<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 March 31, 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                              (I.R.S. Employer 
incorporation 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 periods 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 May 13, 1997 the registrant had outstanding 9,176,180 shares of
         Common Stock, $.01 par value per share.
<PAGE>   2

                         AMBASSADOR APARTMENTS, INC.                   Form 10-Q

                                     INDEX

<TABLE>
<S>                                                                                               <C>
Part I: Financial Information                                                                     Page
-----------------------------                                                                     ----

Item 1. Financial Statements (Unaudited)

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

          Consolidated statements of operations of Ambassador Apartments, Inc. for the  
          quarter ended March 31, 1997 and 1996, respectively. . . . . . . . . . . . . . . . . . .  5

          Consolidated statements of cash flows of Ambassador Apartments, Inc. for the 
          quarter ended March 31, 1997 and 1996, respectively  . . . . . . . . . . . . . . . . . .  6

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

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of 
          Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Part II: Other Information
--------------------------

Item 1.   Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2.   Changes in Securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 3.   Defaults Upon Senior Securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 4.   Submission of Matters to a Vote of Security Holders  . . . . . . . . . . . . . . . . . . 21
Item 5.   Other Information  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6.   Exhibits or Reports on Form 8-K  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
                                                                                                  
Signature  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</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 financial statements should be read in conjunction with the notes
to the 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 MARCH 31, 1997 AND DECEMBER 31, 1996
              (Dollars in thousands, except for per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                  MARCH 31,                 DECEMBER 31,
                                                                     1997                       1996
                                                            ---------------------       -------------------
<S>                                                         <C>                         <C>           
ASSETS
Rental property:
   Land . . . . . . . . . . . . . . . . . . . . . . . .     $              85,139       $            82,124
   Buildings and improvements . . . . . . . . . . . . .                   422,634                   407,002
   Furniture and equipment  . . . . . . . . . . . . . .                     6,527                     6,166
                                                            ---------------------       -------------------
                                                                          514,300                   495,292
Accumulated depreciation  . . . . . . . . . . . . . . .                   (37,683)                  (33,340)
                                                            ---------------------       -------------------
                                                                          476,617                   461,952

Cash and cash equivalents . . . . . . . . . . . . . . .                     2,292                     4,002
Escrow deposits . . . . . . . . . . . . . . . . . . . .                    31,523                    30,897
Bond funds--restricted  . . . . . . . . . . . . . . . .                       758                       549
Note receivable - Officer . . . . . . . . . . . . . . .                     1,000                     1,000
Accounts receivable . . . . . . . . . . . . . . . . . .                     1,868                     1,870
Investment in unconsolidated real estate limited
   partnerships . . . . . . . . . . . . . . . . . . . .                     3,541                     4,549
Deferred financing costs, net . . . . . . . . . . . . .                     9,842                     9,640
Other . . . . . . . . . . . . . . . . . . . . . . . . .                     2,079                     1,325
                                                            ---------------------       -------------------
TOTAL ASSETS  . . . . . . . . . . . . . . . . . . . . .     $             529,520       $           515,784
                                                            =====================       ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
Bonds payable . . . . . . . . . . . . . . . . . . . . .     $             297,923       $           279,355
Notes payable . . . . . . . . . . . . . . . . . . . . .                    76,264                    79,974
Accrued interest  . . . . . . . . . . . . . . . . . . .                     1,766                       913
Real estate taxes payable . . . . . . . . . . . . . . .                     2,631                     3,837
Tenant security deposits  . . . . . . . . . . . . . . .                     2,339                     2,231
Accounts payable and other liabilities  . . . . . . . .                     2,727                     2,138
Distributions/dividends payable . . . . . . . . . . . .                       730                       750
                                                            ---------------------       -------------------
Total liabilities . . . . . . . . . . . . . . . . . . .                   384,380                   369,198
                                                            ---------------------       -------------------

Minority interest . . . . . . . . . . . . . . . . . . .                    31,528                    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  . . . . . . . . . . . . . . . . . . . .                    24,123                    24,132
Stockholders' equity:
   Common Stock, $.01 par value; 100,000,000
      shares authorized, 9,176,180 and 8,958,525
      shares issued and outstanding at March 31, 1997
      and December 31, 1996, respectively   . . . . . .                        91                        90
   Additional paid-in capital . . . . . . . . . . . . .                   114,832                   112,975
   Distributions in excess of accumulated earnings. . .                   (25,434)                  (22,617)
                                                            ---------------------       -------------------
Total stockholders' equity  . . . . . . . . . . . . . .                    89,489                    90,448
                                                            ---------------------       -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  . . . . . .     $             529,520       $           515,784
                                                            =====================       ===================
</TABLE>

See accompanying notes to consolidated financial statements.





                                      -4-
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                                   QUARTER ENDED             Quarter Ended
                                                                   MARCH 31, 1997           March 31, 1996
                                                               ---------------------     --------------------
<S>                                                            <C>                       <C>          
REVENUES:
  Rental  . . . . . . . . . . . . . . . . . . . . . . . . .    $              20,306     $             14,452
  Other   . . . . . . . . . . . . . . . . . . . . . . . . .                    1,475                    1,173
                                                               ---------------------     --------------------
      Total revenue . . . . . . . . . . . . . . . . . . . .                   21,781                   15,625

EXPENSES:
  Property operating  . . . . . . . . . . . . . . . . . . .                    4,794                    3,510
  Real estate taxes   . . . . . . . . . . . . . . . . . . .                    2,063                    1,477
  General and administrative  . . . . . . . . . . . . . . .                    1,320                    1,290
  Depreciation  . . . . . . . . . . . . . . . . . . . . . .                    4,343                    2,812
  Advertising and marketing   . . . . . . . . . . . . . . .                      670                      266
  Repairs and maintenance   . . . . . . . . . . . . . . . .                      448                      519
  Bad debt expense  . . . . . . . . . . . . . . . . . . . .                       81                      135
  Financing fees  . . . . . . . . . . . . . . . . . . . . .                      695                      881
  Interest  . . . . . . . . . . . . . . . . . . . . . . . .                    5,285                    2,579
  Amortization of deferred financing fees   . . . . . . . .                      211                      715
  Losses from unconsolidated real estate
      limited partnership . . . . . . . . . . . . . . . . .                       94                       86
                                                               ---------------------     --------------------
      Total expenses  . . . . . . . . . . . . . . . . . . .                   20,004                   14,270
                                                               ---------------------     --------------------
  Income before allocation to minority interest and loss
      from sale of interest rate cap  . . . . . . . . . . .                    1,777                    1,355
  Income allocated to minority interest   . . . . . . . . .                     (396)                    (195)
                                                               ---------------------     --------------------
  Income before loss on sale of interest rate cap   . . . .                    1,381                    1,160
  Loss on sale of interest rate cap, net of minority                              
      interest  . . . . . . . . . . . . . . . . . . . . . .                       --                   (2,084)
                                                               ---------------------     --------------------
  Net income (loss)   . . . . . . . . . . . . . . . . . . .                    1,381                     (924)
  Income allocated to preferred stockholders  . . . . . . .                     (568)                      -- 
                                                               ---------------------     --------------------
  Net income (loss) applicable to common stockholders   . .                      813                     (924)
                                                               =====================    =====================
  Net income per share of Common Stock outstanding  . . . .    $                0.09    $               (0.10)
                                                               =====================    =====================
  Weighted average common shares outstanding  . . . . . . .                9,058,259                8,958,525 
                                                               =====================    =====================
</TABLE>


See accompanying notes to consolidated financial statements.





                                      -5-
<PAGE>   6

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

<TABLE>
<CAPTION>
                                                                 Quarter Ended             Quarter Ended
                                                                March 31, 1997             March 31, 1996
                                                             --------------------       -------------------
<S>                                                          <C>                        <C>           
OPERATING ACTIVITIES
   Net income (loss)  . . . . . . . . . . . . . . . . . .    $              1,381       $              (924)
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
      Depreciation  . . . . . . . . . . . . . . . . . . .                   4,343                     2,812
      Bad debt expense  . . . . . . . . . . . . . . . . .                      81                       135
      Amortization of deferred financing fees . . . . . .                     211                       715
      Minority interest . . . . . . . . . . . . . . . . .                     396                       195
      Loss from sale of interest rate cap . . . . . . . .                      --                     2,084
      Losses from unconsolidated real estate limited
          partnerships  . . . . . . . . . . . . . . . . .                      94                        86
      Changes in operating assets and liabilities:
          Accounts receivable . . . . . . . . . . . . . .                     (79)                      306
          Other assets  . . . . . . . . . . . . . . . . .                    (754)                       77
          Accrued interest payable  . . . . . . . . . . .                     853                        16
          Real estate taxes payable . . . . . . . . . . .                  (1,206)                   (2,857)
          Tenant security deposits  . . . . . . . . . . .                     108                         6
          Accounts payable and other liabilities  . . . .                     589                    (1,107)
                                                             --------------------       -------------------
          Net cash provided by operating activities . . .                   6,017                     1,544
INVESTING ACTIVITIES
   Purchase of rental property  . . . . . . . . . . . . .                  (2,137)                  (10,905)
   Repayment of advances from unconsolidated real estate
      limited partnerships  . . . . . . . . . . . . . . .                     914                        --
   Improvements to rental property  . . . . . . . . . . .                  (3,621)                   (3,879)
                                                             --------------------       -------------------
      Cash used in investing activities . . . . . . . . .                  (4,844)                  (14,784)
FINANCING ACTIVITIES
   Net proceeds from joint venture partner  . . . . . . .                      --                    21,794
   (Increase) decrease in escrowed bond funds-restricted                     (209)                      417
   Proceeds from bonds payable  . . . . . . . . . . . . .                   6,000                        --
   Repayment of bonds payable . . . . . . . . . . . . . .                    (682)                       --
   Proceeds from notes payable  . . . . . . . . . . . . .                  21,500                    30,205
   Repayment of notes payable . . . . . . . . . . . . . .                 (25,210)                  (36,815)
   Proceeds from sale of interest rate cap  . . . . . . .                      --                     1,485
   Deferred financing fees paid . . . . . . . . . . . . .                  (1,802)                     (708)
   Distributions paid to minority interest  . . . . . . .                    (894)                     (388)
   Partner capital contributions  . . . . . . . . . . . .                   1,320                         3
   Proceeds received from exercise of stock options . . .                   1,918                        --
   Dividends paid to preferred stockholders . . . . . . .                    (568)                       --
   Dividends paid to common stockholders  . . . . . . . .                  (3,630)                   (3,584)
   Escrow deposits  . . . . . . . . . . . . . . . . . . .                    (626)                     (804)
                                                             --------------------       -------------------
      Net cash (used in) provided by financing activities                  (2,882)                   11,605
                                                             --------------------       -------------------
   Net decrease in cash . . . . . . . . . . . . . . . . .                  (1,710)                   (1,635)
   Cash and cash equivalents at beginning of period . . .                   4,002                     5,270
                                                             --------------------       -------------------
   Cash and cash equivalents at end of period . . . . . .    $              2,292       $             3,635
                                                             ====================       ===================
</TABLE>

See accompanying notes to consolidated financial statements.





                                      -6-
<PAGE>   7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

         The accompanying unaudited 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 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
have a majority interest in, or control of, 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.

DEVELOPMENT COSTS

         All property renovation costs including construction, design and other
similar renovation costs incurred during the renovation period are capitalized
to rental property.

CASH EQUIVALENTS

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





                                      -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 impact is
expected to result in an increase in primary earnings per share for the first
quarter ended March 31, 1997 and March 31, 1996 of $0.01 per share.  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:

<TABLE>
         <S>                                                                               <C>
         Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    30-40 years
         Building improvements  . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5-30 years
         Furniture and equipment  . . . . . . . . . . . . . . . . . . . . . . . . . . .     3-12 years
</TABLE>

         Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred.  Significant renovations and improvements which improve
and/or extend the useful life of the asset are capitalized and depreciated over
the estimated useful life.

2.       REAL ESTATE ACQUISITION AND DEBT

         On June 26, 1996, the Company refinanced its revolving credit facility
with Nomura Asset Capital Corporation ("NACC") with a facility from Bank One
Arizona, NA (the "Revolving Loan").  The Revolving Loan bears interest at a
variable rate between LIBOR plus 1.70% and 1.95% (as defined in the Revolving
Loan Credit Agreement) and has a maximum commitment of $75.0 million based upon
the amount of collateral pledged by the Company.  As of March 31, 1997, seven
properties are pledged as collateral under the Revolving Loan and $38.8
million, the maximum amount that the Company can currently borrow under the
Revolving Loan without pledging additional collateral, is outstanding.  The
Revolving Loan matures on June 26, 1999.  The Company may request one-year
extensions pursuant to the terms of the Revolving Credit Agreement.





                                      -8-
<PAGE>   9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


2.       REAL ESTATE ACQUISITION AND DEBT (continued)

         The Company was not in compliance with certain covenants relating to
its Revolving Loan as of March 31, 1997.  However, the Company has obtained a
waiver covering the period through June 30, 1997 and is currently negotiating
with Bank One Arizona, NA to modify the loan agreement.  The ultimate outcome
of their negotiations cannot be determined at this time.

         On March 5, 1997, NACC provided a $21.5 million fixed-rate loan
secured by the Country Club West and Courtney Park properties.  Pursuant to the
terms of the Loan Agreement, the Company is making monthly principal and
interest payments based on a 30-year amortization at a fixed rate of 8.08% per
annum.  The NACC loan matures on March 11, 2027.  The net proceeds from the
NACC loan closing were used to repay outstanding principal under the Revolving
Loan.

         On March 6, 1997, The Industrial Development Authority of the City of
Phoenix, Arizona issued $6.0 million of variable-rate, tax-exempt bonds (the
"Crossroads Bonds") for the benefit of the Crossroads property.  The Crossroads
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
Crossroads Bonds are credit enhanced by a credit facility (the "FNMA Facility")
issued by Federal National Mortgage Association ("FNMA") as discussed in note 2
to the 1996 Annual Report on Form 10-K.

         Effective March 3, 1997, the Company entered into a swap transaction
with Credit Lyonnais New York ("CLNY") in order to hedge itself against
interest rate fluctuations with respect to the Crossroads Bonds.  Pursuant to
the terms of the swap agreement, the Company will pay a fixed rate of 4.85% per
annum on a notional amount of $6.0 million and receive a variable rate based on
the PSA Municipal Index.  The swap agreement terminates on March 3, 2004.

         On March 13, 1997, the Company acquired the Palencia property for
$14.9 million.  Palencia is a 420-unit apartment complex located in Tampa,
Florida.  The Company financed the acquisition by assuming $13.3 million of
fixed-rate, tax-exempt bonds and funding the remainder from working capital.
Pursuant to the terms of the loan agreement, the bonds bear interest at a fixed
rate of 7.65% per annum and mature on March 1, 2024.  The bonds are
collateralized by the Palencia property.

3.       ESCROWED BOND FUNDS--RESTRICTED

         As of March 31, 1997, the Company had $758,464 in escrow, of which
approximately $200,000 relates to the Crossroads property and the remainder to
those properties owned by Ambassador I, L.P., a partnership in which the
Company holds a 50.1% general partnership interest.  The escrow monies will be
used to complete certain renovation projects associated with tax-exempt bond
requirements on those properties.





                                      -9-
<PAGE>   10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.       STOCK OPTION PLAN

         Pursuant to the 1994 stock incentive plan, as amended, (the "1994
Stock Incentive Plan") and the 1996 stock incentive plan (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 March 31, 1997, 116,000
options were exercised under the Stock Incentive Plan at prices ranging from
$15.25 to $18.50 per share of Common Stock.  No  additional stock options were
granted during the quarter ended March 31, 1997.  At March 31, 1997, options
for 1,667,500 shares of Common Stock are available for grant under the Stock
Incentive Plan.  The Stock Incentive Plan is subject to shareholder approval at
the Annual Meeting of Stockholders held on May 15, 1997.

5.       DECLARATION OF DISTRIBUTIONS TO STOCKHOLDERS AND LIMITED PARTNERS

         On April 30, 1997, the Board of Directors of the Company declared a
 quarterly dividend of $0.40 per share to the Common Stockholders of the
 Company for the quarter ended March 31, 1997.  The dividends are payable on
 May 15, 1997, to holders of record as of May 12, 1997.  The Board of Directors
 of the Company also authorized a quarterly dividend in the amount of $567,567
 on April 30, 1997, to the holder of Class A Senior Cumulative Convertible
 Preferred Stock ("Class A Preferred Stock") for the quarterly period ended
 March 31, 1997.  The Class A Preferred Stock dividend is payable on May 15,
 1997.

         On April 30, 1997, the Board of Directors of the Company also
authorized distribution payments of $358,127, or $0.40 per unit holder, to
limited partners of the Operating Partnership for the quarter ended March 31,
1997.  The distributions are payable on May 15, 1997.

6.       SAVINGS PLAN

         Effective January 1, 1996, the Company established an employee
retirement plan with a salary deferral retirement feature. The plan qualifies
under section 401 of the Internal Revenue Code (the "401(k) Plan") and permits
employees of the Company to defer a portion of their compensation in accordance
with the provisions of section 401(k) of the Code.  The 401(k) Plan allows
participants to defer up to 15% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts.  In addition, a  profit-sharing
feature of the 401(k) Plan provides for a contribution to be made annually by
the Company on behalf of each participant in an amount, if any, as determined
by the Company, based upon a to-be-determined percentage of increases in
profitability from year to





                                      -10-
<PAGE>   11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


6.       SAVINGS PLAN (continued)

year.  Amounts contributed by the Company on behalf of the participant will
vest ratably over a period of five years (20% per year).  Amounts contributed
by the Company and by the participants will be held in trust until distributed
to the participant pursuant to the provisions of the 401(k) Plan.

         In February 1997, the Company contributed a total of $33,000 on behalf
of the participants.  This amount was accrued on December 31, 1996, and was
included in accounts payable and other liabilities on the December 31, 1996
Consolidated Balance Sheet.

7.       OTHER

         On March 6, 1997, the Company issued 17,280 and 84,375 shares of
Common Stock to Richard F. Cavenaugh, a former executive officer of the
Company, and LG Trust, a trust in which Mr. Cavenaugh is the trustee and a
beneficiary, respectively, in exchange for an equal number of Common Units
pursuant to the terms of the Exchange Rights Agreement, dated as of August 31,
1994, among the Company, Mr. Cavenaugh, LG Trust and others.  In  March 1997,
LG Trust sold its shares of Common Stock and used a portion of the proceeds to
repay the $1.35 million note plus accrued interest that the Operating
Partnership had made to LG Trust to acquire the Common Units.  Also in March
1997, Mr. Cavenaugh sold 17,280 shares of Common Stock issued by the Company,
as described above.

8.       SUBSEQUENT EVENTS

         On April 17, 1997, the Company refinanced $8.5 million of fixed rate
bonds issued by The Industrial Development Board of the Metropolitan Government
of Nashville and Davidson County (the "Bellevue Bonds") and secured by the
Crossings of Bellevue property.  The Bellevue Bonds bear interest at a floating
rate that is reset weekly by the remarketing agent at a minimum rate required
to remarket the bonds at par.  The Bellevue Bonds are now credit enhanced by
FNMA and are included in the FNMA Facility.  The Bellevue Bonds mature on
December 15, 2027.

         Effective April 17, 1997, the Company entered into an interest rate
cap agreement with CLNY at a purchase price of  $756,370 to protect itself from
interest rate fluctuations with respect to the Bellevue Bonds and the Ashford
Bonds, as defined below.  Pursuant to the terms of the interest rate cap
agreement, the Company's interest rate is limited to 4.95% per annum on a
notional amount of $17.6 million.  The interest rate cap agreement terminates
on April 17, 2004.

         On April 25, 1997, The Harris County Housing Finance Corporation
issued $9.1 million of variable-rate, tax-exempt bonds (the "Ashford Bonds")
for the benefit of the Trails of Ashford property.  The Ashford 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 Ashford Bonds are
credit





                                      -11-
<PAGE>   12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8.       SUBSEQUENT EVENTS (continued)

enhanced by FNMA and are included in the FNMA Facility.  The Ashford Bonds
mature on December 15, 2036.

         On April 25, 1997, The Harris County Housing Finance Corporation also
issued $4.0 million in variable-rate, taxable bonds (the "Sandalwood Bonds")
for the benefit of the Sandalwood property.  The Sandalwood 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 Sandalwood Bonds are credit
enhanced by FNMA and are included in the FNMA Facility.  The Sandalwood Bonds
are considered taxable to the holders of the bonds and will remain as such
until tax-exempt bond allocation becomes available to the Sandalwood property.
The Sandalwood Bonds mature on December 15, 2036.

         Effective April 25, 1997, the Company entered into an interest rate
cap agreement with CLNY at a purchase price of  $234,000 to protect itself from
interest rate fluctuations with respect to the Sandalwood Bonds.  Pursuant to
the terms of the interest rate cap agreement, the Company's interest rate is
limited to 6.5% per annum on a notional amount of $4.0 million.  The interest
rate cap agreement terminates on April 26, 2004.

9.       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.





                                      -12-
<PAGE>   13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10.      PRO FORMA INFORMATION - UNAUDITED

         The following unaudited table of pro forma information has been
prepared as if the Company's acquisitions in 1996 and 1997 had all occurred as
of the beginning of each quarter 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 Quarter Ended March 31
                (Dollars in thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                           1997                        1996
                                                   ---------------------       ---------------------
  <S>                                              <C>                         <C>          
  Total Revenue . . . . . . . . . . . . . . .      $              22,405       $              21,884
  Property Operating  . . . . . . . . . . . .                      9,533                       9,595
  Depreciation and Amortization . . . . . . .                      4,740                       4,800
  Interest  . . . . . . . . . . . . . . . . .                      6,499                       6,317
                                                   ---------------------       ---------------------
  Total expenses  . . . . . . . . . . . . . .                     20,772                      20,712
                                                   ---------------------       ---------------------
  Income Before Minority Interest and loss from
    sale of interest rate cap   . . . . . . .      $               1,633       $               1,172
                                                   =====================       =====================
  Income per share of Common Stock  . . . . .      $                0.16       $                0.12
                                                   =====================       =====================
</TABLE>

         The pro forma financial information includes the following
adjustments:  (i) an increase to rental revenues and property operating
expenses 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 to
reflect four separate issuances of tax-exempt bonds; (iv) a decrease in
amortization in 1997 to the FNMA Facility transaction; and (v) 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 that all limited partnership interests in the Operating
Partnership have been converted to shares of Common Stock; therefore, the total
Common Stock outstanding at January 1, 1996 and January 1, 1997 would have been
9,922,508 and 10,071,498, respectively.





                                      -13-
<PAGE>   14

 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  March 31, 1997, the Company owned
50 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.  The Company has adopted NAREIT's
current method for computing FFO, and all references to FFO in this Form 10-Q
reflect NAREIT's current computation method.

<TABLE>
<CAPTION>
                                                                 (In 000's)
                                                           ---------------------
                                                           For the Quarter Ended
                                                              March 31, 1997
                                                           ---------------------
     <S>                                                        <C>   
                                                                
     Net income before minority interest and                          
        loss from sale of interest rate cap  . . . . . . . .    $     1,777      
     FFO Adjustments:                                                 
     Depreciation  . . . . . . . . . . . . . . . . . . . . .          4,343
     Adjustments to joint ventures . . . . . . . . . . . . .            189
     Other non-recurring FFO adjustments . . . . . . . . . .             23
                                                                -----------
     Funds from operations . . . . . . . . . . . . . . . . .    $     6,332
                                                                ===========
     FFO per share (1) . . . . . . . . . . . . . . . . . . .    $      0.52
                                                                ===========
</TABLE>

      (1)   FFO per share is based upon 12,263,458 fully diluted shares
            outstanding.





                                      -14-
<PAGE>   15

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (continued)

RESULTS OF OPERATIONS

   During the twelve-month period from March 31, 1996 through March 31, 1997,
the Company acquired 13 properties containing 4,092 units from unaffiliated
third-party sellers (the "Additional Properties").  In addition, four separate
issuances of tax-exempt bonds totaling $27.1 million (the "New Bonds") occurred
during the twelve-month period from March 31, 1996 through March 31, 1997, to
reimburse acquisition and renovation costs on four 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, and $4.3 million and $6.0
million of fixed-rate, tax-exempt bonds were issued on April 17, 1996 and May
1, 1996, for the benefit of Cypress Ridge and Broadmoor properties,
respectively.  In addition, on August 20, 1996, the Company acquired four
properties: Haverhill Commons, Village Crossing, the Arbors and Ocean Oaks
(collectively, the "Florida Properties").  In connection with the acquisition
of the Florida Properties, the Company assumed $39.0 million in face amount of
tax-exempt bonds (the "Florida Bonds").  The Florida Bonds are secured by the
four Florida Properties.  In addition, on October 1, 1996 and November 21,
1996, the Company acquired the Crossings of Bellevue and Sun Lake properties,
respectively.  In connection with the acquisition of these two properties, the
Company assumed $24.1 million in variable-rate, tax-exempt bonds.

         The acquisition of the Additional Properties, the assumption of
tax-exempt bonds associated with the purchase of the Additional Properties and
the New Bonds included in the consolidated financial statements of the Company
accounted for the significant changes in operating results for the three months
ended March 31, 1997, when compared to the same period in 1996.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 TO THE THREE MONTHS ENDED
MARCH 31, 1996.

         For the three months ended March 31, 1997, income before allocation to
minority interest  and loss from sale of interest rate cap increased $422,000
to $1.8 million when compared to the same period in 1996.  This increase was
primarily due to increases in total revenues, partially offset by increases in
total expenses.  The aforementioned items are discussed in greater detail
below.

         Total revenues increased by $6.2 million, or 39.4%, to $21.8 million,
for the three-month period ended March 31, 1997, when compared with the same
period in 1996.  Of this increase, approximately $5.9 million is attributable
to the acquisition of the Additional Properties.

         Total expenses (exclusive of depreciation, amortization of deferred
financing fees and interest expense) increased $2.0 million, or 24.5%, to $10.2
million for the three months ended March 31, 1997, when compared with the same
period in 1996.  Property operating expenses increased $1.3 million,  primarily
due to the acquisition of the Additional Properties.  Real estate taxes
increased approximately $586,000.  Of this increase in real estate taxes,
$557,000 related to the purchase of the Additional Properties.  Repairs and
maintenance decreased $71,000 primarily attributable to





                                      -15-
<PAGE>   16

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (continued)

properties, previously in the operational stage, undergoing renovation during
the first quarter of 1997.  Financing fees decreased $186,000 primarily
resulting from the Company replacing its existing credit enhancement on
approximately $203.0 million of variable-rate, tax-exempt bonds with the FNMA
Facility (as defined below).  Management believes that approximately $1.0
million in annual credit enhancement savings will be realized for the Company
as a result of the FNMA Facility transaction.

         Depreciation and amortization increased $1.0 million, or 29.1%, to
$4.6 million for the three- month period ended March 31, 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 the
write-off of approximately $5.8 million of deferred financing costs in the
fourth quarter of 1996.  The Company incurred approximately $4.1 million of
deferred financing costs as a result of the FNMA 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 $2.7 million to $5.3 million for the
three-month period ended March 31, 1997, when compared to the same period in
1996.  This increase is primarily attributable to interest costs associated
with the issuance of the New Bonds and the bonds assumed by the Company in
connection with the acquisition of the Additional Properties during the
twelve-month period April 1, 1996 through March 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH

         Interest rates on approximately $210.7 million (including the
non-consolidated Williamsburg property) of the Company's variable-rate,
tax-exempt bonds as of March 31, 1997, are determined weekly by a remarketing
agent at the minimum interest rate necessary for the bonds to be remarketed at
par.  While these bonds are remarketed at variable rates, as of March 31, 1997,
the Company has successfully hedged all of its variable-rate, tax-exempt bonds
through interest rate swaps.

         On December 9, 1996, the Company entered into a swap transaction with
CLNY in which the Company pays a fixed rate of 4.64% per annum on a notional
amount of $186.5 million and receives a floating rate based upon the PSA
Municipal Swap Index.  This swap agreement matures on December 9, 2003 and
replaced two LIBOR-based swaps the Company had previously entered into with
Nomura Capital Services, Inc. ("NCSI") ($94 million entered into on May 26,
1995, and $17.0 million on March 14, 1996).  It remains management's primary
objective, with respect to its long-term financing, to obtain the lowest cost
of capital available in the marketplace while at the same time protecting the
Company from interest rate fluctuations.





                                      -16-
<PAGE>   17

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (continued)

         On March 5, 1997, Nomura Asset Capital Corporation ("NACC") provided a
$21.5 million fixed rate loan secured by the Country Club West and Courtney
Park properties.  Pursuant to the terms of the Loan Agreement, the Company is
making monthly principal and interest payments based on a 30-year amortization
at a fixed rate of 8.08% per annum.  The net proceeds from the loan closing
were used to repay outstanding principal under the Company's revolving credit
facility at Bank One Arizona, NA (the "Revolving Loan").  The NACC loan matures
on March 11, 2027.

         On March 6, 1997, The Industrial Development Authority of the City of
Phoenix, Arizona issued $6.0 million of variable-rate, tax-exempt bonds (the
"Crossroads Bonds") for the benefit of the Crossroads property.  The Crossroads
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
Crossroads Bonds are credit enhanced by a credit facility (the "FNMA Facility")
issued by Federal National Mortgage Association ("FNMA").

         Effective March 3, 1997, the Company entered into a swap transaction
with Credit Lyonnais New York ("CLNY") in order to hedge itself against
interest rate fluctuations with respect to the Crossroads Bonds.  Pursuant to
the terms of the swap agreement, the Company will pay a fixed rate of 4.85% per
annum on a notional amount of $6.0 million and receive a variable rate based on
the PSA Municipal Index.  The swap agreement terminates on March 3, 2004.

         On March 6, 1997, the Company issued 17,280 and 84,375 shares of
Common Stock to Richard F. Cavenaugh, a former executive officer of the
Company, and LG Trust, a trust in which Mr. Cavenaugh is the trustee and a
beneficiary, respectively, in exchange for an equal number of Common Units
pursuant to the terms of the Exchange Rights Agreement, dated as of August 31,
1994, among the Company, Mr. Cavenaugh, LG Trust and others.  In March 1997, LG
Trust sold its shares of Common Stock and used a portion of the proceeds to
repay the $1.35 million note plus accrued interest that the Operating
Partnership had made to LG Trust to acquire the Common Units.  Also in March
1997, Mr. Cavenaugh sold 17,280 shares of Common Stock issued by the Company,
as described above.

         On March 13, 1997, the Company acquired the Palencia property for
$14.9 million.  Palencia is a 420-unit apartment complex located in Tampa,
Florida.  The Company financed the acquisition by assuming $13.3 million of
fixed-rate, tax-exempt bonds and funding the remainder from working capital.
Pursuant to the terms of the loan agreement, the bonds bear interest at a fixed
rate of 7.65% per annum and mature on March 1, 2024.  The bonds are
collateralized by the Palencia property.

         On April 17, 1997, the Company refinanced $8.5 million of its
fixed-rate bonds issued by The Industrial Development Board of the Metropolitan
Government of Nashville and Davidson County (the "Bellevue Bonds") and secured
by the Crossings of Bellevue property.  The Bellevue Bonds bear interest at a
floating rate that is reset weekly by the remarketing agent at a minimum rate
required to remarket the bonds at par.  The Bellevue Bonds are credit enhanced
by FNMA and are included in the FNMA Facility.  The Bellevue Bonds mature on
December 15, 2027.





                                      -17-
<PAGE>   18

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (continued)

         Also on April 17, 1997, the Company entered into an interest rate cap
agreement with CLNY for $756,370 to protect itself from interest rate
fluctuations with respect to the Bellevue Bonds and the Ashford Bonds, as
defined below.  Pursuant to the terms of the interest rate cap agreement, the
Company's interest rate is limited to 4.95% per annum on a notional amount of
$17.6 million.  The cost of the cap is included in deferred financing costs and
is being amortized over seven years.  The interest rate cap agreement
terminates on April 17, 2004.

         On April 25, 1997, The Harris County Housing Finance Corporation
issued $9.1 million of variable-rate, tax-exempt bonds (the "Ashford Bonds")
for the benefit of the Trails of Ashford property.  The Ashford 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 Ashford Bonds are
credit enhanced by FNMA and are included in the FNMA Facility.  The Ashford
Bonds mature on December 15, 2036.

         Also on April 25, 1997, The Harris County Housing Finance Corporation
issued an additional $4.0 million in variable-rate, taxable bonds (the
"Sandalwood Bonds") for the benefit of the Sandalwood property.  The Sandalwood
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
Sandalwood Bonds are credit enhanced by FNMA and are included in the FNMA
Facility.  The Sandalwood Bonds are considered taxable to the holders of the
bonds and will remain as such until tax-exempt bond allocation becomes
available to the Sandalwood property.  The Sandalwood Bonds mature on December
15, 2036.

         Effective April 25, 1997, the Company entered into an interest rate
cap agreement with CLNY for $234,000 to protect itself from interest rate
fluctuations with respect to the Sandalwood Bonds.  Pursuant to the terms of
the interest rate cap agreement, the Company's interest rate is limited to 6.5%
per annum on a notional amount of $4.0 million.  The cost of the cap is
included in deferred financing costs and is being amortized over seven years.
The interest rate cap agreement terminates on April 26, 2004.

         On April 30, 1997, the Board of Directors of the Company declared a
 quarterly dividend of $0.40 per share to the Common Stockholders of the
 Company for the quarter ended March 31, 1997.  The dividends are payable on
 May 15, 1997, to holders of record as of May 12, 1997.  The Board of Directors
 of the Company also authorized a quarterly dividend in the amount of $567,567
 on April 30, 1997, to the holder of Class A Senior Cumulative Convertible
 Preferred Stock ("Class A Preferred Stock") for the quarterly period ended
 March 31, 1997.  The Class A Preferred Stock dividend is payable on May 15,
 1997.

         On April 30, 1997, the Board of Directors of the Company also
authorized distribution payments of $358,127, or $0.40 per unit holder, to
limited partners of the Operating Partnership for the quarter ended March 31,
1997.  The distributions are payable on May 15, 1997.





                                      -18-
<PAGE>   19

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (continued)

         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 Revolving Loan.

COMPARISON OF  THREE MONTHS ENDED MARCH 31, 1996 TO THE THREE MONTHS ENDED
MARCH 31, 1997

         Cash and cash equivalents decreased $1.3 million to $2.3 million at
March 31, 1997, when compared to the same period in 1996.  This decrease is
primarily related to a decrease in net cash (used in) provided by financing
activities, partially offset by an increase in net cash provided by operating
activities and a decrease in cash used in investing activities.

         Net cash provided by operating activities increased $4.5 million to
$6.0 million for the three- month period ended March 31, 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 a reduction in the amount
paid for real estate taxes in the first quarter of 1997.

         Net cash used in investing activities increased $9.9 million of which
$8.8 million resulted from a reduction in cash paid for properties acquired
during the quarter ended March 31, 1997 as compared to the same period in 1996.

         Net cash provided by financing activities decreased $14.5 million to
($2.9) million for the three-month period ended March 31, 1997, when compared
to the same period in 1996.  This decrease is primarily attributable to $21.8
million of net proceeds received from two joint venture partners in the first
quarter of 1996 and a decrease in proceeds received from bonds payable
borrowings during the quarter ended March 31, 1997, when compared to the same
quarter in 1996.  These decreases were partially offset by a decrease in
principal repayments of $11.6 million with respect to the Revolving Loan.

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.





                                      -19-
<PAGE>   20

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (continued)

         FINANCING RISKS.  Increases in interest rates on the Company's
variable-rate debt, or the inability of the Company to refinance its
indebtedness, 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 OR AS A PARTNERSHIP.  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 a REIT for federal income tax purposes.





                                      -20-
<PAGE>   21

                                    Part II

Other Information

Item 1.   Legal Proceedings

          No material legal proceedings

Item 2.   Changes in Securities

          (c)      Equity Securities Issued by the Registrant

                   On March 6, 1997, The Company issued 17,280 and 84,375
                   shares of Common Stock to Richard F. Cavenaugh, a former
                   executive officer of The Company, and LG Trust, a trust in
                   which Mr. Cavenaugh is the trustee and a beneficiary,
                   respectively, in exchange for an equal number of Common
                   Units pursuant to the terms of the Exchange Rights
                   Agreement, dated as of August 31, 1994, among The Company,
                   Mr. Cavenaugh, LG Trust and others.  Such transactions were
                   exempt from registration under the Securities Act of 1933 by
                   virtue of Section 4(2) thereunder as transactions not
                   involving a public offering.

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 or Reports on Form 8-K

          (a)      Exhibits

                   10.58         The 1997 Stock Incentive Plan for Officers,
                                 Directors and Key Employees of Ambassador
                                 Apartments, Inc., Ambassador Apartments, L.P.
                                 and Subsidiaries.

                   10.59         Swap transaction agreements dated December 18,
                                 1996, in the amount of $119.8 million by and
                                 between Ambassador Apartments, Inc. and Credit
                                 Lyonnais New York Branch.





                                      -21-
<PAGE>   22



Item 6.   Exhibits or Reports on Form 8-K (continued)

                   10.60         Swap transaction agreement dated December 18,
                                 1996, in the amount of $50.2 million by and
                                 between Ambassador Apartments, Inc. and Credit
                                 Lyonnais New York Branch.

                   10.61         Swap transaction agreement dated December 18,
                                 1996, in the amount of $16.5 million by and
                                 between Ambassador Apartments, Inc. and Credit
                                 Lyonnais New York Branch.

                   10.62         Loan Agreement dated as of March 5, 1997 in
                                 the amount of $21.5 million by and between
                                 Ambassador Apartments, Inc. and Nomura Asset
                                 Capital Corporation.

          (b)      Reports on Form 8-K

                   The Company's current reports on Form 8-K, dated February
                   21, 1997 and March 3, 1997, reflects the acquisitions of
                   Haverhill Commons, The Arbors, Ocean Oaks, Sun Lake and
                   Crossings of Bellevue apartments, respectively.





                                      -22-
<PAGE>   23

                                   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: May 13, 1997                      /s/ Adam D. Peterson                  
     --------------------------         ------------------------------------
                                        Adam D. Peterson
                                        Executive Vice President and Chief
                                        Financial Officer





                                      -23-