducted by the community's
     assisted living director, with input from other staff members. The
     six-tiered rate structure is based on a point system. We assign points to
     the various care tasks required by the resident, based on the amount of
     staff time and expertise needed to accomplish the tasks. The point scale
     and pricing are part of the admissions agreement between the community, the
     resident and the resident's family. The community performs reassessments
     after the initial 30 days and periodically throughout the resident's stay
     to ensure that the level of care we provide corresponds to changes in a
     resident's condition. The types of services included in the assessment
     point calculation are:

     -    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;
     -    Help with psychosocial needs, such as memory deficit disorder; and
     -    Special nutritional needs and assistance with eating.

     In addition to the above services, we provide other levels of assistance to
residents at selected ALCs in order to meet individual needs, such as assistance
with diabetic care and monitoring, catheter, colostomy and ileosotomy care,
minor wound care needs and light to moderate transferring needs. Specially
trained staffs provide personalized care, specialized activity programs and
oversee the medication regimens.



                                       5
<PAGE>


     In addition to the base rent, we typically charge between $375 and $1,700
per month plus additional charges for higher levels of assisted living services.
Fee levels vary from community to community and we may charge additional fees
for other specialized assisted living services. We expect that an increasing
number of residents will use additional levels of services as they age in our
ALCs. Our internal growth plan is focused on increasing revenue by continuing to
improve our ability to provide residents with these services.

     There can be no assurance that any ALC will be substantially occupied at
our set rates at any time. In addition, we may only be able to lease the units
in our ALCs at rates below our set rates due to limitations imposed on rates by
local market conditions or other factors. Even if we achieve substantial
occupancy at our set rates, our set rates may not allow for our projected cost
recovery and profit if operating expenses increase. In addition, in order to
increase our set rates, we must provide advance notice of rate increases,
generally at least 30 days. Because of this advance notice requirement, we are
not able to reflect cost increases in our set rates until at least several
months after such cost increases occur.

     Wellness Program. We have implemented a Wellness Program for residents of
our 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, we design a solution to fit that resident's
particular needs. We monitor the physical and mental well being of our
residents, usually at meals and other activities, and informally as the staff
performs services around the facility. Through the Wellness Program we work
with:

     o    home healthcare agencies to provide services the community cannot
          provide;
     o    physical and occupational therapists to provide services to residents
          in need of such therapy; and
     o    long-term care pharmacies to facilitate cost-effective and reliable
          ordering and distribution of medications.

     We arrange for these services to be provided to residents as needed in
consultation with their physicians and families. At the present time, both of
our ALCs have a comprehensive Wellness Program.

FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS

     Our 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, our 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. We have 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 us. 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. We disclaim 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 with the operation of ALCs. These risks include, but
are not limited to:

     o    our ability to access capital necessary for operations of our ALCs;
     o    governmental regulation;
     o    our ability to meet our indebtedness;
     o    competition; and
     o    risks common to the assisted living industry.

DEPENDENCE ON THE AVAILABILITY OF ADEQUATE CAPITAL

We depend heavily on our ability to obtain adequate capital to fund our
operations. Our estimated capital needs for operations over the next 12 months
are $346,000. As of December 31, 2001, we had $2.9 million in cash and cash
equivalents. This means we have cash and cash equivalents to meet our estimated
capital needs for operations for the next 12 months. If, however, our operations
costs exceed our projections, we may have to obtain significant additional
financing.



                                       6
<PAGE>


There is no assurance that we will be able to obtain the financing on a timely
basis, if at all. If we are unable to obtain the required financing on a timely
basis we may not be able to execute our business plan.

COMPETITION

     We operate in two separate markets. Competition to increase or maintain
high occupancies is significant with numerous other companies representing
national, regional, and local fragmented ownership. No one competitor tends to
have a dominant market share within our niche. For the most part we have created
a market niche based on mid-range pricing and competes on quality of service,
services offered, reputation, location, and market longevity. We are continuing
to grow within these competitive markets by providing excellent value in
residential amenities, staff hospitality, and personal care services.

     The healthcare industry is highly competitive and we expect that the
assisted living business, in particular, will become more competitive in the
future. Currently competition includes, family members providing care at home;
numerous local, regional and national providers of retirement, assisted living
and long-term care whose facilities and services range from home-based
healthcare to skilled nursing facilities; and acute care hospitals. In addition,
we believe that as assisted living receives increased attention among the public
and insurance companies, new competitors focused on assisted living will enter
the market, including hospitality companies expanding into the market. Some of
our competitors operate on a not-for-profit basis or as charitable
organizations, while others have, or are capable of obtaining, greater financial
resources than those available to us.

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

INDEBTEDNESS

     As of December 31, 2001, we had outstanding indebtedness of $13.8 million.
Subsequent to December 31, 2001, we amended one of the existing notes to (i)
increase the principal sum of the existing loan by approximately $4.0 million,
(ii) extend the maturity date of the existing loan to July 1, 2003, and (iii)
change the interest rate of the existing loan to 8.5%. As a result, we will
devote a portion of our cash flow to debt service. There is a risk that we will
not be able to generate sufficient cash flow from operations to make required
interest and principal payments.

GOVERNMENT REGULATION

     Assisted Living. Healthcare is subject to extensive regulation and frequent
regulatory change. Currently, no federal rules explicitly define or regulate
assisted living. However, we are 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 and localities where we
operate or intend to operate. 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, and on reimbursement levels from
governmental and other payers. In addition, the President and Congress have
proposed in the past, and may propose in future, healthcare reforms that could
impose additional regulations on the Company or limit the amounts that we may
charge for our services. We cannot assess the ultimate timing and impact that
any pending or future healthcare reform proposals may have on the assisted
living, home healthcare, skilled nursing or healthcare 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 our results of operations.

     SSI Payments. A portion of our revenue comes from residents who receive SSI
payments. Approximately 1% of our residents are on SSI programs. Revenue from
these residents is generally lower than the amounts we receive from our other
residents and could be subject to payment delay. We cannot assure that our
percentage of revenue received from SSI will not increase, or that the amounts
paid by SSI programs will not be further limited. In addition, if we were to
become a provider of services under the Medicaid program, we would be subject to
Medicaid regulations designed to limit fraud and abuse. Violations of these
regulations could result in civil and criminal penalties and exclusion from
participation in the Medicaid program.




                                       7

<PAGE>
RISKS COMMON TO OUR ASSISTED LIVING OPERATIONS

     Staffing and Labor Costs. We compete with other providers of assisted
living and senior housing to attract and retain qualified personnel. We also
rely on the available labor pool of employees, and unemployment rates are low in
many areas where we operate. We make a genuine effort to remain competitive with
other companies in our industry. Therefore, if it is necessary for us to
increase pay and/or enhance benefits to maintain our competitive status in our
industry, our labor costs could rise. We cannot provide assurance that if our
labor costs do increase, they can be matched by corresponding increases in
rental, assisted living or management revenue.

     Obtaining Residents and Maintaining Rates. For the year ended December 31,
2001, our ALCs had a combined occupancy rate of 95.2%. Occupancy may drop in our
existing ALCs, primarily due to:

     o    changes in the health of residents;
     o    increased competition from other assisted living providers,
          particularly those offering newer ALCs;
     o    the reassessment of residents' physical and cognitive state.

     There can be no assurance that any ALC will be substantially occupied at
our set rates at any time. In addition, we may only be able to lease the units
in our ALCs at rates below our set rates due to limitations imposed on rates by
local market conditions or other factors. Even if we achieve substantial
occupancy at our set rates, our set rates may not allow for our projected cost
recovery and profit if operating expenses increase. In addition, in order to
increase our set rates, we must provide advance notice of rate increases,
generally at least 30 days. Because of this advance notice requirement, we are
not able to reflect cost increases in our set rates until at least several
months after such cost increases occur. In addition, if we fail to generate
sufficient revenue, we may be unable to make interest and principal payments on
our indebtedness.

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

     o    an oversupply of, or a reduction in demand for, ALCs in a particular
          market;
     o    the attractiveness of properties to residents;
     o    zoning, rent control, environmental quality regulations or other
          regulatory restrictions;
     o    competition from other forms of housing;
     o    our ability to provide adequate maintenance and insurance;
     o    general economic climates;
     o    our 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 our ability to
vary our portfolio promptly in response to changes in economic or other
conditions. If we fail to operate our ALCs effectively, it may have a material
adverse effect on our business, financial condition and operating results.

     Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be held liable for the costs of the removal or
remediation of certain hazardous or toxic substances. Such laws and regulations
often impose liability whether or not the owner or operator knows of, or is
responsible for, the presence of the hazardous or toxic substances. When we
acquire land for development or existing facilities, we typically obtain
environmental reports on the properties as part of our due diligence in order to
lessen our risk of exposure. Nonetheless, the costs of any required remediation
or removal of these substances could be substantial. The owner's liability is
generally not limited under such laws and regulations and could exceed the value
of the property and the aggregate assets of the owner or operator. The presence
of these substances or failure to remediate such substances properly may also
adversely affect the owner's ability to sell or rent the property or to borrow
using the property as collateral. Under these laws and regulations, an owner,
operator, or any entity that arranges for the disposal of hazardous or toxic
substances at a disposal site may also be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at the disposal
site.

     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. We believe that our 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, we would incur additional costs. Further legislation,
or amendments to the current



                                       8
<PAGE>


legislation, may impose requirements with respect to ensuring access of disabled
persons to our properties, and the costs of compliance could be substantial.

     Geographic Concentration. One of our ALCs is located in Camarillo,
California and one 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. We cannot
provide assurance that such geographic concentration will not have an adverse
impact on our business, financial condition, operating results and prospects.

     Insurance. We believe that we maintain adequate insurance policies, based
on the nature and risks of our business, historical experience and industry
standards. Our business entails an inherent risk of liability. In recent years,
we 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 we are
subject to such suits because of the nature of our business. We cannot assure
that claims will not arise that exceed our insurance coverage or are not covered
by it. A successful claim against us that is not covered by, or is in excess of
our insurance, could have a material adverse effect on our financial condition,
operating results or liquidity. Claims against us, regardless of their merit or
eventual outcome, may also have a material adverse effect on our ability to
attract residents or expand our business and would consume considerable
management time. We must renew our insurance policies annually and can provide
no assurance that we 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.

ITEM 2. PROPERTIES

     The following table sets forth, as of December 31, 2001 the location of
each of our ALCs, the date on which operations commenced at each such ALC, the
number of units at each ALC, and our interest in each ALC.

<TABLE>
<CAPTION>
                                                                COMMENCED
         COMMUNITY                         LOCATION             OPERATIONS           UNITS      INTEREST
         ---------                         --------             ----------           -----      --------
         <S>                             <C>                   <C>                    <C>      <C>
         Chandler Villas                 Chandler, AZ          September 1992         164       Fee Owned
         Villa Las Posas                 Camarillo, CA         December 1997          123       Fee Owned
</TABLE>

PROMISSORY NOTES RESULTING FROM THE SALE OF HERITAGE POINTE CLAREMONT

     In September 1993, we contracted to sell our then owned Heritage Pointe
Claremont to Claremont Senior Partners ("CSP") for $12,281,900. Our General
Partner is a special limited partner of CSP. The transaction closed on December
30, 1993. The consideration we received from CSP in the sale of Heritage Pointe
Claremont ALC consisted of both $10,000 in cash and cash equivalents and
$12,271,900 in the form of a promissory note.

     The promissory note bears interest at 8.0% and the outstanding balance and
interest are payable from excess cash flows as defined in the CSP partnership
agreement. The promissory note is secured by certain CSP partners' interests in
CSP and matures on January 25, 2010.

     Upon the receipt of the principal and interest payments from CSP in April
1996 and January 1995, a sufficient investment as defined by Statements of
Financial Accounting Standards Board No. 66 was made and the sale was
recognized. As CSP's excess cash flows do not currently exceed the interest
payment requirements, SFAS 66 requires profit on the sale to be recognized under
the cost recovery method as payments are received on the notes. We received
interest payments on these note totaling $30,000, $12,000, $54,600 for the years
ended December 31, 2001, 2000 and 1999 respectively. The CSP note balance is
$3.8 million for the years ended December 31, 2001 and 2000.


                                       9

<PAGE>


ITEM 3. LEGAL PROCEEDINGS

     On April 6, 2001, a resident of an ALC sustained injuries when an ALC
employee backed an ALC golf cart into the resident. The injured resident
subsequently filed a claim for damages against the Company and the ALC employee.
In December of 2001, the claim was settled and all claims of the resident were
released.

     We are from time to time subject to lawsuits and other matters in the
normal course of business. While we cannot predict the results with certainty,
we do not believe that any liability from any such lawsuits or other matters
will have a material effect on our 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.



                                       10
<PAGE>


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS

     There is no established public trading market for our securities. As noted
in Item 1, ARVAL, our General Partner, tendered for our limited partnership
units in October 2001. At the close of tender offer period, ARVAL acquired
additional 9,667 units or 51.8% at a net cash price of approximately $400 per
unit. As of December 31, 2001, ARVAL hold 52.1% of limited partner units.

     As of March 31, 2002, there were approximately 1,759 Unit Holders of record
owning 18,666 units. For the years ended December 31, 2001, 2000 and 1999, we
made distributions of $29.33 per limited partner unit, $226.99 per limited
partner unit and $511.24 per limited partner unit, respectively. All of the
distributions during 2001 represent a distribution of earnings before fourth
quarter's loss. Distributions for 2000 represent a distribution of earnings of
$218.08 per unit and a return of capital of $8.92 per unit. Distributions for
1999 represent a distribution of earnings of $252.81 and a return of capital of
$258.43 per unit.

ITEM 6. SELECTED FINANCIAL DATA

     The following table presents financial data for each of the last five
years. Certain of this financial data has been derived from our 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.

<TABLE>
<CAPTION>
                                                          2001          2000           1999         1998          1997
                                                       --------       --------      --------      --------       --------
                                                                         (In thousands, except unit data)
<S>                                                    <C>            <C>           <C>           <C>            <C>
Revenues ........................................      $  7,036       $  8,994      $  8,645      $  9,490       $  6,333
Net income (loss) ...............................           (81)         4,111         4,767          (378)           229
Net income (loss) (per limited partner unit) ....         (4.30)        218.04        252.83        (20.06)         12.27
Total assets ....................................        15,881         21,315        18,786        31,679         31,241
Partners' capital ...............................         1,201          1,832         2,000         6,873          8,547
Long-term obligations ...........................        13,736         13,177        15,665        23,072         20,889
Distributions  of earnings  (per limited  partner
    unit) .......................................         29.33         218.08        252.81            --             --
Distributions  - return of capital  (per  limited
    partner units) ..............................            --           8.92        258.43         68.75             --
Total distributions (per limited partner unit) ..         29.33         226.99        511.24         68.75             --
</TABLE>


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

GENERAL PARTNER AND ORGANIZATION STATUS

     On October 4, 2001, C3 Capital, LLC, a California limited liability company
("C3 Capital"), commenced a hostile tender offer, which was later withdrawn, to
purchase up to 10,000 ARVP III limited partnership units ("units") at a net cash
purchase price of $300 per unit (the "Hostile Offer"), and also filed with the
SEC a preliminary consent solicitation pursuant to which C3 Capital sought to
remove our general partner, and elect C3 Capital as the general partner of ARVP
III.

     In response to the Hostile Offer and the consent solicitation, our General
Partner, through ARVP Acquisition, L.P., a California limited partnership
wholly-owned by our General Partner, commenced a tender offer on October 18,
2001 for 10,000 outstanding partnership units of ARVP III for $360 per unit. Our
General Partner amended the tender offer on October 31, 2001 and increased the
offer price to $400 per unit from $360 per unit, increased the number of Units
we were 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"). The
amendment to the original offer was in response to C3 Capital's withdrawal of
its tender offer, and receipt of a highly conditional offer from Vintage Senior
Housing, LLC ("Vintage"), an affiliate of C3 Capital, to purchase all of ARVP
III's non-cash assets for


                                       11

<PAGE>


$19.5 million. Vintage's offer was subject to, among other things, significant
due diligence and financing contingencies. In addition, on November 9, 2001, we
received a revised offer from Vintage increasing the purchase price for the
assets of ARVP III to $20 million.

     Prior to the tender offer ARVAL owned approximately 58 units. At the close
of the tender offer on December 14, 2001 our General Partner had acquired an
additional 9,667 units or 51.8% of all outstanding units. As of December 31,
2001, ARVAL owns 9,725 units or approximately 52.1% of the limited partnership
units. As such, ARVAL has controlling interest in the Partnership.

CRITICAL ACCOUNTING POLICIES


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:

<Table>
<S>                                                   <C>
Buildings and improvements .......................... 27.5 to 35 years
Furniture, fixtures and equipment ................... 3 to 7 years

</Table>

     We review our 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, we estimate the future 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.

Revenue Recognition

     Rent agreements with tenants are on a month-to-month basis. We apply
advance deposits to the first month's rent. Revenue is recognized in the month
earned for rent and assisted living services.

LIQUIDITY

     We expect that cash generated from the operations of our properties will be
adequate to pay operating expenses and provide distributions to our partners. On
a long-term basis, our liquidity is sustained primarily from cash flow provided
by operating activities. For the year ended December 31, 2001, net cash provided
by operating activities was $0.8 million compared to $1.8 million for the year
ended December 31, 2000 and $1.0 million for the year ended December 31, 1999.

     Net cash used in investing activities was $0.3 million for the year ended
December 31, 2001 as compared to net cash provided by investing activities of
$7.6 million for the year ended December 31, 2000, and net cash provided by
investing activities of $3.8 million for the year ended December 31, 1999. The
increase in 2000 was primarily a result of proceeds from the sale of ARVP
III/Bradford Square Ltd., sold on December 31, 2000 for $8.0 million.

     Net cash used in financing activities was $6.0 million for the year ended
December 31, 2001 as compared to net cash used in financing activities of $3.1
million for the year ended December 31, 2000, and net cash used in financing
activities of $4.5 million for the year ended December 31, 1999. Our financing
activities in 2001 consisted of:

     o    principal repayments on notes payable,
     o    cost acquired in related to refinancing on our two ALCs, and
     o    distributions paid to partners; offset by
     o    proceeds from refinancing.

     On June 28, 1999 we obtained financing on our two ALCs through a loan
agreement with a major financial institution in the aggregate principal amount
of $13.4 million at an interest rate of 9.15% per annum with a maturity date of
June 28, 2001. As required by the loan agreement, we created a wholly owned
subsidiary, Retirement Inns III, LLC as a special purpose entity for the
financial situation. Our General Partner is a limited guarantor on the loan for
fraud, material misrepresentation and certain covenants.

     Our General Partner's Board of Directors approved the refinancing of our
ALCs in March 2000. We chose to refinance to take advantage of lower fixed
interest rates available at the time and extend maturities to 35 years.

     On January 29, 2001, we refinanced one of the two ALCs with thirty-five
year HUD insured loan-bearing interest at 8.06% per annum. With respect to the
loan on the other ALC, on February 1, 2002, the lender agreed to increase the
principal



                                       12
<PAGE>


sum of the loan to $11,980,000, the maturity date has been extended to July 1,
2003, and the interest rate has been changed to 8.5% per annum.

     We are 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

     We estimate that we will incur approximately $346,000 for capital
expenditures during 2002 for physical improvements at our 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.

RESULTS OF OPERATIONS

The Year Ended December 31, 2001 as compared to the Year Ended December 31, 2000

<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)                                                                      Increase/
                                                                     2001         2000     (decrease)
                                                                   --------    --------    ----------
<S>                                                                <C>         <C>          <C>
Revenues:
  Rent ......................................................      $   6.04    $   7.58       (20.3)%
  Assisted living ...........................................          0.71        1.12       (36.6)%
  Interest and other revenue ................................          0.29        0.29        00.0%
                                                                   --------    --------    ----------
          Total revenue .....................................          7.04        8.99       (21.7)%
                                                                   --------    --------    ----------
Costs and expenses:
  Rental property operations ................................          3.48        4.42       (21.3)%
  Assisted living ...........................................          0.52        0.68       (23.5)%
  General and administrative ................................          0.85        0.51        66.7%
  Depreciation and amortization .............................          0.77        1.10       (30.0)%
  Property taxes ............................................          0.19        0.23       (17.4)%
  Interest ..................................................          1.23        1.41       (12.8)%
                                                                   --------    --------    ----------
          Total costs and expenses ..........................          7.04        8.35       (15.7)%
                                                                   --------    --------    ----------
Operating (loss) income .....................................         (0.00)       0.64      (100.0)%
  (Loss) gain on sale of property ...........................         (0.01)       4.82      (100.2)%
                                                                   --------    --------    ----------
(Loss) income before minority interest and extraordinary loss         (0.01)       5.46      (100.2)%
  Minority interest in operations ...........................            --        1.34      (100.0)%
                                                                   --------    --------    ----------
(Loss) income before extraordinary loss .....................         (0.01)       4.12      (100.2)%
  Extraordinary loss from extinguishment of debt ............         (0.07)         --       100.0%
                                                                   --------    --------    ----------
           Net (loss) income ................................      $  (0.08)   $   4.12      (101.9)%
                                                                   ========    ========    ==========
</TABLE>

The decrease in assisted living community rental revenue of $1.54 million from
$7.58 million for the year ended December 31, 2000 to $6.04 million for the year
ended December 31, 2001, or 20.3%, is primarily attributable to:

     o    the sale of Bradford Square, L.P in December 2000;
     o    average occupancy for our remaining assisted living communities
          decreased from 97.6% for the year ended December 31, 2000 as compared
          with 95.2% for the year ended December 31, 2001; offset by
     o    an increase in the same community average rental rate per occupied
          unit to $1,842 for the year ended December 31, 2001 as compared with
          $1,707 for the year ended December 31, 2000.

The decrease in assisted living revenue of $0.41 million from $1.12 million for
the year ended December 31, 2000 to $0.71 million for the year ended December
31, 2001, or 36.6%, is primarily attributable to:
     o    the sale of Bradford Square, L.P in December 2000; offset by
     o    an increase in the average assisted living rate from $641 per month
          for the year ended December 31, 2000 compared to $642 per month for
          the year ended December 31, 2001;


                                       13

<PAGE>



     o    the average assisted living residents for our remaining ALCs remained
          at 92 residents for the year ended December 31, 2000 and December 31,
          2001.

The decrease in rental property operations and assisted living operating
expenses of $1.10 million from $5.10 million for the year ended December 31,
2000 to $4.00 million for the year ended December 31, 2001, or 21.6%, is
primarily attributable to:

     o    the sale of Bradford Square, L.P in December 2000; offset by
     o    an increase in management fees as the result of an increase in
          revenues of our remaining ALCs;
     o    an increase in utilities cost;
     o    the increased salaries of staff and fringe benefits, partially due to
          the increase in California's minimum wage.

The increase in general and administrative expenses of $0.34 million from $0.51
million for the year ended December 31, 2000 to $0.85 million for the year ended
December 31, 2001, or 66.7%, is primarily attributable to:

     o    increased legal expenses related to hostile take-over attempt;
     o    a lawsuit settlement at one of our ALCs;
     o    an increase in property general liability insurance; offset by
     o    the sale of Bradford Square, L.P in December 2000.

The decrease in property tax expense of $0.04 million from $0.23 million for the
year ended December 31, 2000 to $0.19 million for the year ended December 31,
2001, or 17.4%, is primarily related to the sale of Bradford Square, L.P in
December 2000.

The decrease in interest expense of $0.18 million from $1.41 million for the
year ended December 31, 2000 to $1.23 million for the year ended December 31,
2001, or 12.8%, is primarily related to the following:

     o    the sale of Bradford Square, L.P. in December 2000; and
     o    the lower interest on Chandler Villas ALC's mortgage; offset by
     o    the higher mortgage balance as a result of refinancing;
     o    the mortgage insurance expense incurred on this new refinanced loan;
     o    the recovery of $112,000 of the interest rate lock and commitment fees
          in June 2000 that related to a failed refinancing of certain notes
          payable in 1998.

The gain (loss) on sale of property of $0.01 million for the year ended December
31, 2001 is the result of the following:

     o    recalculation of the sale commission related to the sale of Bradford
          Square, L.P in December 2000. The Partnership split the commission
          with ARVP III/BS as the result of a dispute which arose in July 2001
          and was subsequently settled; offset by
     o    gain on the sale of a piece of land at Bradford Square in October
          2001.

There is no minority interest for the year ended December 31, 2001 due to the
sale of Bradford Square, L.P in December 2000.

The extraordinary loss of $0.07 million is the result of the write off of loan
fees due to the refinancing of one of the ALCs in January 2001.

The Year Ended December 31, 2000 as compared to the Year Ended December 31, 1999

<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)                                  Increase/
                                    2000       1999    (decrease)
                                  --------   --------  ----------
<S>                               <C>        <C>            <C>
Revenues:
  Rent .....................      $   7.58   $   7.14       6.2%
  Assisted living ..........          1.12       1.02       9.2%
  Interest and other revenue          0.29       0.48     (38.3)%
                                  --------   --------  ----------
          Total revenue ....          8.99       8.64       4.00%
                                  --------   --------  ----------
Costs and expenses:
  Rental property operations          4.42       4.28       3.3%
  Assisted living ..........          0.68       0.66       3.9%
  General and administrative          0.51       0.41      21.5%
</TABLE>


                                       14

<PAGE>


<TABLE>
<S>                                                           <C>            <C>           <C>
  Depreciation and amortization.........................            1.10           1.06          3.8%
  Property taxes........................................            0.23           0.25         (8.9)%
  Interest..............................................            1.41           1.50         (6.1)%
                                                              ----------     ----------       ------
          Total costs and expenses......................            8.35           8.16          2.3%
                                                              ----------     ----------       ------
          Operating income..............................            0.64           0.48         33.3%
Gain on sale of properties..............................            4.82           4.56          5.7%
                                                              ----------     ----------       ------
Income (loss) before minority interest and change in
accounting principal....................................            5.46           5.04          8.3%
Minority interest in operations.........................            1.34           0.18        648.4%
                                                              ----------     ----------       ------
Income(loss) before change in accounting principal......            4.12           4.86        (15.2)%
Cumulative effect of change in accounting principal.....               -          (0.10)      (100.0)%
                                                              ----------     ----------       ------
           Net income...................................      $     4.12     $     4.76        (13.4)%
                                                              ==========     ==========       ======
</TABLE>

The increase in assisted living community rental revenue of $0.44 million from
$7.14 million for the year ended December 31, 1999 to $7.58 million for the year
ended December 31, 2000, or 6.2%, is primarily attributable to:

     o    average occupancy for our assisted living communities increased to
          96.8% for the year ended December 31, 2000 as compared with 94.7% the
          year ended December 31, 1999;
     o    an increase in average rental rate per occupied unit to $1,723 for the
          year ended December 31, 2000 as compared with $1,663 for the year
          ended December 31, 1999; offset by
     o    one and one-half months of rent from the senior apartments in 1999
          which were sold on February 19, 1999.

The increase in assisted living revenue of $0.10 million from $1.02 million for
the year ended December 31, 1999 to $1.12 million for the year ended December
31, 2000, or 9.2%, is primarily attributable to:

     o    an increase in the assisted living rate from $673 per month for the
          year ended December 31, 1999 compared to $701 per month for the year
          ended December 31, 2000; offset by
     o    the loss of one-third of one month's revenue from Bradford Square
          which was sold on December 21, 2000.

The decrease in interest and other revenue of $0.19 million from $0.48 million
for the year ended December 31, 1999 to $0.29 million for the year ended
December 31, 2000, or (38.3)%, is primarily attributable to:

     o    a decrease in processing and other resident fees for the twelve-month
          period ended December 31, 2000 due to competitor's waiving such fees
          to increase occupancy;
     o    a lack of interest income from notes receivable in connection with the
          sale of three apartment projects in February 1999; and
     o    a decrease in other income from the Claremont Senior Partner note;
          offset by
     o    an increase in interest earned from bank accounts which utilize
          commercial paper investments.

The increase in rental property operations and assisted living operating
expenses of $0.16 million from $4.94 million for the year ended December 31,
1999 to $5.10 million for the year ended December 31, 2000, or 3.2%, is
primarily attributable to:

     o    an increase in variable expenses that related to increases in
          occupancy in assisted living communities;
     o    staffing requirements related to increased assisted living services
          provided; and
     o    increased salaries of staff and fringe benefits; offset by
     o    a decrease in expenses from the senior apartments which were sold in
          1999; and
     o    a small decrease in the expenses of Bradford Square which was sold on
          December 21, 2000.

The increase in general and administrative expenses of $0.10 million from $0.41
million for the year ended December 31, 1999 to $0.51 million for the year ended
December 31, 2000, or 21.5%, is primarily attributable to:

     o    increased administration fees paid to our general partner;
     o    increased marketing and advertising expenses; and
     o    increased legal expenses related to the recovery of the interest rate
          lock and commitment fees incurred in connection with the failed
          refinancing of certain notes payable in 1998; offset by
     o    a reduction of expenses that were previously allocated to general and
          administrative due to cost-cutting efforts.

The decrease in property tax expense of $0.02 million from $0.25 million for the
year ended December 31, 1999 to $0.23 million for the year ended December 31,
2000, or 8.9%, is primarily related to the sale of our three senior apartments
consummated on February 19, 1999.


                                       15

<PAGE>


The decrease in interest expense of $0.09 million from $1.50 million for the
year ended December 31, 1999 to $1.41 million for the year ended December 31,
2000, or 6.1%, is primarily related to the following:

     o    a recovery of $112,000 of interest rate lock and commitment fees
          incurred in connection with the failed refinancing of certain notes
          payable in 1998; and
     o    buyer's assumption of the notes payable for the three senior
          apartments sold on February 19, 1999; offset by
     o    an increase in expense from refinancing of two ALCs in June 1999.

The increase in minority interest in operations of $1.16 million from $0.18
million for the year ended December 31, 1999 to $1.34 million for the year ended
December 31, 2000, or 648.4%, is primarily due to the sale of Bradford Square,
L.P on December 21, 2000.

The cumulative effect of change in accounting principle in 1999 is a result of
the adoption of SOP 98-5 which requires that costs of start-up activities and
organizational costs be expensed as incurred and the write-off of previously
deferred and un-amortized amounts.

SUBSEQUENT CASH DISTRIBUTIONS

     On February 25, 2002, we distributed to our limited partners the
refinancing proceeds of one of our remaining ALCs in the aggregated amount of
$1.7 million. On March 5, 2002, we distributed approximately $2.0 million of
excess cash reserves to our limited partners. We do not have any plans to make
cash distribution in the immediate future. Our ability to make cash
distributions in the future depends on many factors, including: our ability to
rent the available units and maintain high occupancies and rates, our ability to
control both operating and administrative expenses, our ability to maintain
adequate working capital, the absence of any losses from uninsured property
damage or future litigation, and our ability to generate proceeds from the sales
of our properties under favorable terms.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to market risks related to fluctuations in the interest
rates on our fixed rate notes payable. With respect to our 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. We do 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. We do not currently have any variable interest rate debt and,
therefore, are not subject to interest rate risk associated with variable
interest rate debt. Currently, we do not utilize interest rate swap or exchange
agreements and, therefore, are not subject to interest rate risk associated with
interest rate swaps.

     Less than 1% of our total assets and total contract revenues as of and for
the periods ended December 31, 2001 and 2000 were denominated in currencies
other than the U.S. Dollar; accordingly, we believe that we have no material
exposure to foreign currency exchange risk. This materiality assessment is based
on the assumption that the foreign currency exchange rates could change
unfavorably by 10%. We have no foreign currency exchange contracts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and the Report of Independent Auditors are
listed at Item 14 and are included beginning on Page F-1.

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

     None.


                                       16

<PAGE>



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

As an entity, we have no directors and officer. As of December 31, 2001, our
general partner is ARV Assisted Living, Inc. ("ARVAL"), which serves as the
General Partner. Our 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. Gary L. Davidson, John A. Booty, John S. Jason, Tony Rota, and David
P. Collins elected to be converted from general partners to special limited
partners during the fiscal year of 2000. An amendment to our Certificate of
Limited Partnership has been filed with the State of California as of March 7,
2001.

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, 2001.

<TABLE>
<CAPTION>
                NAME                  AGE                  POSITION WITH THE COMPANY
                ----                  ---                  -------------------------
<S>                                   <C>          <C>
        Douglas M. Pasquale           47           Chief Executive Officer and Chairman of  the Board
        Abdo H. Khoury                52           President, Chief  Financial Officer and Secretary of ARVAL
        Maurice J. Dewald             61           Director
        David P. Collins              64           Director
        John A. Moore                 40           Director
</TABLE>

     DOUGLAS M. PASQUALE, has served as the Chief Executive Officer of ARVAL
since March, 1999. Mr. Pasquale also serves as a Director of ARVAL, a position
he has held since October 1998 and as the Chairman of the Board of Directors of
ARVAL, a position he has held since December 1999. He joined ARVAL as President
and Chief Operating Officer on June 1, 1998. Prior to joining ARVAL, Mr.
Pasquale was employed from 1986 until 1998 in various capacities by Richfield
Hospitality Services, Inc., and Regal Hotels International-North America, a
leading hotel ownership and hotel management company based in Englewood,
Colorado including as its President and Chief Executive Officer from 1996 to
1998 and as as its Chief Financial Officer from 1994 to 1996.

     ABDO H. KHOURY, Mr. Khoury has served President of ARVAL since January
2001and has served as Chief Financial Officer and Secretary of ARVAL since March
30, 1999. Previously he served as Vice President, Asset Strategy and Treasury of
ARVAL, a position he held from January 1999 until March 1999, and as President
of the Apartment Division, a position he held from May 1997 until January 1999.
Prior to joining ARVAL, Mr Khoury was a principal with Financial Performance
Group in Newport Beach, California, from 1991 to 1997.

     MAURICE J. DEWALD, age 61, has served as a Director of ARVAL since 1995.
Mr. Dewald is the Chairman and Chief Executive Officer of Verity Financial
Group, Inc., a firm he founded in 1992. He currently serves as a Director of
Tenet Healthcare Corporation, Dai-Ichi Kangyo Bank of California and Monarch
Funds.

     DAVID P. COLLINS, age 64, has served as a Director of ARVAL since 1985.
From 1985 to January 1998, Mr. Collins was a Senior Vice President of ARVAL,
responsible for investor relations and for capital formation for ARVAL and
affiliated entities. Mr. Collins currently is President and Chief Executive
Officer of Euro Senior Living, Lisbon, Portugal.

     JOHN A. MOORE, age 40, has served as a Director of ARVAL since 1999. Mr.
Moore is a principal of Lazard Freres Real Estate Investors L.L.C. and its Chief
Financial Officer. He joined Lazard in 1998 from World Financial Properties,
where he had served as an Executive Vice President and Chief Financial Officer
since 1996. Prior to his employment with World Financial Properties, from 1988
until 1996 Mr. Moore worked with Olympia and York as Senior Vice President,
Finance.

None of the directors or officers is related to each 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.


                                       17

<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

As an entity, we have no officers or directors. We are managed by our General
Partner. We compensate our 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, 2001, 2000 and
                                    1999.

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, 2001, 2000 and
                                    1999.


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, 2001, 2000
                                    and 1999 were $345,000, $442,000, and
                                    $421,000, respectively.

Partnership Management Fees
(ARV Assisted Living, Inc.)         A partnership management fee of 10% of cash
                                    flow before distributions is paid for
                                    implementing our 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, 2001, 2000 and 1999 were
                                    $92,000 $178,000, and $151,000 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 fiscal 2000, $240,060 real
                                    estate selling commission was paid to ARVAL
                                    upon the sale of Bradford Square. In fiscal
                                    1999 no real estate selling commissions were
                                    paid to our 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 2001,
                                    2000 and 1999, 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.


                                       18

<PAGE>


Reimbursed Expenses & Credit
Enhancement (General Partners)      Our General Partner may receive fees for
                                    personal guarantees of loans made to us. All
                                    of our expenses shall be billed directly to
                                    and paid by us. Our General Partners may be
                                    reimbursed for the actual cost of goods and
                                    materials obtained from unaffiliated
                                    entities and used for or by us. Our General
                                    Partner will be reimbursed for
                                    administrative services necessary to our
                                    prudent operation, provided that such
                                    reimbursement is at the lower of its actual
                                    cost or the amount which we would be
                                    required to pay to independent parties for
                                    comparable administrative services in the
                                    same geographic location. The total
                                    reimbursements to ARVAL amounted to $2.5
                                    million, $3.1 million, and $3.7 million for
                                    the years ending December 31, 2001, 2000 and
                                    1999, respectively.


Finder Fees
(ARV Assisted Living, Inc.)         Our General Partner received finder fees in
                                    conjunction with obtaining grants for the
                                    rehabilitation of Cedar Villas and Villa
                                    Azusa. The finders fees amount to 10% of the
                                    total grant money received by us. No finder
                                    fees for the years ending December 31, 2001,
                                    2000 and 1999 were paid.

Indemnity Fees
(General Partners)                  Our General Partner received $96,000 for
                                    indemnifying and holding UHSI, Costa and
                                    Husky harmless from any liabilities as a
                                    result of our buy out of them. No indemnity
                                    fees for the years ending December 31, 2001,
                                    2000 and 1999 were paid.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

<TABLE>
<CAPTION>
                            NAME AND ADDRESS OF     AMOUNT AND NATURE OF     PERCENT OF
   TITLE OF CLASS            BENEFICIAL OWNER       BENEFICIAL OWNERSHIP        CLASS
   --------------            ----------------       --------------------     ----------
<S>                      <C>                        <C>                     <C>
 Limited Partnership     ARV Assisted Living, Inc.       9,725 units            52.1%
        Units            245 Fischer Ave., D-1         Direct ownership
                         Costa Mesa, CA 92626
</TABLE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Other than the compensation earned by our General Partners, as set out
under item 11 above, no General Partner or Affiliate receives any direct or
indirect compensation from us. Our General Partner receives a management fee of
5% of Gross Revenues (as defined in the ARVP III Limited partnership Agreement).
Because these fees are payable without regard to whether particular communities
are generating cash flow or otherwise benefiting us, a conflict of interest
could arise in that it might be to the advantage of our 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 our funds in properties or
entities in which it or any of its affiliate has an interest, provided we
acquire a controlling interest. In any such investment, duplicate property
management or other fees will not be permitted. Our General Partner or any of
its affiliates may, however, purchase property in their own names and
temporarily hold title to facilitate acquisition for us, provided that such
property is purchased by us at cost (including acquisition, closing and carrying
costs). Our General Partner will not commingle our 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
our General Partner and any of its affiliates in the same geographic area. Our
General Partners will seek to reduce any such conflicts by offering such persons
their choice of residence or employment on comparable terms in any community.


                                       19

<PAGE>


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



                                       20
<PAGE>


                                     PART IV

ITEM 14. 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
     o    Independent Auditors' Report;
     o    Consolidated Balance Sheets - December 31, 2001 and 2000;
     o    Consolidated Statements of Operations - Years ended December 31, 2001,
          2000 and 1999;
     o    Consolidated Statements of Partners' Capital - Years ended December
          31, 2001, 2000 and 1999;
     o    Consolidated Statements of Cash Flows - Years ended December 31, 2001,
          2000 and 1999;
     o    Notes to Consolidated Financial Statements;

(2)  Financial Statement Schedules:

     o    Financial Statement Schedule - Schedule III - Real Estate and Related
          Accumulated Depreciation and Amortization - December 31, 2001.

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

<Table>
<Caption>
Exhibit Number     Description
--------------     -----------
<S>                <C>
10.1               Loan Agreement by and between Banc One Capital Funding
                   Corporation and Retirement Inns III, LLC (Incorporated by
                   reference to Exhibit 10.1 on Form 10-Q for the fiscal quarter
                   ended 06-30-99)

10.2               Loan Agreement by and between Banc One Capital Funding
                   Corporation and Retirement Inns III, LLC (Incorporated by
                   reference to Exhibit 10.2 on Form 10-Q for the fiscal quarter
                   ended 06-30-99)

10.3               Letter Agreement as to the Loans in the aggregate amount of
                   $13,382,200 from Banc One Capital Funding Corporation to
                   Retirement Inns III (Incorporated by reference to Exhibit
                   10.14 on Form 10-Q for the fiscal quarter ended 06-30-99)

10.4               Note and Agreement as to Retirement Inns III, LLC.
                   (Incorporated by reference to Exhibit 10.16 on Form 10-Q for
                   the fiscal quarter ended 06-30-99)

10.5               Limited Liability Company Agreement of Retirement Inns III,
                   LLC. (Incorporated by reference to Exhibit 10.18 on Form 10-Q
                   for the fiscal quarter ended 06-30-99)

10.6               Deed of Trust Note of ARV Chandler Villas, L.P. to Red
                   Mortgage Capital, Inc.

10.7               Allonge #1 to Deed of Trust Note of ARV Chandler Villas, L.P.
                   to Red Mortgage Capital, Inc.

10.8               Deed of Trust between ARV Chandler Villas, L.P. and Fidelity
                   National Title Insurance

10.9               Regulatory Agreement for U.S. Department of Housing
                   Multifamily Housing Projects between ARV Chandler Villas,
                   L.P. and Secretary of Housing and Urban Development

10.10              Purchase agreement and Escrow instructions between ARVP
                   III/Brandford Square, L.P., and Vintage Senior Housing, LLC

10.11              First Amendment to Purchase Agreement and Escrow Instructions
                   between ARV III/Bradford Square, L.P., and Avalon at Bradford
                   Square, LLC, assignee of Vintage Senior Housing, LLC

10.12              Second Amendment to Purchase Agreement and Escrow
                   Instructions between ARV III/Bradford Square, L.P., and
                   Avalon at Bradford Square, LLC

10.13              Schedule 14D-9 filed on October 18, 2001 by American
                   Retirement Villas Properties III, L.P.

10.14              Schedule 14D-9 amendment number one filed on October 31, 2001
                   by American Retirement Villas Properties III, L.P

10.15              ARVP Acquisition, L.P. filed schedule TO on October 18, 2001
                   an offer to purchase for cash up to 10,000 of the outstanding
                   limited partnership units.

10.16              ARVP Acquisition, L.P.'s certificate of limited partnership.
</Table>


(b)  Reports on Form 8-K. ARVP III did not file any report on form 8-K for the
     fiscal year ended December 31, 2001.



                                       21
<PAGE>



                                   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. A CALIFORNIA LIMITED
PARTNERSHIP, BY THE FOLLOWING PERSONS ON OUR BEHALF.


                                       ARV ASSISTED LIVING, INC.

                                       By:   /s/    DOUGLAS M. PASQUALE
                                           -------------------------------------
                                                     Douglas M. Pasquale
                                                    Chief Executive Officer

Date: March 29, 2002

     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.

<TABLE>
<CAPTION>
                       SIGNATURE                                       TITLE                                     DATE
                       ---------                                       -----                                     ----

<S>                                                      <C>                                               <C>
            /s/   DOUGLAS M. PASQUALE                    Chief Executive Officer                            March 29, 2002
-----------------------------------------------------    (Principal Executive Officer)
                  Douglas M. Pasquale

            /s/     ABDO H. KHOURY                       President and Chief Financial Officer              March 29, 2002
-----------------------------------------------------    (Principal Financial & Accounting Officer)
                    Abdo H. Khoury

            /s/      JOHN A. MOORE                       Director                                           March 29, 2002
-----------------------------------------------------
                     John A. Moore

            /s/    DAVID P. COLLINS                      Director                                           March 29, 2002
-----------------------------------------------------
                   David P. Collins

            /s/    MAURICE J. DEWALD                     Director                                           March 29, 2002
-----------------------------------------------------
                   Maurice J. DeWald
</TABLE>



                                       22

<PAGE>





              AMERICAN RETIREMENT VILLAS
              PROPERTIES III, L.P.
              (A California Limited Partnership)

              Annual Report - Form 10-K

              Consolidated Financial Statements and Schedule

              Items 8 and 14(a)

              December 31, 2001, 2000 and 1999

              (With Independent Auditors' Report Thereon)


                                       23

<PAGE>




                            Annual Report - Form 10-K

                                Items 8 and 14(a)

             Index to Consolidated Financial Statements and Schedule

<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
<S>                                                                                                <C>
Independent Auditors' Report                                                                             F-1

Consolidated Balance Sheets - December 31, 2001 and 2000                                                 F-2

Consolidated Statements of Operations - Years ended December 31, 2001, 2000 and 1999                     F-3

Consolidated Statements of Partners' Capital - Years ended December 31, 2001, 2000 and 1999              F-4

Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999                     F-5

Notes to Consolidated Financial Statements                                                               F-6

Schedule

Real Estate and Related Accumulated Depreciation and
     Amortization - December 31, 2001                                                               Schedule III
</TABLE>

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.




<PAGE>


                          INDEPENDENT AUDITORS' REPORT

To ARV Assisted Living, Inc.
   as the General Partner
   of American Retirement Villas Properties III, L.P.:

We have audited the consolidated financial statements of American Retirement
Villas Properties III, L.P., a California limited partnership and subsidiaries,
as listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
partnership's 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 principals 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, 2001 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

                                             /s/ KPMG LLP


Orange County, California
March 15, 2002



                                      F-1
<PAGE>



                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

                           Consolidated Balance Sheets

                           December 31, 2001 and 2000
                          (IN THOUSANDS, EXCEPT UNITS)

<TABLE>
<CAPTION>
                                     ASSETS                                                  2001          2000
                                                                                           --------       --------
<S>                                                                                        <C>            <C>
Properties, at cost:
    Land                                                                                   $  1,549       $  1,549
    Building and improvements, less accumulated depreciation
       of $2,822 and $2,371 in 2001 and 2000, respectively                                    9,811         10,111
    Furniture, fixtures and equipment, less accumulated depreciation of $805 and $609
      in 2001 and 2000, respectively                                                            453            510
                                                                                           --------       --------

              Net properties                                                                 11,813         12,170

Cash                                                                                          2,903          8,458
Restricted cash                                                                                  85            168
Loan fees, less accumulated amortization of $311 and $403 in 2001
    and 2000, respectively                                                                      146            176
Other assets                                                                                    934            343
                                                                                           --------       --------
                                                                                           $ 15,881       $ 21,315
                                                                                           ========       ========

                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable to banks                                                                     $ 13,736       $ 13,177
Accounts payable                                                                                262             65
Accrued expenses                                                                                565            550
Amounts payable to affiliates                                                                    43            244
Distributions payable to Partners                                                                74          5,447
                                                                                           --------       --------
              Total liabilities                                                              14,680         19,483
                                                                                           --------       --------

Partners' capital (deficit):
    General partners                                                                             (2)            (2)
    Special Limited Partners                                                                   (142)          (138)
    Limited partners, 18,666 units outstanding at December 31, 2001 and 2000                  1,345          1,972
                                                                                           --------       --------

              Total partners' capital                                                         1,201          1,832
                                                                                           --------       --------
                                                                                           $ 15,881       $ 21,315
                                                                                           ========       ========
</TABLE>


        See accompanying notes to the consolidated financial statements.


                                       F-2

<PAGE>







                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

                      Consolidated Statements of Operations

                  Years ended December 31, 2001, 2000 and 1999
                      (IN THOUSANDS EXCEPT PER UNIT DATA)

<TABLE>
<CAPTION>
                                                                                      2001          2000          1999
                                                                                     -------       -------       -------
<S>                                                                                  <C>           <C>           <C>
Revenues:
    Rent                                                                             $ 6,037       $ 7,582       $ 7,143
    Assisted living                                                                      714         1,115         1,022
    Interest                                                                             148           158           206
    Other                                                                                137           139           274
                                                                                     -------       -------       -------
           Total operating revenues                                                    7,036         8,994         8,645
                                                                                     -------       -------       -------

Costs and expenses:
    Rental property operations (including $2,212, $2,834, and $2,450 related to
      affiliates in 2001, 2000 and 1999, respectively)                                 3,476         4,419         4,277
    Assisted living (including $516, $676, and $651 related to
      affiliates in 2001, 2000 and 1999, respectively)                                   522           685           659
    General and administrative (including $238, $297, and $258
       related to affiliates in 2001, 2000 and 1999, respectively)                       771           403           332
    Depreciation and amortization                                                        771         1,104         1,060
    Property taxes                                                                       185           228           250
    Advertising                                                                           76           103            84
    Interest                                                                           1,225         1,410         1,502
                                                                                     -------       -------       -------
           Total operating costs and expenses                                          7,026         8,352         8,164
                                                                                     -------       -------       -------
           Operating income                                                               10           642           481
(Loss) gain on sale of properties                                                        (15)        4,823         4,562
                                                                                     -------       -------       -------
(Loss) income before income tax, minority interest in income of
      majority owned entities, extraordinary loss, and change in
      accounting principle                                                                (5)        5,465         5,043
Income tax expense                                                                       (10)          (10)           --
Minority interest in income of majority owned entities                                    --         1,344           180
                                                                                     -------       -------       -------
(Loss) income before extraordinary loss and change in accounting
     principle                                                                           (15)        4,111         4,863

Extraordinary loss from extinguishment of debt                                           (66)           --            --
Cumulative effect of change in accounting principle                                       --                         (96)
                                                                                     -------       -------       -------
Net income (loss)                                                                    $   (81)      $ 4,111       $ 4,767
                                                                                     =======       =======       =======

Net income (loss) per limited partner unit                                           $ (4.30)      $218.04       $252.83
                                                                                     =======       =======       =======
</TABLE>

         See accompanying notes to the consolidated financial statements


                                      F-3

<PAGE>


                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

                  Consolidated Statements of Partners' Capital

                  Years ended December 31, 2001, 2000 and 1999
                      (IN THOUSANDS EXCEPT PER UNIT DATA)


<TABLE>
<CAPTION>
                                                                           SPECIAL                      TOTAL
                                                              GENERAL      LIMITED       LIMITED      PARTNERS'
                                                              PARTNER      PARTNERS     PARTNERS      CAPITAL
                                                            ----------     --------    -----------    ---------
<S>                                                         <C>            <C>         <C>            <C>
Balance (deficit) at December 31, 1998                      $      (90)    $     --    $     6,963    $   6,873
Distribution to partners ($511.24 per limited partner
    unit)                                                          (97)          --         (9,543)      (9,640)
Net income                                                          48           --          4,719        4,767
                                                            ----------     --------    -----------    ---------
Balance (deficit) at December 31, 1999                            (139)          --          2,139        2,000

Change in status of general partners to special limited
    partners                                                       137         (137)            --           --
Distribution to partners ($226.99 per limited partner
    unit)                                                           --          (42)        (4,237)      (4,279)
Net income                                                          --           41          4,070        4,111
                                                            ----------     --------    -----------    ---------
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
                                                            ==========     ========    ===========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>


                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.

                       (A California Limited Partnership)

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                            2001           2000            1999
                                                                           --------       --------       --------
                                                                            (IN THOUSANDS EXCEPT PER UNIT DATA)
<S>                                                                        <C>            <C>            <C>
Cash flows from operating activities:
    Net (loss) income                                                      $    (81)      $  4,111       $  4,767
    Adjustment to reconcile net (loss) income to net cash provided by
      operating activities:
        Depreciation and amortization                                           771          1,104          1,060
        Gain on sale of properties                                               --         (4,823)        (4,562)
        Extraordinary loss from extinguishment of debt                           66             --             --
        Cumulative effect of change in accounting principal                      --             --             96
        Minority interest in income of majority owned entities                   --          1,344             20
    Change in assets and liabilities:
      Decrease (increase) in restricted cash                                     83             --             (6)
      Decrease in accounts receivable                                            --             47             --
      (Increase) decrease in other assets                                       (42)          (101)           151
      Increase (decrease) in accounts payable and accrued expenses              212             13           (515)
      Increase (decrease) in amounts payable to affiliates                     (201)           126             (4)
                                                                           --------       --------       --------
                Net cash provided by operating activities                       808          1,821          1,007
                                                                           --------       --------       --------
Cash flows from investing activities:

    Additions to properties, net                                               (332)          (168)          (187)
    Proceeds from sales of properties, net                                       --          7,738          3,962
                                                                           --------       --------       --------
                Net cash (used in) provided by investing activities            (332)         7,570          3,775
                                                                           --------       --------       --------
Cash flows from financing activities:

    Borrowing from notes payable                                              5,783             --         13,361
    Principal repayments on notes payable to banks and others                (5,223)        (2,488)       (10,162)
    Proceeds from note receivable                                                --             --          2,765
    Reserve for replenishment                                                  (549)            --             --
    Loan fees                                                                   (89)           (58)          (704)
    Mortgage insurance                                                          (29)            --             --
    Distributions paid                                                       (5,924)          (577)        (9,752)
                                                                           --------       --------       --------
                Net cash (used in) financing activities                      (6,031)        (3,123)        (4,492)
                                                                           --------       --------       --------
                Net (decrease) increase in cash                              (5,555)         6,268            290
Cash at beginning of year                                                     8,458          2,190          1,900
                                                                           --------       --------       --------
Cash at end of year                                                        $  2,903       $  8,458       $  2,190
                                                                           ========       ========       ========
Supplemental cash flow information - cash paid during the year for
    interest                                                               $  1,241       $  1,508       $  1,473
                                                                           ========       ========       ========
</TABLE>

        See accompanying notes to the consolidated financial statements.


                                      F-5

<PAGE>


                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

          The consolidated financial statements of American Retirement Villas
     Properties III, L.P. (the "Partnership" or "ARVPIII") include the accounts
     of the Partnership, ARVP III/Bradford Square, L.P. (ARVPIII/BS), Retirement
     Inns III, LLC and ARV Chandler Villas, L.P. The Retirement Inns III, LLC
     and ARV Chandler Villas L.P. are 100% owned and therefore consolidated into
     the Partnership. Bradford Square was sold on December 31, 2000.

          ARVPIII was the 50% general partner of ARVPIII/BS. The Partnership
     accounted for ARVPIII/BS using the principles of accounting applicable to
     investment in subsidiaries (consolidation). All inter-company balances and
     transactions had been eliminated in consolidation. Minority interest
     represented the minority partners' cost to acquire the minority interest
     adjusted by their proportionate share of subsequent earnings, losses and
     distributions. As a managing general partner, pursuant to the ARVPIII/BS
     limited partnership agreement, the general partner had full, exclusive and
     complete discretion and authority to control the partnership's business and
     affairs as if it were a partnership without limited partners. The limited
     partner shall not participate in control of the partnership business and
     have only the voting rights provided by the limited partnership agreement
     as follows: "Limited Partner shall not have the right or power to (a)
     withdraw or reduce their Capital Contribution; (b) bring an action for
     partition against the partnership; (c) cause the termination or dissolution
     of the partnership; (d) demand or receive property other than cash in
     return for its Capital." However, with the written consent of the limited
     partner, the Partnership, as general partner, may (a) dissolve or wind up,
     (b) sell or refinance the project, (c) change the nature of the
     partnership's business, or (d) admit new general partner(s). Management
     believes that the general partner had control consistent with the
     requirements of paragraph 9 of SOP 78-9 and that the rights the limited
     partner had are protective rights as discussed in EITF 96-16.

     BASIS OF ACCOUNTING

          We maintain our records on the accrual method of accounting for
     financial reporting and Federal and state tax purposes.

     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:

<TABLE>
<S>                                                                <C>
               Buildings and improvements......................    27.5 to 35 years
               Furniture, fixtures and equipment...............    3 to 7 years
</TABLE>

          We review our 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, we estimate the future 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 our financial statements in conformity with
     accounting principles generally accepted in the United States of America,
     we have made estimates and assumptions that affect the following:

     o    reported amounts of assets and liabilities at the date of the
          financial statements;
     o    disclosure of contingent assets and liabilities at the date of the
          financial statements; and
     o    reported amounts of revenues and expenses during the reporting period.

     Actual results could differ from those estimates.

     CAPITAL EXPENDITURES

          We capitalize all assets, obtained by purchase, trade or capital lease
     that have a useful life of more than one year, and costs exceeding $500, or
     a group of similar assets purchased together where the total purchase price
     exceeds $1,000 and the cost of each asset exceeds $50. Improvements or
     additions to existing assets are also capital expenditures when they extend
     the useful life of the assets beyond their original life. Refurbishment
     expenditures are expensed as incurred.

     IMPOUND ACCOUNTS

          The U.S. Department of Housing and Urban Development ("HUD") insures
     the financing on certain of our properties. HUD holds certain of our funds
     in impound accounts for payment of property taxes, insurance and future
     property improvements (replacement reserves) on these properties. We
     include these impound accounts in other assets.

                                      F-6

<PAGE>

                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

             Notes to Consolidated Financial Statements, Continued


     CHANGE IN ACCOUNTING PRINCIPLE

     In April 1998, the Accounting Standards Executive Committee issued
     Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up
     Activities," which was effective for fiscal years beginning after December
     15, 1998. The SOP provides guidance on the financial reporting of start-up
     activities and organizational costs. It required costs of start-up
     activities and organizational costs to be expensed when incurred and, upon
     adoption, the write-off as a cumulative effect of a change in accounting
     principle of any previously capitalized and un-amortized start-up or
     organizational costs. We adopted the provisions of SOP 98-5 in the first
     quarter of 1999 writing off capitalized start-up costs of approximately
     $96,000.

     LOAN FEES

          We amortize loan fees using the effective interest method over the
     term of the respective note payable.

     RENTAL INCOME

          Rent agreements with tenants are on a month-to-month basis. We apply
     advance deposits to the first month's rent. Revenue is recognized in the
     month earned for rent and assisted living services.

     ADVERTISING COSTS

          We expense all advertising costs as they are incurred.

     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.

          We have not requested a ruling from the Internal Revenue Service to
     the effect that we 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.

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

<TABLE>
<CAPTION>
                               2001                      2000
                       --------------------      ---------------------
                        GAAP       TAX BASIS      GAAP       TAX BASIS
                        BASIS         (1)         BASIS         (1)
                       -------      -------      -------      --------
<S>                    <C>          <C>          <C>          <C>
Total assets           $15,881      $17,195      $21,315      $ 23,362
                       =======      =======      =======      ========
Total liabilities      $14,680      $14,680      $19,483      $ 13,802
                       =======      =======      =======      ========
</TABLE>




                                      F-7




<PAGE>

                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

             Notes to Consolidated Financial Statements, Continued


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

<TABLE>
<CAPTION>
                                                        2001          2000          1999
                                                       -------       -------       -------
<S>                                                    <C>           <C>           <C>
Net income (loss) per financial statements             $   (81)      $ 4,111       $ 4,767
Guaranteed payments (1)                                    436           502           459
Depreciation differences on properties (1)                   4           (40)         (105)
Amortization differences on intangible assets (1)           99            75           102
Deferred income (1)                                         55            (3)          (89)
(Loss) gain on sale of assets (1)                            1            74            72
Other (1)                                                   70            (2)           15
                                                       -------       -------       -------
         Total income per Federal tax return (1)       $   584       $ 4,717       $ 5,221
                                                       =======       =======       =======
</TABLE>

(1)  Unaudited.

     NET INCOME (LOSS) PER LIMITED PARTNER UNIT

          Net income (loss) per limited partner unit was based on the weighted
     average number of limited partner units outstanding of 18,666 in 2001, 2000
     and 1999.

     RECLASSIFICATIONS

          We have reclassified certain prior period amounts to conform to the
     December 31, 2001 presentation.

     ACCOUNTING PRONOUNCEMENTS

          In June 2001, the Financial Accounting Standards Board ("FASB") issued
     Statements of Financial Accounting Standards ("SFAS") No. 143 "Accounting
     for Asset Retirement Obligations". SFAS 143 requires that the fair value of
     a liability for an asset retirement obligation be recognized in the period
     in which it is incurred if a reasonable estimate of fair value can be made.
     The Partnership is required to adopt SFAS 143 on January 1, 2002.
     Management believes the adoption of SFAS 143 will not have a material
     effect on the Partnership's financial position, results of operations, or
     cash flows. On October 3, 2001 the FASB issued SFAS 144 "Accounting for the
     Impairment and Disposal of Long Lived Assets". SFAS 144 supercedes SFAS
     121, "Accounting for the Impairment of Long-lived Assets and Long-lived
     Assets to be Disposed of". However, SFAS 144 retains the fundamental
     provisions of SFAS 121 for (a) recognition and measurement of the
     impairment of long-lived assets to be held and used and (b) measurement of
     long-lived assets to be disposed of by sale. The Partnership is required to
     adopt SFAS 144 on January 1, 2002. Management has not determined the impact
     SFAS 144 will have on the Partnership's financial position, results of
     operations, or cash flows

(2)  ORGANIZATION AND PARTNERSHIP AGREEMENT

          We were formed on June 28, 1989 for the purpose of acquiring,
     developing and operating assisted living and senior apartment communities.
     The term of the Partnership is 60 years and may be dissolved earlier under
     certain circumstances. We commenced operations on December 28, 1989 when
     the minimum number of units (1,250) had been sold.

          Limited partner units (minimum of 2 units per investor for Individual
     Retirement Accounts, KEOGH'S and pension plans and 5 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


                                      F-8

<PAGE>

                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

             Notes to Consolidated Financial Statements, Continued

     resold. Under the Partnership Agreement, the maximum liability of the
     Limited Partners is the amount of their capital contributions.

          Our 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 ("Special
     Limited Partners"). Our 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.

          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 our 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 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 us
     are to be distributed in accordance with positive capital account balances.

          On October 4, 2001, C3 Capital, LLC, a California limited liability
     company ("C3 Capital"), commenced a hostile tender offer, which was later
     withdrawn, to purchase up to 10,000 ARVP III limited partnership units
     ("units") at a net cash purchase price of $300 per unit (the "Hostile
     Offer"), and also filed with the SEC a preliminary consent solicitation
     pursuant to which C3 Capital sought to remove our general partner, and
     elect C3 Capital as the general partner of ARVP III.

          In response to the Hostile Offer and the consent solicitation, our
     General Partner, through ARVP Acquisition, L.P., a California limited
     partnership wholly-owned by our General Partner, commenced a tender offer
     on October 18, 2001 for 10,000 outstanding partnership units of ARVP III
     for $360 per unit. Our General Partner amended the tender offer on October
     31, 2001 and increased the offer price to $400 per unit from $360 per unit,
     increased the number of Units we were 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"). The amendment to the original
     offer was in response to C3 Capital's withdrawal of its tender offer, and
     receipt of a highly conditional offer from Vintage Senior Housing, LLC
     ("Vintage"), an affiliate of C3 Capital, to purchase all of ARVP III's
     non-cash assets for $19.5 million. Vintage's offer was subject to, among
     other things, significant due diligence and financing contingencies. In
     addition, on November 9, 2001, we received a revised offer from Vintage
     increasing the purchase price for the assets of ARVP III to $20 million.

          Prior to the tender offer ARVAL owned approximately 58 units. At the
     close of the tender offer on December 14, 2001 our General Partner had
     acquired an additional 9,667 units or 51.8% of all outstanding units. As of
     December 31, 2001, ARVAL owns 9,725 units or approximately 52.1% of the
     limited partnership units. As such, ARVAL has controlling interest in the
     Partnership.



                                      F-9
<PAGE>


                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

             Notes to Consolidated Financial Statements, Continued

(3)  TRANSACTIONS WITH AFFILIATES

          Our properties are managed by ARVAL. For this service we pay a
     property management fee of 5% of gross revenues totaling $345,000,
     $442,000, and $421,000, for the years ended December 31, 2001, 2000 and
     1999, respectively. Additionally, we pay a partnership management fee of
     10% of cash flow before distributions, as defined in the Partnership
     Agreement, amounting to $92,000, $178,000, and $151,000 for the years ended
     December 31, 2001, 2000 and 1999, respectively.

          Payment of the partnership management fee out of cash flow is
     subordinated to a quarterly noncumulative 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.

          We reimburse ARVAL for certain expenses, such as payroll and
     retirement benefit expenses, repairs and maintenance, and supplies expenses
     paid on our behalf. The total reimbursements to ARVAL, are included in
     rental property operations and general and administrative expenses in the
     accompanying statements of operations and amounted to $2,530,000,
     $3,160,000, and $3,673,000 for the years ended December 31, 2000, 1999 and
     1998, 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, 2001.

          We 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, 2001 and 2000 include
     expense reimbursements and accrued property management and partnership
     management fees.

(4)  PROPERTIES

          The following table sets forth, as of December 31, 2001 the location
     of each our ALCs, the date on which operations commenced at each such ALC,
     the number of units at each ALC, and our interest in each ALC.

<TABLE>
<CAPTION>
                                                                             COMMENCED
                  COMMUNITY                             LOCATION             OPERATIONS         UNITS
                  ---------                             --------             ----------         -----
<S>                                                   <C>                  <C>                 <C>
                  Chandler Villas                     Chandler, AZ         September 1992        164
                  Villa Las Posas                     Camarillo, CA         December 1997        123
</TABLE>

     ARVP III/BRADFORD SQUARE LTD.

          On December 18, 1990, we entered into a limited partnership, ARVP
     III/BS, with an unrelated third party, Bradford Square Ltd. Both partners
     made an initial $1,000 cash contribution. We were the Managing General
     Partner and Bradford Square Ltd. was the Limited Partner, each with a 50%
     interest. Pursuant to the agreement, Bradford Square Ltd. contributed an
     existing community (Bradford Square), to ARVP III/BS, and, we contributed
     cash. Income and loss was generally allocated to the Managing General
     Partner and Bradford Square, Ltd. based on their partnership interests.
     The partnership agreement was terminated December 31, 2000.

                                      F-10

<PAGE>
                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

             Notes to Consolidated Financial Statements, Continued


          Under the limited partnership agreement between Bradford Square Ltd.,
     and us, we received a 9% preferred return on 125% of amounts contributed to
     the partnership. The remaining cash flow from operations was divided
     equally between Bradford Square Ltd and us. During 2000 and 1999, we
     received a preferred return of $ 218,000 for each of these years.

     SALE OF PROPERTY - ARVP III/BRADFORD SQUARE LTD.

          On December 21, 2000 we sold ARVP III/BS for $8,002,000. Under the
     limited partnership agreement between Bradford Square Ltd., and ARVP III,
     the distribution of assets on liquidation of the partnership was made in
     the following order:

          First, to ARVP III one hundred twenty five percent (125%) of the cash
     contributions made to the Partnership;

          Second, in proportion to and to the extent of the positive balance of
     respective capital accounts as of the date of distribution; and

          Third, the balance shall be paid 50% to Bradford Square, L.P. and 50%
     to ARVP III.

          The Partnership received a distribution of $3,622,000 from the sale of
     Bradford Square in January 2001.

     SALE OF PROPERTY - HERITAGE POINTE CLAREMONT

          In September 1993, we contracted to sell our then owned Heritage
     Pointe Claremont property to Claremont Senior Partners ("CSP") for
     $12,281,900. Our General Partner is a special limited partner of CSP. The
     transaction closed on December 30, 1993. The consideration we received from
     CSP in the sale of Heritage Pointe Claremont consisted of both $10,000 in
     cash and cash equivalents and $12,271,900 in the form of a promissory note.

          The promissory note bears interest at 8.0% and the outstanding balance
     and interest are payable from excess cash flows as defined in the CSP
     partnership agreement. The promissory note is secured by certain CSP
     partners' interests in CSP and matures January 25, 2010.

          Upon the receipt of the principal and interest payment from CSP in
     April 1996 and January 1995, a sufficient investment as defined by
     Statements of Financial Accounting Standards Board No. 66 was made and the
     sale was recognized. As CSP's excess cash flows do not currently exceed the
     interest payment requirements, SFAS 66 requires profit on the sale to be
     recognized under the cost recovery method as payments are received on the
     notes. We received interest payments on these note totaling $30,000,
     $12,000, $54,600 for the years ended December 31, 2001, 2000 and 1999
     respectively. The CSP note balance is $3.8 million for the years ended
     December 31, 2001 and 2000.

(5)  NOTES PAYABLE TO BANKS

          At December 31, 2001 and 2000, notes payable to banks and others
     included the following (in thousands):

<TABLE>
<CAPTION>
                                                                              2001              2000
                                                                           -------           -------
<S>                                                                        <C>               <C>
Note payable to the bank, bearing interest at 9.15%. Monthly               $ 7,979           $13,177
  principal and interest payment of $69; due July 2003.
  Collateralized by Villa Las Posas.
Note payable to the bank, bearing interest at 8.06%. Monthly
  principal and interest payment of $41; due February 2036.
  Collateralized by Chandler Villas.                                         5,757                --
                                                                           -------           -------
                                                                           $13,736           $13,177
                                                                           =======           =======
</TABLE>



                                      F-11

<PAGE>


                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

             Notes to Consolidated Financial Statements, Continued


          The annual principal payments of notes payable as of December 31, 2001
     are as follows (in thousands):

<TABLE>
            <S>                                 <C>
             Year ending December 31:
                 2002                            $        144
                 2003                                   7,903
                 2004                                      39
                 2005                                      42
                 2006                                      46
                 Thereafter                             5,562
                                                 ------------
                                                 $     13,736
                                                 ============
</TABLE>

          Due to a failed financing in 1998, we paid the lender approximately
     $0.7 million of fees for an interest rate lock and $0.10 million for loan
     commitment and other fees. The lender terminated the loan commitment and
     underlying interest rate lock in October 1998 due to adverse market
     conditions. The lender returned $0.2 million of the interest rate lock fees
     in January 1999. After pursuing legal action against the lender, we
     received an additional refund in the amount of $112,000 of the interest
     rate lock fees in July 2000 as full and final settlement. We have included
     the amounts paid and received in interest expense in the accompanying
     statements of operations for the years ended December 31, 2000 and 1999.

          In June 28, 1999 we completed the first refinancing of the ALCs. The
     loan is secured by the two ALCs; in addition, ARV Assisted Living, our
     General Partner is a guarantor on the loan for fraud, material
     misrepresentation and certain covenants. As part of the loan requirements,
     we created a wholly owned subsidiary Retirement Inns III, LLC as a special
     purpose entity. The loan term is for 24 months with a lender option to
     extend for 10 years. The interest rate is 9.15% per annum and the payments
     are based upon a 25 year principal and interest amortization schedule.

          Our General Partner's Board of Directors approved a second refinancing
     of the assisted living communities in March 2000 to:

     o    take advantage of lower fixed interest rates available at the time
          through the commercial mortgage-backed security market;
     o    provide a return of equity to ARVP III limited partners; and
     o    borrow against the increased value of these properties.

          On January 29, 2001, we refinanced one of the two ALCs with
     thirty-five year HUD insured loan bearing interest at 8.06% per annum. 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 has been extended to July 1, 2003 and the interest rate has
     been changed to 8.5% per annum.

(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 January 1). ARVAL matches employees' contributions beginning on
     the first enrollment date following one year of service or 1,000 hours of
     service. Our Savings Plan expense was $6,000, $8,000 and $10,000 (as a
     reimbursement to ARVAL) for the years ended December 31, 2001, 2000 and
     1999.

                                      F-12

<PAGE>

                 AMERICAN RETIREMENT VILLAS PROPERTIES III, L.P.
                       (A California Limited Partnership)

             Notes to Consolidated Financial Statements, Continued


(7)  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

          The estimated fair value of the Partnership's financial instruments
     have 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, 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 bear interest at rates and have other terms
     that approximate those currently available in the market. Therefore, we
     believe that the carrying value approximates fair value.

(8)  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                      FOR THE QUARTER ENDED
                                         -----------------------------------------------
                                         DECEMBER 31   SEPTEMBER 30   JUNE 30   MARCH 31
                                         -----------   ------------   -------   --------
                                                          (IN THOUSANDS)
<S>                                       <C>           <C>           <C>       <C>
2001
Total revenue ...............             $ 1,729       $ 1,774       $ 1,762   $ 1,771
Income (loss) from operations                (338)           92           144       112
Net income (loss)............                (290)           24           139        46
Net income (loss) per limited
  partner unit ..............             $(15.38)      $  1.27       $  7.37   $  2.46

2000
Total revenue ...............             $ 2,280       $ 2,246       $ 2,202   $ 2,266
Income from operations.......                 107           119           269       147
Net income...................               3,769            51           227        64
Net income (loss) per limited
  partner unit ..............             $199.90       $  2.71       $ 12.09   $  3.43
</TABLE>


                                      F-13

<PAGE>



                                  Schedule III

                    AMERICAN RETIREMENT VILLAS PROPERTIES III
                       (A California Limited Partnership)

        Real Estate and Related Accumulated Depreciation and Amortization

                                December 31, 2001
                                 (In thousands)

<TABLE>
<CAPTION>
                                   INITIAL COST                                 GROSS AMOUNT
                                                           COSTS
                                                         CAPITALIZED
                                           BUILDINGS     SUBSEQUENT                BUILDINGS
                                              AND            TO                      AND
 DESCRIPTION      ENCUMBRANCES    LAND    IMPROVEMENTS  ACQUISITION       LAND   IMPROVEMENTS    TOTAL (1)
----------------------------------------------------------------------------------------------------------
<S>                <C>             <C>         <C>           <C>          <C>        <C>         <C>
Villa Las Posas    $    8,081      1,210       572           8,666        1,249      9,257       10,506
Chandler Villas         5,096        300     2,902             342          300      3,376        3,676
                   ---------------------------------------------------------------------------------------
                   $   13,177    $ 1,510   $ 3,474         $ 9,008      $ 1,549    $12,633      $14,182
                   =======================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                   DEPRECIABLE
                   ACCUMULATED       DATE OF          LIVES
 DESCRIPTION       DEPRECIATION    ACQUISITION       (YEARS)
--------------------------------------------------------------
<S>                   <C>        <C>                <C>
Villa Las Posas         1,534     December 1987     27 1/2 years
Chandler Villas         1,288     September 1990    27 1/2 years
                      -------
                      $ 2,822
                      =======
</TABLE>

Following is a summary of investment in properties for the year ended December
31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                2001          2000           1999
                                              --------      --------       --------
<S>                                           <C>           <C>            <C>
Balance at beginning of year                  $ 14,031      $ 17,968       $ 33,423
Transfer of cost from other fixed assets            --            --            189
Improvements/construction                          151            62             51
Disposals                                           --        (3,999)       (15,695)
                                              --------      --------       --------
Balance at end of year                        $ 14,182      $ 14,031       $ 17,968
                                              ========      ========       ========
</TABLE>

Following is a summary of accumulated depreciation and amortization of
investment in properties for the years ended December 31, 2001, 2000, and 1999:

<TABLE>
<CAPTION>
                                                             2001        2000           1999
                                                           -------      -------       -------
<S>                                                        <C>          <C>           <C>
Balance at beginning of year                               $ 2,371      $ 2,976       $ 5,177
Transfer of accumulated depreciation from other fixed
  assets                                                        --           --            92
Additions charged to expense                                   451          566           746
Disposals                                                       --       (1,171)       (3,039)
                                                           -------      -------       -------
Balance at end of year                                     $ 2,822      $ 2,371       $ 2,976
                                                           =======      =======       =======
</TABLE>


(1)  Aggregate cost for Federal income tax purposes is $13,404 December 31,
     2001.
                 See accompanying independent auditors' report.


                                      F-14