<PAGE>   1

                                United States
                      Securities and Exchange Commission
                            Washington, D.C. 20549
                                  FORM 10-Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the Quarterly Period Ended September 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  1-14132
                        ------------

                         AMBASSADOR APARTMENTS, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

               MARYLAND                                   36-3948161  
---------------------------------------------   ------------------------------- 
(State or other jurisdiction of incorporation           (I.R.S. Employer   
or organization)                                       Identification No.) 

       
           77 W. Wacker Drive
           Suite 4040
           Chicago, Illinois                                 60601    
---------------------------------------------   ------------------------------- 
(Address of principal executive offices)                   (Zip Code) 


                                (312) 917-1600
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)

                                NOT APPLICABLE
--------------------------------------------------------------------------------
  (Former name, former address, or former fiscal year, if changed since last
report)

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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.

      As of November 13, 1997 the registrant had outstanding 10,552,180
      shares of Common Stock, $.01 par value per share.



<PAGE>   2

                         AMBASSADOR APARTMENTS, INC.              Form 10-Q


                                    INDEX

<TABLE>
<CAPTION>
Part I: Financial Information                                                           Page

<S>     <C>                                                                             <C>
Item 1. Financial Statements


         Consolidated balance sheets of Ambassador Apartments, Inc. as of
         September 30, 1997 and December 31, 1996......................................  4

         Consolidated statements of operations of Ambassador Apartments, Inc.
         for the three-and nine-month periods ended September 30, 1997 and 199.........  5

         Consolidated statements of cash flows of Ambassador Apartments, Inc.
         for the nine-month periods ended September 30, 1997 and 1996..................  6


         Notes to consolidated financial statements....................................  7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of 
         Operations.................................................................... 15

Part II: Other Information

Item 1.  Legal Proceedings............................................................. 24
Item 2.  Changes in Securities......................................................... 24
Item 3.  Defaults Upon Senior Securities............................................... 24
Item 4.  Submission of Matters to a Vote of Security Holders........................... 24
Item 5.  Other Information............................................................. 24
Item 6.  Exhibits or Reports on Form 8-K............................................... 25

Signature.............................................................................. 26
</TABLE>





                                      -2-
<PAGE>   3


                                    Part I

ITEM 1. FINANCIAL INFORMATION

     The information furnished in the accompanying balance sheets, statements
of operations and statements of cash flows reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the
financial statements for the interim period.

     The aforementioned financial statements should be read in conjunction with
the notes to the consolidated financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations.













                                     -3-
<PAGE>   4

                         AMBASSADOR APARTMENTS, INC.
                         CONSOLIDATED BALANCE SHEETS
                AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
             (Dollars in thousands, except for per share amounts)
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                          SEPTEMBER  30, 1997  DECEMBER 31, 1996
                                                          -------------------  -----------------
<S>                                                       <C>                  <C>
ASSETS
Rental property:
  Land..................................................  $            89,440  $          82,124
  Buildings and improvements............................              450,782            407,002
  Furniture and equipment...............................                7,068              6,166
                                                          -------------------  -----------------
                                                                      547,290            495,292
Accumulated depreciation................................              (47,273)           (33,340)
                                                          -------------------  -----------------
                                                                      500,017            461,952
Cash and cash equivalents...............................                5,536              4,002
Escrow deposits.........................................               31,017             30,897
Escrowed bond funds--restricted.........................                  248                549
Note receivable - Officer...............................                1,000              1,000
Accounts receivable.....................................                1,421              1,870
Investment in and advances to unconsolidated real estate
  limited partnerships..................................                4,018              4,549
Deferred financing costs, net...........................               13,725              9,640
Other...................................................                2,894              1,325
                                                          -------------------  -----------------
TOTAL ASSETS............................................  $           559,876  $         515,784
                                                          ===================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY
Bonds payable...........................................  $           317,796  $         279,355
Notes payable...........................................               62,114             79,974
Accrued interest........................................                  329                913
Real estate taxes payable...............................                6,327              3,837
Tenant security deposits................................                2,480              2,231
Accounts payable and other liabilities..................                3,036              2,138
Distributions/dividends payable.........................                  739                750
                                                          -------------------  -----------------
Total liabilities.......................................              392,821            369,198
                                                          -------------------  -----------------
Minority interest.......................................               29,913             32,006

Preferred Stock, $.01 par value; 20,000,000 shares
  authorized, 1,351,351 shares of Class A Senior
  Cumulative Convertible Preferred Stock issued and
  outstanding...........................................               24,132             24,132
Stockholders' equity:
  Common Stock, $.01 par value; 100,000,000
    shares authorized, 10,552,180 and 8,958,525
    shares issued and outstanding at September 30, 1997
    and December 31, 1996, respectively.................                  106                 90
  Additional paid-in capital............................              146,754            112,975
  Distributions in excess of accumulated earnings.......              (33,850)           (22,617)
                                                          -------------------  -----------------
Total stockholders' equity..............................              113,010             90,448
                                                          -------------------  -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..............  $           559,876  $         515,784
                                                          ===================  =================
</TABLE>

See accompanying notes to consolidated financial statements.



                                     -4-
<PAGE>   5




                          AMBASSADOR APARTMENTS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              (Dollars in thousands, except for per share amounts)
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                               THREE MONTHS           NINE MONTHS         
                                                            ENDED SEPTEMBER 30     ENDED SEPTEMBER 30     
                                                            ------------------     ------------------     
                                                              1997        1996       1997       1996       
                                                            -------     -------    -------    --------    
<S>                                                          <C>         <C>        <C>        <C>        
Revenues:                                                                                                 
 Rental.............................................          $22,342    $16,086     $63,661    $45,553    
 Other..............................................            1,917      1,397       5,084      3,790    
                                                           ----------  ---------   ---------  ---------   
      Total revenues................................           24,259     17,483      68,745     49,343    
Expenses:                                                                                                  
  Property operating................................            6,225      4,102      16,770     11,554    
  Real estate taxes.................................            1,985      1,693       6,165      4,442    
  General and administrative........................            1,924      1,373       5,052      3,753    
  Depreciation......................................            5,027      3,359      13,933      9,547    
  Advertising and marketing.........................              483        362       1,208        905    
  Repairs and maintenance...........................            1,020        575       2,176      1,668    
  Bad debt expense..................................               33         85         130        307    
  Financing fees....................................              768        762       2,086      2,425    
  Interest..........................................            5,661      3,452      16,809      9,072    
  Amortization of deferred financing fees...........              387        349         871      1,452    
  Income from unconsolidated real estate                                                                  
     limited partnerships...........................              (11)      (267)       (333)      (55)    
                                                           ----------  ---------   ---------  ---------   
      Total expenses................................           23,502     15,845      64,867     45,070    
                                                           ----------  ---------   ---------  ---------   
Income before allocation to minority interest, loss                                                       
  on sale of interest rate cap and  extraordinary
  item..............................................              757      1,638       3,878      4,273    
Income allocated to minority interest...............             (261)      (555)     (1,004)    (1,032)   
                                                           ----------  ---------   ---------  ---------   
Income before loss on sale of interest rate cap                                                           
  and extraordinary item............................              496      1,083       2,874      3,241    
Loss on sale of interest rate cap, net of minority                                                        
  interest..........................................               --         --          --      2,084    
                                                           ----------  ---------   ---------  ---------   
Income before extraordinary item                                  496      1,083       2,874      1,157    
Extraordinary item, net of minority interest........               --         --        (900)        --    
                                                           ----------  ---------   ---------  ---------   
Net income.........................................               496      1,083       1,974      1,157    
Income allocated to preferred stockholders.........              (576)      (283)     (1,711)      (283)   
                                                           ----------  ---------   ---------  ---------   
Net (loss) income allocable to common                                                                     
  stockholders.....................................              $(80)      $800        $263      $874    
                                                           ==========  =========   =========  =========   
(Loss) income per share of weighted average                                                               
  common stock outstanding:                                                                               
Before extraordinary item..........................            $(0.01)      $0.09      $0.12      $0.10    
                                                           ==========   =========  =========  =========   
Extraordinary item.................................               $--         $--     $(0.09)       $--    
                                                           ==========   =========  =========  =========   
Net (loss) income..................................            $(0.01)      $0.09      $0.03      $0.10   
                                                           ==========   =========  =========  =========   
Weighted average common shares outstanding.........        10,512,260   8,958,525  9,592,925  8,958,525   
                                                           ==========   =========  =========  =========   
</TABLE>

     See accompanying notes to consolidated financial statements.


                                       5
<PAGE>   6



                         AMBASSADOR APARTMENTS, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Dollars in thousands)
                                 (Unaudited)
                                      

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                     SEPTEMBER 30,
                                                            ----------------------------
                                                                1997            1996
                                                            ------------    ------------
<S>                                                         <C>              <C>
OPERATING ACTIVITIES
  Net income..........................................     $     1,974      $     1,157
  Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation.......................................           13,933            9,547
   Bad debt expense...................................              130              307
   Amortization of deferred financing fees............              871            1,452
   Minority interest..................................            1,004            1,032
   Income from investments in unconsolidated
     real estate limited partnerships.................             (333)             (55)
   Loss from sale of interest rate cap................               --            2,084
Extraordinary item, net of minority interest..........              900               --
   Changes in operating assets and liabilities:
     Accounts receivable..............................              319           (1,377)
     Other assets.....................................           (1,569)          (1,184)
     Accrued interest payable.........................             (584)             238
     Real estate taxes payable........................            2,490             (143)
     Tenant security deposits.........................              249              347
     Accounts payable and other liabilities...........              898             (100)
                                                            -----------      -----------
  Net cash provided by operating activities...........           20,282           13,305
INVESTING ACTIVITIES
  Purchase of rental property.........................          (24,179)         (42,045)
  Improvements to rental property.....................          (14,569)         (12,847)
  Advances to unconsolidated real estate limited
     partnerships.....................................               --          (36,815)
  Repayment from unconsolidated real estate limited
     partnerships.....................................              864           25,908
                                                            -----------      -----------
   Net cash used in investing activities..............          (37,884)         (65,799)
FINANCING ACTIVITIES
  Net proceeds from joint venture partners............               --           21,671
  Net proceeds from preferred stock offering..........               --           24,394
  Net proceeds from sale of shelf offering............           28,887               --
  Escrowed bond funds - restricted....................              301           (8,159)
  Escrow deposit......................................             (120)          (8,393)
  Deferred financing fees paid........................           (5,946)          (2,413)
  Proceeds from sale of interest rate cap.............               --            1,485
  Proceeds from bonds payable.........................           34,805           10,250
  Repayment of bonds payable..........................           (9,614)              --
  Proceeds from notes payable.........................           75,431          125,628
  Repayment of notes payable..........................          (93,291)        (101,575)
  Proceeds from exercise of stock options.............            3,196               --
  Proceeds from sale of common units..................              100               --
  Partner capital contributions.......................            1,322               13
  Dividends paid to preferred stockholders............           (1,702)              --
  Dividends paid to common stockholders...............          (11,496)         (10,750)
  Distributions paid to minority interest.............           (2,737)          (2,222)
                                                            -----------      -----------
   Net cash provided by financing activities..........           19,136           49,929
                                                            -----------      -----------
Net increase (decrease) in cash and cash equivalents..            1,534           (2,565)
Cash and cash equivalents at beginning of period......            4,002            5,270
                                                            -----------      -----------
Cash and cash equivalents at end of period............      $     5,536      $     2,705
                                                            ===========      ===========
</TABLE>

         See accompanying notes to consolidated financial statements.
                                       
                                       
                                      -6-
                                       
<PAGE>   7





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X.  They should be read in conjunction with the consolidated
financial statements and notes thereto included in the Ambassador Apartments,
Inc. (the "Company") 1996 Annual Report on Form 10-K.  The following notes to
the consolidated financial statements highlight significant changes to the
notes included in the 1996 Annual Report on Form 10-K and present interim
disclosures as required by the SEC.  Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation.  In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included.  Operating results for such interim periods are not necessarily
indicative of the results that may be expected for a full fiscal year.

     Investments in joint venture partnerships which the Company does not
control or in which the Company does not have a majority interest are accounted
for on the equity method.

     Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 consolidated presentation.  Such reclassifications have
not changed the results of operations for 1996.

     Significant intercompany accounts and transactions have been eliminated in
consolidation.

Revenue Recognition

     Rental revenue is recognized as income in the period earned.

Cash Equivalents

     All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.

Earnings Per Share

     Earnings per share is computed based upon net income and weighted average
common shares outstanding for the appropriate period.  The dilutive effect of
common stock equivalents on the primary earnings per share computation is not
considered significant.  Fully diluted earnings per share for the three and
nine month periods ended September 30, 1997 equals $0.06 and $0.15,
respectively, and is based upon weighted average common and common share
equivalents of 12,882,033 and 11,962,698, respectively.

                                     -7-

<PAGE>   8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Issued Accounting Standards

     In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997.  At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods.  Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded.  The Company
believes that the new requirements for calculating primary earnings per share
will have no material impact since there is no dilutive effect with respect to
stock options.  The impact of Statement 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.

Rental Property

     Rental property is carried at lower of cost or fair value.

     Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets which are as follows:


     Building .................  30-40 years
     Building improvements ....   5-30 years
     Furniture and equipment ..   3-12 years


     Expenditures for recurring maintenance and repairs are expensed to
operations as incurred. Renovation and improvement costs which improve and/or
extend the useful life of the asset are capitalized and depreciated over the
estimated useful life.  In addition, initial "turn over" costs such as
electrical, plumbing and painting generally incurred during the renovation,
re-tenanting and stabilization period, which are necessary to restore apartment
units to their intended use, are capitalized and depreciated over their
estimated useful life.

     Leasing costs, such as commissions, locator fees and other costs incurred
in connection with renting the Company's apartment units, are amortized on a
straight-line basis over a period of nine months.  The amortization period is
consistent with the weighted average life of the associated lease agreements.

     Marketing costs incurred to rent real estate during the approximate
two-year renovation, re-tenanting and stabilization period are capitalized and
amortized over such stabilization period.

2. DEBT

     On May 28, 1997, the Company entered into an unsecured revolving credit
facility with Credit Lyonnais New York Branch ("CLNY") for $25.0 million (as
amended on June 27, 1997, the "CLNY


                                     -8-

<PAGE>   9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


2.   DEBT (continued)

Unsecured Line of Credit") at the prime rate plus 1.25% or, at the
option of the Company, the Eurorate plus 2.25% or LIBOR plus 2.25%.  Unpaid
advances, together with any accrued or unpaid interest thereon, shall be due
and payable 120 days following the date of any advance under the CLNY Unsecured
Line of Credit.  As of September 30, 1997, there were no amounts outstanding
under the CLNY Unsecured Line of Credit.  The CLNY Unsecured Line of Credit
previously had a maturity date of December 31, 1997; however, on September 30,
1997, the Company amended the CLNY Unsecured Line of Credit to extend the
maturity date to May 23, 1998.

On June 22, 1997, the Company entered into a secured revolving credit
facility to refinance its credit facility with Bank One Arizona (the "Bank One
Credit Facility") with Nomura Asset Capital Corporation (as amended, the "NACC
Revolving Loan").  The NACC Revolving Loan bears interest at LIBOR plus 1.50%
and has a maximum commitment of $75.0 million subject to the amount of
collateral pledged by the Company.  As of September 30, 1997, six properties
were pledged as collateral under the NACC Revolving Loan, and approximately
$24.8 million was outstanding.  As of September 30, 1997, the six properties
pledged as collateral would have permitted an additional $11.0 million of
borrowings under the NACC Revolving Loan.  The NACC Revolving Loan previously
had a maturity date of  December 31, 1997; however, on September 30, 1997, the
Company amended the NACC Revolving Loan to extend the maturity date to December
31, 1998.

     On September 18, 1997, Bexar County Housing Finance Corporation issued
$2.3 million of variable-rate taxable bonds (the "Shallow Creek Bonds") for the
benefit of the Shallow Creek property.  The Shallow Creek Bonds bear interest
at a floating rate that is reset weekly by the remarketing agent at the minimum
rate required to remarket the bonds at par.  The Shallow Creek Bonds are credit
enhanced by a credit facility (the "FNMA Facility") issued by Federal National
Mortgage Association ("FNMA") and mature on December 15, 2026.

     Effective September 11, 1997, the Company entered into an interest rate
cap agreement with CLNY at a purchase price of $58,000 to protect against
interest rate fluctuations with respect to the Shallow Creek Bonds.  Pursuant
to the terms of such interest rate cap agreement, the interest rate is limited
to 6.53% per annum on a notional amount of $2.3 million.  The interest rate cap
agreement terminates on September 11, 2002.

3. ESCROWED BOND FUNDS--RESTRICTED

As of September 30, 1997, the Company has approximately $248,000 in
escrow, of which approximately $199,000 related to those properties owned by
Ambassador I, L.P., a partnership in which the Company holds a 50.1% interest. 
The escrow monies will be used to complete certain renovation projects
associated with tax-exempt bond requirements on those properties.

4.   ESCROW DEPOSITS

     As of September 30, 1997, the Company has approximately $31.0 million in
escrow deposits.  The 


                                     -9-

<PAGE>   10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

escrow deposits consist primarily of reserves for (i) real estate
taxes, (ii) insurance, (iii) recurring capital expenditures, (iv) sinking fund
deposits, (v) collateral for swap contracts entered into by the Company and
(vi) additional collateral for debt.

5. STOCK OPTION PLAN

Pursuant to the 1994 stock incentive plan, as amended (the "1994 Stock
Incentive Plan") and the 1996 stock incentive plan, as amended (the "1996 Stock
Incentive Plan") as discussed in note 6 to the 1996 Annual Report on Form 10-K,
directors, executive officers and certain key employees were offered the
opportunity to acquire shares of Common Stock through stock options.  In March
1997, the Board of Directors adopted the 1997 stock incentive plan (the "1997
Stock Incentive Plan") for the purpose of attracting and retaining directors,
officers and key employees.  The 1997 Incentive Plan provides for the issuance
of options to purchase up to 1.6 million shares of Common Stock.  Collectively,
the 1994, 1996 and 1997 Stock Incentive Plans are referred to herein as the
"Stock Incentive Plan."  During the quarter ended September 30, 1997, 67,000
options were exercised under the Stock Incentive Plan at prices ranging from
$15.53 to $18.65 per share of Common Stock.  The Company granted 7,000 stock
options to certain non-executive officers during the quarterly period ended
September 30, 1997.  At September 30, 1997, options for 1,665,990 shares of
Common Stock are available for grant under the Stock Incentive Plan.

6. DECLARATION OF DISTRIBUTIONS TO STOCKHOLDERS AND LIMITED PARTNERS

     On October 31, 1997, the Board of Directors of the Company authorized
distribution payments of approximately $4.6 million, or $0.40 per Common Unit,
to holders of Common Units of Ambassador Apartments, L.P. (the "Operating
Partnership") for the quarter ended September 30, 1997.  The distributions are
payable on November 17, 1997.  Also on October 31, 1997, the Board of Directors
of the Company authorized distribution payments of $576,197, or approximately
$0.4264 per Class A Senior Cumulative Convertible Preferred Unit  ("Class A
Preferred Units"), to the holder of Class A Preferred Units of the Operating
Partnership, for the quarter ended September 30, 1997.  This distribution is
also payable on November 17, 1997.

     On October 31, 1997, the Board of Directors of the Company declared a
quarterly dividend of $0.40 per share of Common Stock to the Common
Stockholders of the Company for the quarter ended September 30, 1997. The
dividends are payable on November 17, 1997, to holders of record as of November
13, 1997.  The Board of Directors of the Company also authorized a quarterly
dividend in the amount of approximately $0.4264 per Class A Senior Cumulative
Convertible Preferred Stock ("Class A Preferred Stock") to the holder of Class
A Preferred Stock for the quarterly period ended September 30, 1997.  The Class
A Preferred Stock dividend is also payable on November 17, 1997.

7.   EXTRAORDINARY ITEM

     On June 22, 1997, the Company refinanced the Bank One Credit Facility.
Unamortized deferred financing fees associated with the Bank One Credit
Facility were written-off upon issuance of the NACC Revolving Loan.  As a
result of this write-off, the Company recognized a $900,000 extraordinary loss,
net of minority interest.


                                     -10-

<PAGE>   11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


8. LEGAL PROCEEDINGS

The Company is involved in a variety of legal proceedings arising in the
ordinary course of business.  It is management's belief that, collectively, all
such proceedings are not expected to have  material impact on the Company's
financial position.
        
     An advisor to investors who hold the Class B certificates described below
has challenged the Company's right to pay off the Class B certificates prior to
August 1, 2003.  The Company believes it has the current right to redeem such
certificates.  The advisor has threatened to bring an action against the
Company for damages.  If litigation is filed, the
Company will vigorously defend its position.

9.   SUBSEQUENT EVENTS

     On October 24, 1997, the Company borrowed $7.5 million under its NACC
Revolving Loan to fund the escrow account required to redeem the Prior Florida
Bonds (as hereinafter defined) associated with the TEB transaction (described
below) plus certain costs and fees associated therewith, fund renovation
expenses on certain of the Company's properties and to provide for additional
working capital needs.

     On October 27, 1997, the Housing Finance Authority of Palm Beach County,
Florida and The Housing Finance Authority of Volusia County, Florida issued
$16.1 million and $17.9 million, respectively, of variable-rate tax exempt
bonds (the "Florida Bonds") for the benefit of Haverhill Commons, Village
Crossing, Arbors and Ocean Oaks Properties.  The Florida Bonds are rated
AA+/A-1+ and bear interest at a floating rate that is reset weekly by the
remarketing agent at the minimum rate required to remarket the bonds at par.
The Florida Bonds mature on October 1, 2027.  The Florida Bonds are credit
enhanced by four separate letters of credit aggregating $34.5 million from CLNY
and a corresponding confirming letter of credit issued by Republic Bank of New
York.  Under the terms of the CLNY letter of credit agreement, CLNY was paid an
origination fee of $345,030 and is also entitled to a letter of credit fee of
1.5% per annum of the stated amount of the letters of credit payable monthly in
arrears.  An additional fee of 0.25% per annum of the stated amount of the
letter of credit is due to CLNY as long as a confirming letter of credit
remains in place.  The CLNY letters of credit expire not later than October 27,
2002.

     Concurrently with the issuance of the Florida Bonds, the Company defeased
$38.7 million of bonds (the "Prior Florida Bonds") owned by TEB Municipal Trust
I ("TEB"), a New York Trust in which an unconsolidated subsidiary of the
Company holds an approximately $2.0 million of original principal balance Class
G certificate.  In addition to the Class G certificate, TEB also sold $27.0
million of original principal balance in Class A certificates and $10.0 million
of original principal balance in Class B certificates.  During the third
quarter ended September 30, 1997, the trust certificates were subject to a
$300,000 partial redemption, thereby leaving an aggregate outstanding balance
of $38.7 million in trust certificates.  Pursuant to the terms of the bond
agreements, the Company deposited the proceeds from the Florida Bonds plus an
additional $4.7 million into an escrow account which will be used to redeem the


                                     -11-

<PAGE>   12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Prior Florida Bonds on December 1, 1997 and ultimately redeem the Class B and
Class G certificates in TEB and to reimburse the credit enhancer for the Class
A certificates for the draw on its direct pay letter of credit with respect to
the Class A certificates.  Alternatively, the Class B certificate holders may
have the option to put their certificates to the Company at a price equal to
their par value plus a 4% premium if exercised prior to January 14, 1998.

     On November 12, 1997, the Company obtained a $20 million standby
commitment (the "Standby Commitment") from Bank of America National Trust and
Savings Association ("Bank of America") for the benefit of FNMA in connection
with the FNMA Facility.  FNMA may draw upon the Standby Commitment in the event
that (i) under certain circumstances the limited partner of Jupiter-I, L.P. has
elected to dissolve the partnership and receive a cash liquidation or to cause
the partnership to redeem its interest for cash or (ii) FNMA has not received a
replacement standby commitment or other adequate security by October 12, 1998.
The Standby Commitment has a term of one year.  The Company paid $400,000 to
Bank of America in connection with the issuance of the Standby Commitment and
must pay an additional fee of $200,000 if the Standby Commitment remains
outstanding on the six month anniversary of its issuance.  In the event of any
advance under the Standby Commitment, the Company shall pay to Bank of America
a fee equal to 2% of the amount of such advance and on each 90th day thereafter
a fee equal to 2% of any unreimbursed advance then outstanding.  In addition,
any unreimbursed advances under the Standby Commitment accrue interest at a
rate equal to Bank of America's reference rate plus 500 basis points and are
required to be repaid on the earlier of the expiration date of the Standby
Commitment, an event of default under the Standby Commitment documents and a
merger of or the transfer of more than 40% of the voting interests in
Ambassador Apartments, Inc., Ambassador Apartments, L.P., or AJ One Limited
Partnership.

     The Standby Commitment was provided to FNMA in connection with FNMA's
consent to certain amendments to the Jupiter-I, L.P. Partnership Agreement and
a related document (the "Jupiter Amendments") that were entered into without
FNMA's prior consent as required by the FNMA Facility.  On November 12, 1997,
FNMA consented to the Jupiter Amendments effective as of the date the Jupiter
Amendments were executed and confirmed that, as a result of such consent, there
is not continuing a default under the FNMA Facility.  At the same time, the
Company agreed to use its good faith efforts to cause the Jupiter Amendments to
be reversed.  The Standby Commitment documents provide that if FNMA determines
in its sole discretion that the Company has not used such efforts by January
31, 1998, it may notify the Company of the actions reasonably required to
discharge the Company's good faith efforts.  Failure of the Company to satisfy
such requirements within 30 days of such notice could result after notice from
FNMA in the revocation and termination of FNMA's consent to the Jupiter
Amendments, in which event the Company would be in default under the FNMA
Facility.  FNMA has agreed to release the Standby Commitment in the event that
(i) the Company reverses the Jupiter Amendments or (ii) the Company becomes the
owner of substantially all of the ownership interests in Jupiter-I, L.P., and a
subsidiary of the Company guarantees certain obligations to FNMA under the FNMA
Facility.


                                     -12-


<PAGE>   13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10.  PRO FORMA INFORMATION

     The following unaudited table of pro forma information has been prepared
as if the Company's acquisitions and related debt in 1996 and 1997 had all
occurred as of the beginning of each period  presented.  In management's
opinion, the pro forma is not indicative of consolidated results of operations
that may have occurred had the above  transactions taken place on January 1 of
each year.

             Pro Forma for the Nine-Month Period Ended September 30
                (Dollars in thousands, except per share amounts)



<TABLE>
<CAPTION>

                                               1997     1996
                                              -------  -------
<S>                                           <C>      <C>
Total revenue...............................  $71,629  $69,060
Property operating..........................   31,470   29,905
Depreciation and amortization...............   15,442   14,980
Interest....................................   20,238   20,263
                                              -------  -------
Total expenses..............................   67,150   65,148
                                              -------  -------
Income before Minority Interest, loss from
 sale of interest rate cap, and extraordinary
 item........................................  $4,479   $3,912
                                              =======  =======
Income per share of weighted average Common
Stock.......................................    $0.35    $0.32
</TABLE>                                      =======  =======


                                     -13-

<PAGE>   14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


     The pro forma financial information includes the following adjustments:
(i) an increase to rental revenues, property operating expenses and related
interest expense to reflect the acquisitions in 1996 and 1997; (ii) an increase
in general and administrative expense to reflect additional costs associated
with increasing the size of the portfolio; (iii) an increase in interest
expenses associated with acquisitions in 1996 and 1997; and (iv) an increase in
depreciation to reflect the acquisitions noted in (i) above.

     Net income has not been reduced for Minority Interests, and net income per
share assumes  conversion into Common Stock of (i) all limited partnership
interests in the Operating Partnership;  (ii) certain limited partnership
interests in Jupiter I, L.P. and Jupiter II, L.P.; and (iii) the Class A
Preferred Stock.  Therefore, the total Common Stock outstanding at January 1,
1997 and January 1, 1996 would have been 12,858,016 and 12,192,181,
respectively.

                                     -14-

<PAGE>   15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS



INTRODUCTION

     The following is a discussion and analysis of the results of operations
and financial condition of Ambassador Apartments, Inc. (together with its
affiliates, the "Company").  As of September 30, 1997, the Company owned 52
multifamily residential properties, including ownership interests in two
unconsolidated joint ventures.  Historical results and percentage relationships
presented herein are not necessarily indicative of future operations.

     The following discussion should be read in conjunction with the
consolidated and combined financial statements and the management discussion
and analysis contained in the Company's 1996 Annual Report on Form 10-K.  The
Company believes that to facilitate a clear understanding of its operating
results, funds from operations ("FFO") should be examined in conjunction with
net income as presented in the consolidated statements as included herein.
Industry analysts generally consider FFO an appropriate measure of performance
of an equity REIT.  FFO is currently defined by the National Association of
Real Estate Investment Trusts ("NAREIT") as net income (loss) computed in
accordance with GAAP, excluding gains (or losses) from debt restructuring or
sales of property, plus depreciation and amortization of capitalized leasing
expenses and tenant allowances or improvements, after adjustments for
unconsolidated partnerships and joint ventures.  Items such as amortization of
deferred financing fees and depreciation of computer software and a company's
office improvements are specifically excluded from the computation and may not
be "added back" to FFO.  FFO should not be considered as an alternative to net
income as an indication of the Company's performance or as an alternative to
cash flows as a measure of liquidity.

     The following table sets forth the calculations of FFO for the Company
using NAREIT's current computation method and all references to FFO in this
Form 10-Q reflect NAREIT's current computation method.

<TABLE>
<CAPTION>

                                         (In 000's, except per share amounts)
                                         ------------------------------------
                                                For the Quarter Ended
                                                  September 30, 1997
                                         ------------------------------------
<S>                                                 <C>
Net income before minority interest and
  extraordinary item...................             $      757
FFO ADJUSTMENTS:
Depreciation (1).......................                  4,969
Non-recurring adjustments (2)..........                    145
Adjustments to joint ventures..........                    184
                                                    ----------
FFO....................................             $    6,055
                                                    ==========
FFO per share (3)......................             $     0.44
</TABLE>                                            ==========

   (1)  Excludes depreciation of non-real estate related assets.
   (2)  The non-recurring adjustment represents payments to a former senior
        executive of the Company in connection with his resignation.
   (3)  FFO per share is based upon the weighted average number of
        13,777,351 fully diluted common shares outstanding for the
        quarter ended September 30, 1997.


                                     -15-

<PAGE>   16



RESULTS OF OPERATIONS

     During the twelve-month period from October 1, 1996 through September 30,
1997, the Company acquired seven properties containing 2,747 units from
unaffiliated third-party sellers.  The Company also acquired nine properties
containing 2,345 units from unaffiliated third-party sellers during the period
January 1, 1996 through September 30, 1996.  The Company's results for the nine
months ending September 30, 1997, include a full nine months of operations for
these nine properties.  The Company's results for the nine months ending
September 30, 1996, include only partial operations from these nine properties.
These 16 properties are collectively referred to as the "Additional
Properties".

     Four separate issuances of tax-exempt bonds totaling $32.0 million and two
taxable bond issuances totaling $6.3 million (collectively, the "New Bonds")
occurred during the twelve-month period from October 1, 1996 through September
30, 1997, to reimburse acquisition and renovation costs on five properties.  Of
the New Bonds, $14.6 million and $2.3 million of variable-rate, tax-exempt
bonds were issued on November 13, 1996, and November 26, 1996, for the benefit
of The Mills and Shallow Creek properties, respectively.  On March 6, 1997,
$6.0 million of variable-rate, tax-exempt bonds were issued for the benefit of
the Crossroads property.  On April 25, 1997, $9.1 million of variable-rate,
tax-exempt bonds were issued for the benefit of the Trails of Ashford property,
and $4.0 million of variable-rate, taxable bonds were issued for the benefit of
the Sandalwood property.  On September 18, 1997, $2.3 million of variable-rate,
taxable bonds were issued for the benefit of the Shallow Creek property.

     On May 1, 1997, the Company sold at par $4.0 million of tax-exempt bonds
(the "Stonybrook Bonds") and approximately $900,000 of tax-exempt subordinate
bonds (the "Madera Bonds")  to TEB Municipal Trust II, a New York Trust ("TEB
II").  The Company has an approximately 1% ownership interest in TEB II through
G.P. Municipal Holdings, L.L.C., an Illinois limited-liability company of which
the Company is a member ("G.P. Holdings").  The Stonybrook Bonds bear interest
at 10% per annum and are collateralized by the Stonybrook property.  The
Stonybrook Bonds mature on October 1, 2012.  The Madera Bonds bear interest at
11% per annum and are collateralized by the Madera Point property.  The Madera
Bonds mature on June 1, 2027.

     On October 1, 1996 and November 21, 1996, the Company assumed $24.1
million in variable-rate, tax-exempt bonds with respect to the acquisition of
two properties.  In addition, on March 13, 1997, the Company assumed $13.3
million of fixed-rate, tax-exempt bonds in connection with the acquisition of
one property.

     The acquisition of the Additional Properties, the assumption of tax-exempt
bonds associated with the purchase of the Additional Properties, the issuance
of the New Bonds, and the sale of the Stonybrook Bonds and the Madera Bonds
included in the consolidated financial statements of the Company accounted for
the significant changes in operating results for the nine months ended
September 30, 1997, when compared to the same period in 1996.

                                     -16-

<PAGE>   17


COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996.

     For the nine months ended September 30, 1997, income before allocation to
minority interest, loss from sale of interest rate cap and extraordinary item
decreased $395,000 to $3.9 million when compared to the same period in 1996.
This decrease was primarily due to increases in total expenses, partially
offset by increases in total revenues.  These items are discussed in greater
detail below.

     Total revenues increased by $19.4 million, or 39.3%, to $68.7 million, for
the nine-month period ended September 30, 1997, when compared with the same
period in 1996.  Of this increase, approximately $17.9 million is attributable
to the acquisition of the Additional Properties.

     Total expenses (exclusive of depreciation, amortization of deferred
financing fees and interest expense) increased $8.3 million, or 33.0%, to $33.3
million for the nine months ended September 30, 1997, when compared with the
same period in 1996.  Property operating expenses increased $5.2 million,  of
which approximately $4.8 million is due to the acquisition of the Additional
Properties.  Real estate taxes increased approximately $1.7 million, which is
attributable to the purchase of the Additional Properties.  General and
administrative expenses increased $1.3 million.  This increase was due
primarily to increased administrative costs incurred in connection with the
Company increasing the size of its portfolio from 12,981 units at September 30,
1996, to 15,728 units at September 30, 1997.  These increases in expenses were
partially offset by a decrease in financing fees and an increase in income from
unconsolidated real estate limited partnerships.  Financing fees decreased
$339,000 primarily resulting from the Company replacing its existing credit
enhancement on approximately $184.5 million of variable-rate, tax-exempt bonds
with the FNMA Facility (as defined below).  Income from unconsolidated real
estate limited partnerships increased $278,000 primarily as a result of the
Company's investment in G.P. Holdings.

     Depreciation and amortization increased $3.8 million, or 34.6%, to $14.8
million for the nine-month period ended September 30, 1997, when compared to
the same period in 1996.  This increase is primarily related to an increase in
depreciable assets associated with the purchase of the Additional Properties,
partially offset by lower amortization as a result of a longer amortization
period for those costs incurred in connection with the FNMA Facility and lower
deferred financing fees resulting from the write-off of approximately $5.8
million of deferred financing costs in the fourth quarter of 1996.   The
Company incurred approximately $4.5 million of deferred financing costs as a
result of the FNMA Facility transaction.  These costs are being amortized over
the term of the FNMA Facility (25 years) compared to an average term of seven
years for those costs written off in the fourth quarter of 1996.

     Interest expense increased $7.7 million to $16.8 million for the
nine-month period ended September 30, 1997, when compared to the same period in
1996.  This increase is primarily attributable to interest costs associated
with the bonds assumed by the Company in connection with the acquisition of the
Additional Properties during the twelve-month period October 1, 1996 through
September 30, 1997 ($4.0 million); the issuance of the New Bonds ($855,000);    
two conventional long-term secured financings with Nomura Asset Capital
Corporation for $16.1 million and $21.5 million entered into in March 1996 and
March 1997, respectively ($1.3 million); the December 1996 remarketing of $7.2
million of

                                     -17-
<PAGE>   18



tax-exempt bonds secured by Madera Point and the sale of Stonybrook and Madera
Bonds ($518,000); and an increase of swap interest expense ($756,000).  These
increases are partially offset by a $326,000 reduction in interest expense
associated with the Company's secured line of credit.

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1996.
     For the three months ended September 30, 1997, income before allocation to
minority interest, loss from sale of interest rate cap and extraordinary item
decreased $881,000 to $757,000 when compared to the same period in 1996.  This
decrease was primarily due to increases in total expenses, partially offset by
increases in total revenues.  These increases are discussed in greater detail
below.

     Total revenues increased by $6.8 million, or 38.8%, to $24.3 million, for
the three-month period ended September 30, 1997, when compared with the same
period in 1996.  Of this increase, approximately $6.0 million is attributable
to the acquisition of the Additional Properties.

     Total expenses (exclusive of depreciation, amortization of deferred
financing fees and interest expense) increased $3.7 million, or 43.1%, to $12.4
million for the three months ended September 30, 1997, when compared with the
same period in 1996.  Property operating expenses increased $2.1 million, of
which $1.6 million was due to the acquisition of the Additional Properties.
General and administrative expenses increased $551,000.  This increase was due
primarily to increased administrative costs incurred in connection with the
Company increasing the size of its portfolio.  Repairs and maintenance
increased $445,000, primarily attributable to the acquisition of the Additional
Properties.  Income from unconsolidated real estate limited partnerships
decreased $256,000 primarily as a result of the Company's investment in G.P.
Holdings.

     Depreciation and amortization increased $1.7 million, or 46.0%, to $5.4
million for the three-month period ended September 30, 1997, when compared to
the same period in 1996.  This increase is primarily related to an increase in
depreciable assets associated with the purchase of the Additional Properties.

     Interest expense increased $2.2 million to $5.7 million for the
three-month period ended September 30, 1997, when compared to the same period
in 1996.   This increase is primarily attributable to interest costs associated
with the bonds assumed by the Company in connection with the acquisition of the
Additional Properties during the twelve-month period October 1, 1996 through
September 30, 1997, the issuance of the New Bonds, the December 1996
remarketing of $7.2 million of tax-exempt bonds secured by Madera Point, and
the sale of the Stonybrook and Madera Bonds.

                                     -18-
<PAGE>   19



LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH

     Interest rates on approximately $234.6 million (including the
non-consolidated Williamsburg property) of the Company's variable-rate,
tax-exempt and taxable bonds as of September 30, 1997, are determined weekly by
a remarketing agent at the minimum interest rate necessary for the bonds to be
remarketed at par.  In an effort to reduce risk, as of September 30, 1997, the
Company hedged all of its variable-rate, tax-exempt and taxable bonds through
interest rate swaps or caps for an average term of approximately 6.25 years at
an average all in cost of approximately 6.2% annually.  As a result of the
Company entering into interest rate swaps with CLNY (the "CLNY Swaps") on
approximately $192.5 million of variable rate, tax-exempt bonds, the Company is
subject to mandatory margin calls for the posting of collateral if the cost of
the Company breaking the CLNY Swaps exceeds $100,000.  Pursuant to the ISDA
Credit Support Agreement between CLNY and the Company, the breakage cost of
CLNY Swap is determined weekly.  If interest rates decline, the Company is
required to post additional collateral to protect CLNY form the Company
breaking the CLNY Swaps.  If interest rates increase, less collateral will be
needed and CLNY will return excess collateral to the Company.  As of September
30, 1997, the Company has not posted any collateral with respect to the CLNY
Swaps.  As of November 14, 1997, the Company had approximately $2.1 million
posted as collateral with respect to the CLNY Swaps.

        On May 28, 1997, the Company entered into an unsecured revolving credit
facility with CLNY for $25.0 million (as amended on June 27, 1997, the "CLNY
Unsecured Line of Credit") at the prime rate  plus 1.25% or, at the option of
the Company, the Eurorate plus 2.25% or LIBOR plus 2.25%.  Unpaid advances,
together with any accrued or unpaid interest thereon, shall be due and payable
120 days following the date of any advance under the CLNY Unsecured Line of
Credit.  As of September 30, 1997 and November 13, 1997, there were no amounts
outstanding under the CLNY Unsecured Line of Credit.  The CLNY Unsecured Line
of Credit previously had a maturity date of December 31, 1997; however, on
September 30, 1997, the Company amended the CLNY Unsecured Line of Credit to
extend the maturity date to May 23, 1998.

      On June 22, 1997, the Company entered into a secured revolving credit
facility) with Nomura Asset Capital Corporation (as amended, the "NACC
Revolving Loan") to refinance its credit facility with Bank One Arizona (the
"Bank One Credit Facility". The NACC Revolving Loan bears interest at LIBOR
plus 1.50% and has a maximum commitment of $75.0 million subject to the amount
of collateral pledged by the Company.  As of September 30, 1997, six properties
were pledged as collateral under the NACC Revolving Loan, and approximately
$24.8 million was outstanding.  As of September 30, 1997, the six properties
pledged as collateral would have permitted an additional $11.0 million under
the NACC Revolving Loan.  The NACC Revolving Loan previously had a maturity
date of December 31, 1997; however, on September 30, 1997, the Company amended
the NACC Revolving Loan to extend the maturity date to December 31, 1998.
On November 13, 1997, the NACC Revolving Loan had an outstanding principal
balance of approximately $32.3 million.

     On September 18, 1997, Bexar County Housing Finance Corporation issued
$2.3 million of variable-rate taxable bonds (the "Shallow Creek Bonds") for the
benefit of the Shallow Creek property.  The Shallow Creek Bonds bear interest
at a floating rate that is reset weekly by the remarketing agent at the minimum
rate required to remarket the bonds at par.  The Shallow Creek Bonds are credit
enhanced 

                                     -19-

<PAGE>   20



by a credit facility (the "FNMA Facility") issued by Federal National
Mortgage Association ("FNMA").  The Shallow Creek Bonds mature on December 15,
2026.

     Effective September 11, 1997, the Company entered into an interest rate
cap agreement with Credit Lyonnais New York Branch ("CLNY") at a purchase price
of $58,000 to protect against interest rate fluctuations with respect to the
Shallow Creek Bonds.  Pursuant to the terms of such interest rate cap
agreement, the interest rate is limited to 6.53% per annum on a notional amount
of $2.3 million.  The interest rate cap agreement terminates on September 11,
2002.

        On October 24, 1997, the Company borrowed $7.5 million under its NACC
Revolving Loan described above to fund the escrow account required to redeem
the Prior Florida Bonds (as hereinafter defined) associated with the TEB
transaction (described below) plus certain costs and fees associated therewith,
fund renovation expenses on certain of the Company's properties and to provide
for additional working capital needs.

     On October 27, 1997, the Housing Finance Authority of Palm Beach County,
Florida and The Housing Finance Authority of Volusia County, Florida issued
$16.1 million and $17.9 million, respectively, of variable-rate tax exempt
bonds (the "Florida Bonds") for the benefit of Haverhill Commons, Village
Crossing, Arbors and Ocean Oaks Properties.  The Florida Bonds are rated
AA+/A-1+  and bear interest at a floating rate that is reset weekly by the
remarketing agent at the minimum rate required to remarket the bonds at par.
The Florida Bonds mature on October 1, 2027.  The Florida Bonds are credit
enhanced by four separate letters of credit aggregating $34.5 million from CLNY
and a corresponding confirming letter of credit issued by Republic Bank of New
York.  Under the terms of the CLNY letter of credit agreement, CLNY was paid an
origination fee of $345,030 and is also entitled to a letter of credit fee of
1.5% per annum of the stated amount of the letters of credit payable monthly in
arrears.  An additional fee of 0.25% per annum of the stated amount of the
letter of credit is due to CLNY as long as a confirming letter of credit
remains in place.  The CLNY letters of credit expire not later than October 27,
2002.

     Concurrently with the issuance of the Florida Bonds, the Company defeased
$38.7 million of bonds (the "Prior Florida Bonds") owned by TEB Municipal Trust
I ("TEB"), a New York Trust in which an unconsolidated subsidiary of the
Company holds an approximately $2.0 million of original principal balance Class
G certificate.  In addition to the Class G certificate, TEB also sold $27.0
million of original principal balance  in Class A certificates and $10.0
million of original principal balance in Class B certificates.  During the
third quarter ended September 30, 1997, the trust certificates were subject to
a $300,000 partial redemption, thereby leaving an aggregate outstanding balance
of $38.7 million in trust certificates.  Pursuant to the terms of the bond
agreements, the Company deposited the proceeds from the Florida Bonds plus an
additional $4.7 million into an escrow account which will be used to redeem the
Prior Florida Bonds on December 1, 1997 and ultimately redeem the Class B and
Class G certificates in TEB and to reimburse the credit enhancer for the Class
A certificates for the draw on its direct pay letter of credit with respect to
the Class A certificates.  Alternatively, the Class B certificate holders may
have the option to put their certificates to the Company at a price equal to
their par value plus a 4% premium if exercised prior to January 14, 1998.

     On October 31, 1997, the Board of Directors of the Company authorized
distribution payments of 

                                     -20-

<PAGE>   21


approximately $4.6 million, or $0.40 per Common Unit, to holders of
Common Units of Ambassador Apartments, L.P.  (the "Operating Partnership") for
the quarter ended September 30, 1997.  The distributions are payable on
November 17, 1997.  Also on October 31, 1997, the Board of Directors of the
Company authorized distribution of $576,197, or approximately $0.4264 per Class
A Senior Cumulative Convertible Preferred Unit ("Class A Preferred Units"), to
the holder of Class A Preferred Units of the Operating Partnership, for the
quarter ended September 30, 1997.  This distribution is also payable on
November 17, 1997.

     On October 31, 1997, the Board of Directors of the Company declared a
quarterly dividend of $0.40 per share of Common Stock to the Common
Shareholders of the Company for the quarter ended September 30, 1997.  The
dividends are payable on November 17, 1997, to holders of record as of November
13, 1997.  The Board of Directors of the Company also authorized a quarterly
dividend in the amount of approximately $0.4264 per Class A Senior Cumulative
Convertible Preferred Stock ("Class A Preferred Stock") to the holder of Class
A Preferred Stock for the quarterly period ended September 30, 1997.  The Class
A Preferred Stock dividend is also payable on November 17, 1997.

     On November 12, 1997, the Company obtained a $20 million standby
commitment (the "Standby Commitment") from Bank of America National Trust and
Savings Association ("Bank of America") for the benefit of FNMA in connection
with the FNMA Facility.  FNMA may draw upon the Standby Commitment in the event
that (i) under certain circumstances the limited partner of Jupiter-I, L.P. has
elected to dissolve the partnership and receive a cash liquidation or to cause
the partnership to redeem its interest for cash or (ii) FNMA has not received a
replacement standby commitment or other adequate security by October 12, 1998.
The Standby Commitment has a term of one year.  The Company paid $400,000 to
Bank of America in connection with the issuance of the Standby Commitment and
must pay an additional fee of $200,000 if the Standby Commitment remains
outstanding on the six month anniversary of its issuance.  In the event of any
advance under the Standby Commitment, the Company shall pay to Bank of America
a fee equal to 2% of the amount of such advance and on each 90th day thereafter
a fee equal to 2% of any unreimbursed advance then outstanding.  In addition,
any unreimbursed advances under the Standby Commitment accrue interest at a
rate equal to Bank of America's reference rate plus 500 basis points and are
required to be repaid on the earlier of the expiration date of the Standby
Commitment, an event of default under the Standby Commitment documents and a
merger of or the transfer of more than 40% of the voting interests in
Ambassador Apartments, Inc., Ambassador Apartments, L.P., or AJ One Limited
Partnership.

     The Standby Commitment was provided to FNMA in connection with FNMA's
consent to certain amendments to the Jupiter-I, L.P. Partnership Agreement and
a related document (the "Jupiter Amendments") that were entered into without
FNMA's prior consent as required by the FNMA Facility.  On November 12, 1997,
FNMA consented to the Jupiter Amendments effective as of the date the Jupiter
Amendments were executed and confirmed that, as a result of such consent, there
is not continuing a default under the FNMA Facility.  At the same time, the
Company agreed to use its good faith efforts to cause the Jupiter Amendments to
be reversed.  The Standby Commitment documents provide that if FNMA determines
in its sole discretion that the Company has not used such efforts by January
31, 1998, it may notify the Company of the actions reasonably required to
discharge the Company's good faith efforts.  Failure of the Company to satisfy
such requirements within 30 days of such notice could result after notice from
FNMA in the revocation and termination of FNMA's consent to the Jupiter


                                     -21-
<PAGE>   22

Amendments, in which event the Company would be in default under the FNMA
Facility.  FNMA has agreed to release the Standby Commitment in the event that
(i) the Company reverses the Jupiter Amendments or (ii) the Company becomes the
owner of substantially all of the ownership interests in Jupiter-I, L.P., and a
subsidiary of the Company guarantees certain obligations to FNMA under the FNMA
Facility.

     The Company expects to meet its liquidity requirements including, for
example, scheduled debt maturities, future property acquisitions and capital
improvements, using its cash flow from operating activities or cash provided by
collateralized or uncollateralized borrowings, including the NACC Revolving
Loan and the CLNY Unsecured Line of Credit. The Company, with the assistance of
its financial advisor Merrill Lynch, is continuing to evaluate strategic
alternatives for improving shareholder value.  In addition, the Company
believes that it would be desirable, and has and will continue to evaluate
various courses of action, to increase its debt financing, equity capital and
liquidity position, while at the same time evaluating the possible impact of
any such action on the Company's efforts to improve shareholder value.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED
SEPTEMBER  30, 1996

     Cash and cash equivalents increased $1.5 million to $5.5 million at
September 30, 1997 as compared to December 31, 1996.  This increase is
primarily attributable to an increase in net cash provided by operating
activities and a decrease in net cash used in investing activities, partially
offset by a decrease in net cash provided by financing activities.

     Net cash provided by operating activities increased $7.0 million to $20.3
million for the nine-month period ended September 30, 1997, when compared to
the same period in 1996.  The primary reason for this increase was an increase
in operating cash flow as a result of the purchase of the Additional Properties
as more fully described in Results of Operations and the Company paying the
majority of its 1996 real estate taxes in December 1996, compared to paying its
1995 real estate taxes in the first quarter of 1996.

     Net cash used in investing activities decreased $27.9 million to $37.9
million for the nine-month period ended September 30, 1997, when compared to
the same period in 1996.  This decrease was primarily caused by a reduction in
the number of units acquired during the nine-month period ended September 30,
1997 (1,164 units) when compared to the same period in 1996 (2,438 units).

     Net cash provided by financing activities decreased $30.8 million to $19.1
million for the nine-month period ended September 30, 1997, when compared to
the same period in 1996.  This decrease is primarily attributable to a decrease
in proceeds from equity transactions, an increase in deferred financing fees
paid and a decrease in proceeds received from the Company's short-term
borrowings.  These decreases were partially offset by an increase in proceeds
received from new bond issues.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995

     Except for historical matters, the matters discussed in this Form 10-Q are
forward-looking statements that involve risks and uncertainties.  The Company
wishes to caution readers that in addition to the important factors described
elsewhere in this Form 10-Q, the following important factors, among others,
sometimes have affected and in the future could affect the Company's actual
results and could cause the Company's actual results during fiscal 1997 and
beyond to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company.

                                     -22-

<PAGE>   23


     FINANCING RISKS.  Increases in interest rates on the Company's
variable-rate debt, or the inability of the Company to refinance its
indebtedness, to obtain additional or replacement credit facilities upon the
expiration or termination of existing facilities, to replace any credit
enhancement with respect to its credit-enhanced bonds or to remarket any of its
bonds on acceptable terms or at all, could increase the Company's interest
expense, force the Company to dispose of one or more of its properties upon
disadvantageous terms, or result in a loss of the applicable property or pool
of properties securing such obligation by foreclosure or otherwise.

     RISKS OF EQUITY REAL ESTATE INVESTMENTS.  Changes in the national and
regional economic climates, changes in local real estate conditions such as the
oversupply of apartments or a reduction in demand for apartments, competition
from single family housing, apartment properties and other forms of multifamily
residential housing, the inability to provide adequate maintenance and to
obtain adequate insurance, increased operating costs, changes in zoning,
building, environmental, rent control and other laws and regulations, the costs
of compliance with current and future laws, changes in real property taxes and
acts of God (such as earthquakes and floods) and other factors beyond the
control of the Company may adversely affect the income from, and value of, the
Company's properties.

     RISKS OF RENOVATION AND ACQUISITIONS.  Construction delays or cost
overruns, the risk that occupancy or rental rates upon completion of a project
will not meet expectations, and the risk of incurrence of predevelopment costs
in connection with projects that are not pursued to completion, could adversely
affect the results of operations from any such property or the return on
investment that the Company recognizes in connection with the renovation of
existing properties.  The acquisition of existing properties entails risks that
investments will fail to perform in accordance with expectations, and that
judgments with respect to the costs of improvements to bring an acquired
property up to standards established for the market position intended for that
property will prove inaccurate, as well as general investment risks associated
with any new real estate investment.

     FAILURE TO QUALIFY AS A REIT.  If the Company fails to qualify as a REIT
in any taxable year, the Company would not be allowed a deduction for
distributions to stockholders in computing taxable income, and such
distributions would be subject to federal income tax at regular corporate
rates.  If the Operating Partnership or any of its subsidiary partnerships were
to fail to qualify as a partnership for federal income tax purposes, such
entity would be taxable as a corporation, and the Company could cease to
qualify as  REIT for federal income tax purposes.

                                     -23-
<PAGE>   24




                                    PART II

Other Information

Item 1.  Legal Proceedings

         There are no material legal proceedings.

Item 2.  Changes in Securities

         None

Item 3.  Defaults Upon Senior Securities


         The Company entered into certain amendments to the Jupiter-I, L.P.
Partnership Agreement and a related document (the "Jupiter Amendments") without
FNMA's consent as required under the FNMA Facility, which FNMA asserted as a
non-monetary default under the FNMA Facility.  On November 12, 1997, FNMA
consented to the Jupiter Amendments effective as of the date the Jupiter
Amendments were executed and confirmed that, as a result of such consent, there
is not continuing a default under the FNMA Facility.  For further information
about this matter, including an agreement by the Company to use its good faith
efforts to reverse the Jupiter Amendments, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Sources and Uses of Cash".


Item 4.  Submission of Matters to a Vote of Security Holders

         None

Item 5.  Other Information

         None

                                     -24-


<PAGE>   25

                              PART II (continued)

Item 6. Exhibits or Reports on Form 8-K

     (a) Exhibits

             10.77 Amended and Restated Agreement of Limited
                   Partnership dated December 18, 1996 of Jupiter I, L.P. among
                   the Company and Yugenkaisha Sankyo Sekiyu.

             10.78 The Second Amendment to Revolving Credit
                   Agreement dated September 30, 1997, by and between the
                   Company and Credit Lyonnais New York Branch.

             10.79 Amendment to Note Agreement dated September
                   30, 1997, between the Company and Nomura Asset Capital
                   Corporation.

             10.80 Resignation and Release Agreement dated August
                   22, 1997 by and between the Company and Adam D. Peterson.

             27.1  Financial Data Schedule

     (b) Reports on Form 8-K

             The Company filed a current report on Form 8-K dated August 25,
             1997, reporting under Item 5 disclosing earnings estimate for 1997
             Funds From Operations, engaging an advisor to maximize shareholder
             value, extension of NACC Revolving Loan, resignation of Adam
             Peterson as Chief Financial Officer, and a telephone conference
             for analysts and investors.

                                     -25-
<PAGE>   26



                                   SIGNATURES

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


                                AMBASSADOR APARTMENTS, INC.
                                Registrant



Date: November 13, 1997                /s/ Thomas J. Coorsh
                                       ------------------------------
                                       Thomas J. Coorsh
                                       Senior Vice President and
                                       Chief Financial Officer











                                     -26-