<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

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

                                   (Mark One)

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997

                                       OR

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

             FOR THE TRANSITION PERIOD FROM ________ TO ___________

                         COMMISSION FILE NUMBER: 0-26470

                           AMERICAN RETIREMENT VILLAS
                              PROPERTIES III, L.P.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

               CALIFORNIA                                 33-365417
     (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)

        245 FISCHER AVENUE, D-1                              92626
            COSTA MESA, CA                                 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

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

    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 [ ]
                                


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

<PAGE>   2
PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                 American Retirement Villas Properties III, L.P.
                       (a California limited partnership)
                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                           JUNE 30,       DEC. 31,
                                                                             1997           1996
                                  ASSETS                                  --------       --------
                                                                         (Unaudited)     (Audited)
                                                                             (IN THOUSANDS EXCEPT
                                                                                 PER UNIT DATA)
<S>                                                                        <C>               <C>  
Properties, at cost
    Land                                                                   $  4,676       $  4,674
    Building and improvements, less accumulated depreciation
      of $3,700 in 1997 and $3,373 in 1996                                   21,356         18,921
    Furniture, fixtures and equipment, less accumulated depreciation
      of $459 in 1997 and $498 in 1996                                          295            322
                                                                           --------       --------
              Net properties                                                 26,327         23,917

Cash                                                                          1,007            893
Restricted cash                                                                 141            137
Loan fees,  net                                                                  88            105
Other assets                                                                    353            248
                                                                           --------       --------
                                                                           $ 27,916       $ 25,300
                                                                           ========       ========

                       LIABILITIES AND PARTNERS' CAPITAL

Notes payable                                                              $ 18,287       $ 16,023
Accounts payable and accrued expenses                                         1,139            734
Amounts payable to affiliates                                                    72            138
Distributions payable to Partners                                                54             46
                                                                           --------       --------
              Total liabilities                                              19,552         16,941
                                                                           --------       --------

Minority interest                                                                57             41

Partners' capital (deficit) :
    General partners                                                            (76)           (76)
    Limited partners, 18,666 and 18,652 units outstanding at June 30,
      1997 and December 31, 1996, respectively                                8,383          8,394
                                                                           --------       --------
              Total partners' capital                                         8,307          8,318
                                                                           $ 27,916       $ 25,300
                                                                           ========       ========
</TABLE>


<PAGE>   3
                 American Retirement Villas Properties III, L.P.
                       (a California limited partnership)
                            Statements of Operations
                                   (Unaudited)
                       (in thousands except per unit data)


<TABLE>
<CAPTION>
                                                 FOR THE                  FOR THE
                                           THREE MONTHS ENDED        SIX MONTHS ENDED
                                         ---------------------     ---------------------
                                         JUNE 30,     JUNE 30,     JUNE 30,     JUNE 30,
                                           1997         1996         1997         1996
                                         --------     --------     --------     --------
<S>                                        <C>          <C>          <C>          <C>  
REVENUES:
Rent ...............................      $1,375       $1,308       $2,752      $ 2,581
Assisted living ....................         141          100          278          190
Interest ...........................           6           92            8          197
Other ..............................          19           44           44          105
                                          ------       ------       ------      -------
         Total revenues ............       1,541        1,544        3,082        3,073
                                          ------       ------       ------      -------

COSTS AND EXPENSES:
Rental property operations .........         685          630        1,376        1,271
Assisted living ....................          52           49          107           94
Depreciation and amortization ......         228          299          455          598
Interest ...........................         358          477          719          953
General and administrative .........         133          109          244          203
Property taxes .....................          66           86          131          162
Advertising ........................          14            5           23           15
Minority interest in operations ....          16           20           38           17
                                          ------       ------       ------      -------
         Total costs and expenses ..       1,552        1,675        3,093        3,313
                                          ------       ------       ------      -------

Net income (loss) ..................         (11)        (131)         (11)        (240)
                                          ======       ======       ======      =======

Net income (loss) to General Partner          --           (1)          --           (2)
Net income (loss) to Limited Partner         (11)        (130)         (11)        (238)
                                          ======       ======       ======      =======
Net income (loss) per Limited 
Partner unit .......................      ($0.58)      ($6.94)      ($0.58)     ($12.77)
                                          ======       ======       ======      =======
</TABLE>


See accompanying notes to financial statements (unaudited).


<PAGE>   4
                 American Retirement Villas Properties III, L.P.
                       (a California limited partnership)
                             Statements of Cash Flow
                                   (Unaudited)
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                             FOR THE SIX MONTHS
                                                                               ENDED JUNE 30,
                                                                           ---------------------
                                                                            1997          1996
                                                                           -------       -------
<S>                                                                        <C>           <C>     
Cash flows from operating activities:
    Net income (loss)                                                      $   (11)      $  (240)
    Adjustment to reconcile net income (loss) to net cash provided by
      operating activities:
        Depreciation and amortization                                          455           597
    Minority interest in operations                                             16          --
    CHANGE IN ASSETS AND LIABILITIES:
      Increase in other assets                                                (100)         (108)
      Increase in accounts payable and accrued expenses                        405            57
      Increase in amounts payable to affiliates                                (58)          (58)
                                                                           -------       -------

                Net cash provided by operating activities                      707           248
                                                                           -------       -------

Cash flows from investing activities:
    Increase in restricted cash                                                 (4)          (64)
    Capital expenditures                                                       (50)          (63)
    Construction of building                                                (2,802)         (579)
    Increase in deposit on property under contract for sale                   --           1,576
                                                                           -------       -------

 Net cash used in investing activities                                      (2,856)          870
                                                                           -------       -------

Cash flows from financing activities:
    Proceeds from construction loan                                          2,403          --
    Principal repayments on long-term debt                                    (139)         (125)
    Distributions paid                                                        --            (613)
                                                                           -------       -------

                Net cash provided by (used in) financing activities
                                                                             2,264          (738)
                                                                           -------       -------

                Net increase in cash                                           115           380


Cash at beginning of period                                                    892           478
                                                                           -------       -------

Cash at end of period                                                      $ 1,007       $   858
                                                                           =======       =======
</TABLE>



<PAGE>   5


PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)

                 American Retirement Villas Properties III, L.P.
                       (a California limited partnership)
                          Notes to Financial Statements
                             (Unaudited) (Continued)

                                  June 30, 1997

(1) SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10K is incorporated by this reference.

BASIS OF ACCOUNTING

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

CARRYING VALUE OF REAL ESTATE

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

ORGANIZATION COSTS

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

PRE-OPENING COSTS

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

LOAN FEES

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

RENTAL INCOME

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

INCOME TAXES

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.


<PAGE>   6



NET INCOME (LOSS) PER LIMITED PARTNER UNIT

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

CASH AND CASH EQUIVALENTS

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

RECLASSIFICATIONS

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

(2) ORGANIZATION AND PARTNERSHIP AGREEMENT

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

(3) TRANSACTIONS WITH AFFILIATES

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference, except for the following
additional comments. For the three months ended June 30, 1997, property
management fees and partnership administration fees of $77,000 and $25,000,
respectively, were paid or accrued to the Managing General Partner.

(4) PROPERTIES

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

 (5) NOTES PAYABLE

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.

(6) GRANT INCOME

Pursuant to Regulation S-X Rule 10-1(5), the material stated in the December 31,
1996 Form 10-K is incorporated by this reference.


<PAGE>   7

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1996.

Revenue for the three month periods ended June 30, 1997 and June 30, 1996
includes rental income, assisted living income, interest earned on cash balances
and other revenue. Total revenues for the each of the three month periods ended
June 30, 1997 and June 30, 1996 were $1.5 million.

The largest component of revenue, rent, increased by over 5% to $1.4 million for
the three months ended June 30, 1997 from $1.3 million for the three months
ended June 30, 1996. The increase in rent was due to inflation as well as a
change to include meals as part of the base rental package.

Revenue from assisted living increased 41% from $100,000 for the three months
ended June 30, 1996 to $141,000 for the three months ended June 30, 1997. The
increase in assisted living revenue was due to the full implementation of an
assisted living services program in the Partnership facilities.

Interest and other revenue decreased approximately 82% from the three months
ended June 30, 1996 to the three months ended June 30, 1997. Interest income
currently results from interest earned on cash deposits. Other revenue generally
includes banquet income, processing fees, and beauty shop revenue.

During 1996, the Partnership met the requirements of statement of accounting
standards No. 66 ("SFAS No. 66") and thus was able to record the sale of
Heritage Pointe Claremont. In the three months ended June 30, 1996, the
Partnership received interest income related to Heritage Pointe Claremont prior
to recording the sale of the asset at the end of 1996. Under the requirements of
SFAS No. 66, interest income was recorded to the extent that interest expense
related to Heritage Point Claremont was incurred. Since the debt related to
Heritage Point Claremont has been eliminated from the financial statements of
the Partnership in conjunction with recognition of the sale of the property,
interest income has declined significantly.

In addition, other income was lower in 1997 compared to 1996 due to a change in
the billing practices for meals. In 1996, meals were charged to residents on an
a la carte plan and income derived from these meals were included in other
income. In 1997, a change was made to include meals as part of the base rental
package at the assisted living facilities.

Sources of revenue for the three months ended June 30, 1997 and June 30, 1996
are summarized as follows:

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED
                                      --------------------
                                      JUNE 30,    JUNE 30,
                                        1997        1996
                                      --------    --------
                                         (in thousands)
          <S>                          <C>         <C>   
          Rent                         $1,375      $1,308
          Assisted Living                 141         100
          Interest                          6          92
          Other                            19          44
                                       ------      ------
                    Total Revenue      $1,541      $1,544
                                       ======      ======
</TABLE>

Total costs and expenses for the three months ended June 30, 1997 were $1.6
million, a decrease of over 7% compared to costs and expenses of $1.7 million
for the three months ended June 30, 1996.

The largest component of expenses, rental property operations, consists
primarily of property management costs, payroll related expenses, utilities,
food expenses and maintenance and supplies. Rental property operations expenses
for the three months ended June 30, 1997 increased approximately 9% to $685,000
for three months ended June 30, 1997 from $630,000 for the three months ended
June 30, 1996. The increase in rental property operations is primarily due to
increased payroll expenses.


<PAGE>   8

Assisted living expenses consist primarily of payroll expense related to the
provision of assisted living services. Assisted living expenses increased to
$52,000 for the three months ended June 30, 1997 from $49,000 for the three
months ended June 30, 1996. Assisted living expenses increased due to increased
levels of staffing required to providing assisted living services.

General and administrative expenses are comprised of, but not limited to, costs
for accounting, partnership administration, bad debt, data processing, investor
relations, insurance and professional services. General and administrative
expenses increased 22% to $133,000 for the three months ended June 30, 1997 from
$109,000 for the three months ended June 30 1996. The general and administrative
expenses increase is due to increased accounting and corporate overhead
expenses.

Depreciation and amortization expense incurred during the three months ended
June 30, 1997 decreased by $71,000 (approximately 24%) to $228,000 compared to
$299,000 for the three months ended June 30, 1996. The decrease is due to a
portion of fixed assets becoming fully depreciated.

Interest expense decreased approximately 25% to $358,000 for the three months
ended June 30, 1997 from interest expense of $477,000 incurred during the three
months ended June 30, 1996. Following recognition of the sale of Heritage Pointe
Claremont, the property and related debt were eliminated from the financial
statements of the Partnership. As a result, the decrease in debt led to the
decrease in interest expense.

Selected costs and expenses for the three months ended June 30, 1997 and June
30, 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED
                                               --------------------
                                               JUNE 30,    JUNE 30,
                                                 1997        1996
                                               --------    --------
                                                  (in thousands)
          <S>                                    <C>           <C> 
          Rental Property Operations             $685          $630
          Assisted Living                          52            49
          General and Administrative              133           109
          Depreciation and amortization           228           299
          Property Taxes                           66            86
          Interest Expense                        358           477
</TABLE>


SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996.

Revenue for the six months ended June 30, 1997 and 1996 includes rental income,
assisted living revenue from all five facilities, interest income and other
revenue. Total revenue for the six months ended June 30, 1997 and June 30, 1996
was $3.1 million for both periods.

The largest component of revenue, rent, increased by $172,000 to $2.8 million
during the six months ended June 30, 1997 reflecting an approximate 7% increase
over rental income of $2.6 million earned during the six months ended June 30,
1996.

During the six month period ended June 30, 1997, assisted living revenue
increased 46% to $278,000 from assisted living revenues of $190,000 recorded
during the six months ended June 30, 1996. The increase in assisted living
revenue was due to the full implementation of a tiered assisted living services
program in conjunction with an aggressive marketing campaign within the
facilities.

Interest income and other income for the six month period ended June 30, 1997
decreased 96% and 59%, respectively, when compared to the six month period ended
June 30, 1996. The reduction of interest income reflects the elimination of
Heritage Point Claremont from the financial statements and the related interest
income.


<PAGE>   9
Other revenue, which consists primarily of banquet income, processing fees and
beauty shop revenue, was lower during the six month period ended June 30, 1996
in comparison to the six month period ended June 30, 1996. The primary reason
for the decline in revenue is the change in billing practice which includes
meals in the base rental fee.

Sources of revenue for the six months ended June 30, 1997 and June 30, 1996 are
summarized as follows:

<TABLE>
<CAPTION>
                                           SIX MONTHS      SIX MONTHS
                                              ENDED           ENDED
                                             JUNE 30,        JUNE 30,
                                               1997            1996
                                           ----------      ----------
                                                (in thousands)
                    <S>                      <C>             <C>   
                    Rent                     $2,752          $2,581
                    Assisted Living             278             190
                    Interest                      8             197
                    Other Income                 44             105
                                             ------          ------
                    TOTAL REVENUE            $3,082          $3,073
                                             ======          ======
          </TABLE>

Total costs and expenses for the six months ended June 30, 1997 were $3.1
million, a decrease of approximately 7% over costs and expenses of $3.3 million
the six months ended June 30, 1996.

The largest component of expenses, rental property operations, consists
primarily of property management costs, payroll related expenses, utilities,
food expenses and maintenance and supplies. Rental property operations expense
increased by 8% to $1.4 million for the six months ended June 30, 1997 compared
to $1.3 million for the six month period ended June 30, 1996. The increase in
rental property operating expenses is primarily due to an increase in both
payroll-related and maintenance and supplies expenses.

Assisted living expenses consist mainly of payroll expense related to the
provision of assisted living services. Assisted living expenses incurred for the
six months ended June 30, 1997 increased to $107,000, an increase of 14%, from
$94,000 for the six months ended June 30, 1996. The increase corresponds
directly to the increase in assisted living services revenue in the current year
and the staffing required to provide these services.

General and administrative expenses are comprised of, but not limited to, costs
for accounting, partnership administration, bad debt, data processing, investor
relations, insurance, and professional services. General and administrative
expenses increased approximately 20% to $244,000 for the six months ended June
30, 1997 from $203,000 for the six months ended June 30, 1996.

Depreciation and amortization expense decreased $143,000 to $455,000 for the six
months ended June 30, 1997 from $598,000 for the six months ended June 30, 1996.
Depreciation and amortization expense decreased due to the full depreciation of
certain fixed assets.

Interest expense decreased by 25% to $719,000 for the six months ended June 30,
1997 compared to $953,000 for the six months ended June 30, 1996. Following
recognition of the sale of Heritage Pointe Claremont, the property and related
debt were eliminated from the financial statements of the Partnership. As a
result, the decrease in debt led to the decrease in interest expense.

Selected costs and expenses for the six months ended June 30, 1997 and June 30,
1996 are as follows:

<TABLE>
<CAPTION>
                                            SIX MONTHS      SIX MONTHS
                                               ENDED           ENDED
                                              JUNE 30,        JUNE 30,
                                                1997            1996
                                            ----------      ----------
                                                  (in thousands)
          <S>                                 <C>             <C>   
          Rental Property Operations          $1,376          $1,271
          Assisted Living                        107              94
          General & Administrative               244             203
          Depreciation & Amortization            455             598
          Property Taxes                         131             162
          Interest Expense                       719             953
</TABLE>


<PAGE>   10
LIQUIDITY AND CAPITAL RESOURCES

The General Partners expect that the cash to be generated from operations of all
the Registrant's properties will be adequate to pay operating expenses, make
necessary capital improvements and make required principal reductions of debt.
Cash currently generated by operations is being reserved by the Partnership to
fund start-up costs to be incurred by the Villa Las Posas facility which is
expected to commence operations in the fall of 1997. On a long-term basis, the
Registrant's liquidity is sustained primarily from cash flow provided by
operating activities. During the three months ended June 30, 1997, cash provided
by operating activities was $707,000 compared to cash provided by operating
activities of $248,000 for the three months ended June 30, 1996.

During the three months ended June 30, 1997, the Registrant used net cash in
investing activities of $2.9 million compared to net cash provided by investing
activities of $870,000 for the three months ended June 30, 1996. The
Registrant's investing activities consisted of capital improvements made on its
five operating properties and construction of its assisted living facility in
development (Villa Las Posas).

During the three months ended June 30, 1997, financing activities provided net
cash of $2.3 million compared to using net cash in financing activities of
$738,000 for the three months ended June 30, 1996. The Registrant's financing
activities consisted of borrowings from its construction loan, principal
reduction on notes payable and distributions paid to the Partners.

The General Partners are not aware of any trends, other than national economic
conditions which have had, or which may be reasonably expected to have, a
material favorable or unfavorable impact on the revenues or income from the
operations or sale of properties. The General Partners believe that if the
inflation rate increases they will be able to pass the subsequent increase in
operating expenses onto the residents of the facilities by way of higher rental
and assisted living rates.

On March 12, 1997, ARVP III obtained a $7.7 construction loan from Bank United
of Texas for financing the construction of the assisted living facility known as
Villa Las Posas located in Camarillo, California. The terms of the construction
loan provide for the interest rate to be equal to 30 day LIBOR rate plus 2.75%.
In addition, the Registrant has long term debt of $18.3 million as of June 30,
1997, comprised of $4.8 million due January 1, 2007, $3.0 million due February
1, 2017, $3.9 million due February 1, 2019 and $4.2 million due November 1,
2017. The remaining balance of $61,000 consists of notes secured by equipment.

The Registrant contemplates spending approximately $130,000 for capital
expenditures during 1997 for physical improvements at its five facilities and
$7.7 million for construction costs for its Villa las Posas assisted living
facility. The funds for these improvements should be available from operations
and cash reserves while the funds for construction of the Villa las Posas
facility should be available from the construction loan with Bank United of
Texas.

There are no known material trends, favorable or unfavorable, in the
Registrant's capital resources, and there is no expected change in the mix of
such resources.



<PAGE>   11



PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

    None

ITEM 2.  CHANGE IN SECURITIES

    None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

    None

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

    None

ITEM 5.  OTHER INFORMATION

    None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    A.   Exhibit 27 - Financial Data Schedule

    B.   None


<PAGE>   12


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

AMERICAN RETIREMENT VILLAS PROPERTIES III
A CALIFORNIA LIMITED PARTNERSHIP

    By:    ARV Assisted Living, Inc.
           (Managing General Partner)

           By: /s/ GARY L. DAVIDSON
              -----------------------------
               Gary L. Davidson
               Chairman of the Board

               Date:  August 14, 1997

           By: /s/ GRAHAM P. ESPLEY-JONES
              -----------------------------
               Graham P. Espley-Jones
               Chief Financial Officer

               Date:  August 14, 1997