<PAGE>   1

                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549
                                  FORM 10-K

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

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                     OR
       [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934

                       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 WEST WACKER DRIVE, SUITE 4040, CHICAGO, ILLINOIS                60601
   (Address of principal executive offices)                     (Zip Code)
                                   

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

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


    Title of each class               Name of each exchange on which registered
Common Stock, $.01 par value                   New York Stock Exchange

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

                                    NONE

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
  1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
          filing requirements for the past 90 days.  Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
   best of the registrant's knowledge, in definitive proxy or information
  statements incorporated by reference in Part III of this Form 10-K or any
                     amendment to this Form 10-K. [   ]

 The aggregate market value of voting stock held by nonaffiliates was $231.9
    million based upon the sale price of registrant's Common Stock as of
                               March 17, 1998.

                 At March 17, 1998, 10,708,430 shares of the
                 Registrant's Common Stock were outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE

                                    None.


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                         AMBASSADOR APARTMENTS, INC.

                              TABLE OF CONTENTS


<TABLE>
<CAPTION>

PART I.                                                                  Page
                                                                         ----
<S>    <C>                                                                <C>
       Item 1.  Business ..............................................    1
                Cautionary Statement for Purposes of the Safe 
                Harbor of the Private Litigation Reform Act of 1995 ...    8
       Item 2.  Properties ............................................   11
       Item 3.  Legal Proceedings .....................................   23
       Item 4.  Submission of Matters to a Vote of Security Holders ...   24

PART II.

       Item 5.  Market for the Registrant's Common Equity and Related
                Stockholder Matters ...................................   25
       Item 6.  Selected Financial Data ...............................   26
       Item 7.  Management's Discussion and Analysis of Financial
                Condition and Results of Operations ...................   29
       Item 8.  Financial Statements and Supplementary Data ...........   41
       Item 9.  Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure ...................   43

PART III.

      Item 10.  Directors and Executive Officers of the Registrant ....   44
      Item 11.  Executive Compensation ................................   48
      Item 12.  Security Ownership of Certain Beneficial Owners 
                and Management ........................................   56
      Item 13.  Certain Relationships and Related Transactions ........   60

PART IV.

      Item 14.  Exhibits, Financial Statement Schedules and Reports 
                on Form 8-K ...........................................   64


SIGNATURES ............................................................   71

</TABLE>



<PAGE>   3


                                   PART I

ITEM 1. BUSINESS

FORMATION OF THE COMPANY

     Ambassador Apartments, Inc. (together with its consolidated and
unconsolidated investments, the "Company") was organized in Maryland on April
15, 1994.  For the fiscal years ended December 31, 1994, 1995 and 1996, the
Company made an election to be treated as a REIT under the Internal Revenue
Code of 1986, as amended.  In addition, upon filing of the Company's 1997
Federal income tax return, the Company will make an election to qualify as a
REIT for the year ended December 31, 1997.

     On August 31, 1994 the Company completed an initial public offering (the
"Offering") of 7,821,000 shares of its common stock ("Common Stock") at $16.00
per share.  On September 12, 1994, the underwriters of the Offering exercised
their over allotment option to purchase 1,137,525 shares of Common Stock at
$16.00 per share.

     Upon consummation of the Offering, the Company contributed the initial net
proceeds from the Offering and the exercise of the underwriters' over allotment
option in exchange for 7,821,000 and 1,137,525, respectively, common units of
partnership interest ("Common Units") of Ambassador Apartments, L.P., a
Delaware limited partnership (the "Operating Partnership").

     The Company is the sole general partner of the Operating Partnership and
owns 93.54% of the outstanding Common Units and 100% of the Class A Senior
Cumulative Convertible Preferred Units ("Class A Preferred Units") as of March
17, 1998.  Dividends declared or paid to holders of Common Stock and Class A
Preferred Stock are based upon distributions received by the Company from the
Operating Partnership with respect to its Common Units and Preferred Units.

PROPOSED MERGER

     On December 23, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Apartment Investment and Management
Company ("AIMCO"), an owner and manager of multifamily apartment properties,
based in Denver, Colorado.  Pursuant to the Merger Agreement, the Company will
be merged with and into AIMCO (the "Merger"), with AIMCO as the surviving
corporation (the "Surviving Corporation").  Upon consummation of the Merger,
each outstanding share of the Company's common stock ("Ambassador Common
Stock") other than Ambassador Common Stock held by the Company or AIMCO, will
be converted into the right to receive that number of shares of AIMCO's common
stock ("AIMCO Common Stock") equal to the quotient (rounded to the nearest
1/1000) (the "Conversion Ratio") determined by dividing $21.00 by the AIMCO
Index Price (as defined below).  The term "AIMCO Index Price" means the
aggregate of the average of the high and low sales prices of AIMCO Common
Stock, as reported on the New York Stock Exchange ("NYSE"), on each of the
twenty consecutive NYSE trading days ending on the fifth NYSE trading day
immediately preceding the effective time of the Merger ("Effective Time"),
divided by 20.  Notwithstanding the foregoing, if the Conversion Ratio



<PAGE>   4


calculated pursuant to the foregoing is greater than 0.583, then, at AIMCO's
option, the Conversion Ratio to be used shall be either the Conversion Ratio as
calculated pursuant to the foregoing or 0.583 (so long as the Merger would
continue to qualify as a reorganization under Section 368(a) of the Code).  If
AIMCO opts for the Conversion Ratio to equal 0.583, then, in addition to 0.583
shares of AIMCO Common Stock, AIMCO will pay to each holder of Ambassador
Common Stock for each share of Ambassador Common Stock held by such shareholder
an amount in cash equal to (i) $21.00 minus (ii) the product of the AIMCO Index
Price and 0.583.  In lieu of any fractional shares of AIMCO Common Stock, each
holder of Ambassador Common Stock who would otherwise be entitled to receive
such fractional shares will be paid cash equal to the product of such
fractional shares and the AIMCO Index Price.  The Merger is subject to a number
of conditions, including the approval by the stockholders of the Company.

     In the Merger Agreement, AIMCO and the Company agreed that the parties
will use their reasonable best efforts to effect a business combination (the
"OP Reorganization") of the Operating Partnership with AIMCO Properties, L.P.,
a Delaware limited partnership ("AIMCO Operating Partnership") immediately
following the Effective Time, with the AIMCO Operating Partnership as the
surviving entity, which business combination will have, to the extent possible,
for the holders of Common Units, the same economic and tax consequences for the
holders of Common Units as the Merger has for holders of Ambassador Common
Stock.  If a business combination is not effected due to the failure to obtain
consents of all persons entitled to give or withhold such consents which are
necessary for such business combination, then (i) the partnerships shall remain
and be operated as separate entities and (ii) AIMCO will execute and deliver to
each limited partner in the Operating Partnership the agreement relating to the
exchange rights of holders of Common Units contemplated by a certain Exchange
Rights Agreement of the Company (the "Exchange Agreement") and be bound
thereby.

     The Merger Agreement also provides that at or prior to the Effective Time,
the Company will call for the redemption of all limited partnership interests
not owned by the Company or its affiliates in Jupiter-I, L.P. and Jupiter-II,
L.P. (the "Jupiter Redemption") in accordance with their respective partnership
agreements and subject to and simultaneously with the Effective Time, the
Surviving Corporation will provide the funds for, and cause payment to be made
in respect of, the redemption thereof upon the Effective Time.

     The Merger Agreement also provides that prior to the Effective Time, the
Board of Directors of the Company (the "Ambassador Board") will call for the
redemption of all outstanding shares of  the Class A Senior Cumulative
Convertible Preferred Stock of the Company ("Ambassador Preferred Stock") in
accordance with, and at a redemption price equal to the amount set forth in
Section 8(a) of the Articles Supplementary of the Company with respect thereto,
to be effective simultaneously with, and to be conditioned upon, the occurrence
of, the Effective Time.  Notwithstanding the foregoing, the parties may convert
such stock into Ambassador Common Stock in the manner set forth in such
Articles Supplementary.  To the extent any Ambassador Preferred Stock shall not
have been converted as of the Effective Time, AIMCO will provide the funds for,
and cause payment to be made in respect of, the redemption thereof on the date
of the Effective Time.


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     In addition to its regular quarterly dividends, the Company will declare a
special dividend with a record date prior to the Effective Time which will
result in its stockholders receiving an amount per share equal to the product
of (x) the difference between (a) Ambassador's most recent quarterly dividend
amount (appropriately adjusted for any stock splits and the like) and (b) the
product of the Conversion Ratio (as determined pursuant to the Merger
Agreement)  and AIMCO's most recent quarterly dividend amount (approximately
adjusted for any stock splits and the like) and (y)  the number of days which
shall have elapsed through and including the day immediately prior to the day
of  the Effective Time since the end of the most recent calendar quarter (as of
the Effective Time) for which Ambassador's dividend record date has then
occurred, divided by 91.  For example, if the Effective Time occurs on May 1,
1998, it is anticipated that the Company will declare a regular quarterly
dividend of $.40 per share to holders of record shortly before that date.  In
such event, and assuming AIMCO's most recent quarterly dividend at that time is
$.5625, the amount of its first quarter dividend, then the Company would
declare a special dividend of approximately $0.0238 per share (assuming the
Conversion Ratio is 0.583).  Concurrent and equivalent per unit distributions
for the benefit of holders of Common Units shall be made in connection with the
special dividend.

     Pursuant to the Merger Agreement, immediately prior to the Effective Time,
each outstanding stock option issued by the Company ("Ambassador Stock
Options") will become fully vested and exercisable.  Pursuant to the Merger
Agreement, holders of Ambassador Stock Options may elect prior to the Effective
Time to have the Ambassador Stock Options with respect to which such election
is made canceled, and, in consideration for such cancellation, each such
electing holder shall receive on the day of the Effective Time for each share
subject to the Ambassador Stock Options for which such election is made, an
amount (subject to any applicable withholding tax) in cash equal to the excess,
if any, of $21.00 over the per share exercise price of such Ambassador Stock
Option.  Pursuant to the Merger Agreement, as of the Effective Time, each
outstanding Ambassador Stock Option for which such an election has not been
made shall be converted into an option (or a new substitute option shall be
granted) to purchase the number of shares of AIMCO Common Stock (rounded up to
the nearest whole share) equal to the number of shares of Ambassador Common
Stock subject to such option multiplied by the Conversion Ratio (as calculated
pursuant to the definition thereof, without regard to the proviso regarding
AIMCO's election) at an exercise price per share of AIMCO Common Stock (rounded
down to the nearest penny) equal to the former exercise price per share of
Ambassador Common Stock under such option divided by the Conversion Ratio (as
calculated pursuant to the definition thereof, without regard to the proviso
regarding AIMCO's election), subject to adjustment based on the applicability
of certain provisions of the Code.  Except as provided above, the converted or
substituted Ambassador Stock Options shall be subject to the same terms and
conditions (including without limitation, expiration date, vesting and exercise
provisions) as were applicable to Ambassador Stock Options immediately prior to
the Effective Time, except that all converted or substituted Ambassador Stock
Options shall be vested and fully exercisable and optionees may exercise their
options through the expiration date unless their employment is terminated for
cause or they are removed as directors for cause.  Based upon the number of
Ambassador Stock Options outstanding at December 31, 1997, and assuming a
Conversion Ratio of 0.583, AIMCO will reserve approximately 260,898 shares of
AIMCO Common Stock for issuance upon exercise of such options, assuming no
cancellation elections are made.


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<PAGE>   6


     Under certain circumstances under the Merger Agreement, the Company may be
required to pay a "Break-Up Fee" and "Break-Up Expenses" (both as defined in
the Merger Agreement) to AIMCO if the Merger does not occur.  The maximum
amount payable by the Company in such circumstances is $9.7 million.

     Due to the potential impact on employee retention and other relationships, 
any material delay or any failure to consummate the Merger could have a 
materially adverse affect on the Company's results of operations and financial 
condition.


GENERAL

     The Company is a self-administered and self-managed REIT engaged in the
ownership and management of garden style apartment properties leased primarily
to middle income tenants.  As of December 31, 1997, the Company owned 52
apartment communities (the "Properties" or singularly a "Property") with a
total of 15,728 units located in Arizona, Colorado, Florida, Georgia, Illinois,
Tennessee and Texas.  As of March 17, 1998, the Company continued to own 15,728
units in 52 properties.  In addition, the Company manages one property
containing 252 units for an unrelated third party.

     Management believes its overall portfolio size, management operations and
property concentrations in selected geographic markets provide economies of
scale regarding operating expenses, advertising, marketing, and insurance.
Management also believes that a geographic distribution of the properties in a
number of strategically selected markets helps insulate the overall portfolio's
economic returns from regional economic fluctuations.  The Company's Principal
Markets (defined as metropolitan areas in which the Company owns more than
1,000 apartments) currently include Phoenix and Tucson, Arizona; Tampa,
Florida; Atlanta, Georgia; Austin, Houston and San Antonio, Texas.

BUSINESS PHILOSOPHY AND BACKGROUND

     The Company's mission is to deliver long term growth in value and
increasing earnings for its stockholders by providing:

     1. An organization dedicated to excellence,
     2. Affordable, quality housing for its residents,
     3. Respect and opportunity for its employees, and
     4. Socially responsible corporate behavior to its customers and the 
        communities in which it invests.

THE INDUSTRY/PRINCIPAL MARKETS

     The Company believes that firms that compete in the middle income sector
of the apartment industry differentiate themselves based upon the level of
service they provide to their customers.  Prospective residents have many
similarly priced choices for housing.  In most of the markets where the Company
owns property, the rental rates have been increasing over the past three years.
As market occupancies exceed 95%, there is an upward pressure on rental rates
that typically grow faster than the median income levels.  This situation can
create higher turnover of existing residents and higher operating expenses.
The Company believes that its customer service program allows for 



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<PAGE>   7

increases in market rental rates while maintaining lower overall resident       
turnover; this results in lower operating expenses than most of its
competition. 

RECENT DEVELOPMENTS

     As of January 30, 1998, the Company  amended its existing revolving credit
agreement dated as of May 28, 1997, with Credit Lyonnais New York Branch
("CLNY") (as amended, the "Unsecured Line of Credit").  The amendment to the
Unsecured Line of Credit (the "Amendment") provides the Company with $10
million of borrowing capacity to be used by the Company solely to meet, or to
reimburse itself for previous payments made to meet, margin calls from CLNY
made on or after January 12, 1998 relating to the Company's outstanding swap
agreements with CLNY.  This $10 million of availability is in addition to the
$6.25 million working capital availability provided under the Unsecured Line of
Credit, but does not increase the aggregate $25 million availability under the
Unsecured Line of Credit.  The Company paid a fee of $200,000, plus expenses,
for the amendment.  The amendment further provides for a method of required
pay-downs to the Unsecured Line of Credit under various circumstances.

     On February 4, 1998, the Company's partner (the "Jupiter I Limited
Partner") in the Jupiter-I, L.P. executed a Second Amended and Restated
Agreement of Limited Partnership dated as of January 28, 1998 for Jupiter-I,
L.P. and approved a related agreement (collectively, the "Reversing
Amendments"), the combined effect of which is to reverse certain amendments to
the Jupiter-I, L.P. limited partnership agreement and related document entered
into without the Federal National Mortgage Association's ("FNMA") prior consent
as required by the terms of the Company's existing credit facility with FNMA
("FNMA Facility").  As consideration for executing the Reversing Amendments,
the Company paid the Jupiter I Limited Partner $100,000.  As a result of the
Reversing Amendments, FNMA  released a $20 million standby commitment (the
"Standby Commitment") for the benefit of  FNMA.  The Company has no further
obligations to Bank of America with respect to the Standby Commitment.

     On March 5, 1998, The Industrial Development Authority of the City of
Phoenix, Arizona issued $6.0 million of variable rate, tax-exempt bonds (the
"Heather Ridge Bonds") for the benefit of the Heather Ridge property.  The
Heather Ridge Bonds, which are collateralized by the Heather Ridge property,
are credit enhanced under the FNMA Facility.  The Heather Ridge Bonds will
mature on December 15, 2037 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 Company used net proceeds of $5.5 million to repay a portion
of the outstanding principal balance on a secured revolving credit facility
with Nomura Asset Capital Corporation (as amended, the "NACC  Revolving Loan")
and the remainder to fund a portion of the working capital.

     Effective March 5, 1998, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $9,000 to protect itself against
interest rate fluctuations with respect to the Heather Ridge Bonds.  Pursuant
to the terms of the interest rate cap agreement, the interest rate is limited
to 4.8% per annum on a notional amount of $6.0 million.  The interest rate cap
agreement terminates on March 15, 1999.



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     On or about March 30, 1998, the Company intends to file a Definitive Proxy
Statement with the Securities and Exchange Commission discussing the terms of
the proposed Merger.  The Merger is subject to certain conditions, including
approval by the Company's stockholders.  The Definitive Proxy Statement will be
mailed to stockholders shortly after that date.

COMPETITION

     All of the Company's properties are located in metropolitan areas.  There
are numerous other apartment properties within the market area of each property
which have a material effect on the rental rates charged at the properties, as
well as the Company's ability to rent apartments at the properties.  The
Company competes for residents with others who may have greater resources than
the Company and whose officers, employees and directors may have more
experience in operating apartment properties than that of the Company's
officers, employees and directors.  In addition, single-family housing and all
forms of multifamily residential properties provide housing alternatives to
potential tenants of the Company's properties.

EMPLOYEES/PROPERTY MANAGEMENT

     The Company's headquarters are located at 77 West Wacker Drive, Suite
4040, Chicago, Illinois, 60601, telephone (312) 917-1600.  Regional offices are
located in Atlanta, Georgia and San Antonio, Texas and Phoenix, Arizona.  There
were approximately 546 employees as of March 17, 1998, including 41 corporate
and 505 property management employees.

     The Company provides complete property management services to each
property in its portfolio including on-site management supervision, leasing,
marketing, accounting and training.  The Company does not utilize third party
management companies.  Each of the 53 on-site property managers and their staff
report to an area/district manager located in each market who reports to the
Director of Property Management.  Each property is treated as an individual
business operation established with an annual budget, defined policies and
procedures, full time on-site professional staffing and supervision.  The
Company uses property management and accounting computer systems that are
linked to the regional and corporate offices to provide timely information to
senior management.  The Company's asset management system utilizes the leasing,
marketing and accounting information created at each site to permit senior
management to monitor the performance and operations of each property.

ENVIRONMENTAL MATTERS

General

     Under various Federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property.  Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances.  The costs of remediation
or removal of such substances may be substantial, and the presence of such
substances, or the failure 



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to promptly remediate such substances, may adversely affect the owner's
ability to sell such real estate or to borrow using such real estate as
collateral.  Moreover, certain of the Company's loan documents provide for
recourse liability in connection with hazardous or toxic substances.

     The Company does not believe that any of its properties are currently
subject to any environmental liability which would have a material adverse
effect on the Company's business, assets or results of operations.
Furthermore, except as described below, the Company believes that the
properties are in compliance in all material respects with all Federal, state
and local ordinances and regulations regarding hazardous or toxic substances.
Except as described below, the Company has not been notified by any
governmental authority of any noncompliance, liability or other claim relating
to hazardous or toxic substances in connection with any of its properties.  No
assurance can be given that future laws, ordinances or regulations will not
impose any material environmental liability; that any prior owner of a property
did not create any material environmental condition not known to the Company;
or that the current environmental condition of the properties will not be
affected by tenants and occupants of the properties, by the condition (such as
the presence of underground storage tanks or contamination of ground water) of
properties in the vicinity of the Company's properties or by third parties
unrelated to the Company.

ACMs and PCBs

     The Company is aware of the presence of asbestos-containing materials
("ACMs") and polychlorinated biphenyls ("PCBs") at certain of its properties as
noted in the property schedule on pages 12 and 13.  Limited quantities of ACMs
are present in such materials as floor coverings, acoustical tile and mastic,
and ceiling treatments at certain properties.  However, these ACMs generally
are in good condition and the Company has implemented operations and
maintenance plans, and provides its staff with training in the maintenance of
ACMs, at properties where ACMs are present.  The Company will replace or repair
any damaged ACMs, and, where appropriate, ACMs will be abated in buildings
which undergo renovation.  Most of the properties have fluid electrical
transformers owned by the local utility companies, many of which have not been
tested for PCBs.  Under Federal regulations, untested fluid transformers must
be considered PCB-contaminated, and the Company must assume that some of these
transformers may contain PCBs.  The local utilities are legally responsible for
these transformers and their maintenance, as well as for remediating any
contamination they may cause.  The Company has requested that the utility
companies that own these transformers test transformers on the properties which
have not been tested previously.  If any transformer is found to be
PCB-contaminated, the Company will request the utility company that owns such
transformer to replace it.

Tierra Bonita

     The Tierra Bonita property acquired by the Company in February, 1995
("Tierra Bonita") is located within the Tucson International Airport Superfund
Site (the "TIA Site"), a site identified by the U.S. Environmental Protection
Agency (the "EPA") as containing hazardous substances.  According to an
informational brochure dated September, 1994 prepared by the EPA (the
"Informational Brochure"), the EPA has found that a regional aquifer located
140 feet beneath Tierra 



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<PAGE>   10



Bonita (the aquifer is not a source of water for the property) has been
contaminated with trichloroethylene, a hazardous substance. Nine parties are
listed in the Informational Brochure as potentially responsible for clean-up at
the TIA Site (the Company is not listed as a potentially responsible party)
pursuant to the federal Superfund law, known officially as the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA").  Systems
designed to remove the contaminants from the aquifer are operating at the TIA
Site.

     Although the Company, based solely on its ownership of Tierra Bonita,
might also be considered potentially responsible under CERCLA, the Information
Brochure indicates that the EPA is pursuing only those parties that either (i)
disposed of hazardous substances on their property within the TIA Site or (ii)
owned or operated facilities where hazardous substances were disposed.  A Phase
I Environmental Site Assessment on the property commissioned by the Company in
December, 1994 concluded that past and present activities at the property have
not contributed to the contamination of the regional aquifer.  In addition, the
EPA's project manager for the TIA Site indicated to the consultants that an
enforcement action will not be brought against the Company because such
activities appear not to have contributed to the contamination of the aquifer.
The Company does not expect to incur expenses with respect to the clean up of
the contamination at the TIA Site, nor does the Company expect such
contamination to adversely affect operation of Tierra Bonita.

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-K are
forward-looking statements that involve risks and uncertainties.
Forward-looking statements in this Form 10-K include, but are not limited to,
statements under the following headings: (i) under the caption "Business --
Proposed Merger" as to consummation of the transactions contemplated by the
Merger Agreement, and other transactions related thereto, (ii) under the
caption "Business -- Business Philosophy and Background" as to future revenue
collections, operating expenses, demographic trends, and investment
opportunities, (iii) under the caption "Business -- Environmental Matters --
Tierra Bonita" as to future clean up expenses and the effect of contamination
on the operation of Tierra Bonita, (iv) under the caption "Market for the
Registrant's Common Equity and Related Stockholder Matters" as to future
dividends and distributions, (v) under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Sources and Uses of Cash -- Short-term Liquidity Needs" as
to future access to capital resources, short-term liquidity requirements,
extraordinary capital expenditures, and sufficiency of working capital, (vi)
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Sources and
Uses of Cash -- Long-term Liquidity Needs" as to meeting long-term liquidity
requirements through borrowings, and (vii) under the caption "Properties --
Mortgage and Tax-Exempt Bond Financing --- Purchase of Tax-exempt Bonds" as to
remarketing of Stonybrook Bonds.

     The Company wishes to caution readers that in addition to the important
factors described elsewhere in this Form 10-K, the following important factors,
among others, sometimes have 


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affected and in the future could affect the Company's actual results and
could cause the Company's actual results during fiscal 1998 and beyond to
differ materially from those expressed in any forward-looking statements made
by or on behalf of the Company:

FINANCING RISKS

     A substantial portion of the Company's currently outstanding indebtedness
bears interest at rates that adjust based on prevailing market interest rates.
Although the Company has interest rate protection agreements which hedge or
limit its exposure to increases in interest expense for a portion of its
variable rate debt, increases in the interest rates on the variable rate debt
would adversely affect the Company's cash flow and could reduce the amount of
funds available for distribution to stockholders.  The Company's variable rate
long-term tax-exempt bonds are marketed based on credit enhancement provided by
unaffiliated third parties.  Certain of these variable rate tax-exempt bonds
also have the benefit of standby credit enhancement commitments.  If the
Company is unable to replace any credit enhancement when it expires, or to
remarket the applicable bonds without credit enhancement, the indebtedness
under such bonds could be accelerated, in which event lenders would be entitled
to foreclose under the mortgages securing such indebtedness.  The interest cost
of the credit-enhanced debt will increase or the debt could be unmarketable
(with the resulting risk of acceleration and foreclosure) if the existing
credit enhancement is not replaced upon its expiration or if the credit rating
of a credit enhancement provider is lowered.  If prevailing interest rates or
other factors at the time of refinancing result in higher interest rates on
refinancings, the Company's interest expense would increase, which would
adversely affect the Company's cash available for distributions and its ability
to pay expected distributions to stockholders.  If the Company were unable to
refinance its indebtedness on acceptable terms, or at all, the Company might be
forced to dispose of one or more of the Properties upon disadvantageous terms,
and if the Company is unable to meet its obligations under any financing
agreement, a loss could be sustained as a result of foreclosure on the relevant
Property or pool of Properties securing such obligation.

RISKS OF EQUITY REAL ESTATE INVESTMENTS

     An apartment property's income and value may be adversely affected by the
national and regional economic climates, local real estate conditions such as
the oversupply of apartments or a reduction in demand for apartments,
availability of "for purchase" housing, the attractiveness of the properties to
tenants, competition from other apartment properties, the ability of the owner
to provide adequate maintenance and to obtain adequate insurance, and increased
operating costs (including real estate taxes).  A substantial percentage of the
total number of the Company's apartments are located in Texas, Arizona and
Florida.  The Company's income will also be adversely affected if a significant
number of tenants are unable to pay rent or if the apartments cannot be rented
on favorable terms.  In addition, the income and value of an apartment property
are affected by such factors, among others, as changes in zoning, building,
environmental, rent control and other laws and regulations, changes in real
property taxes and interest rates, the availability of financing and acts of
God (such as earthquakes and floods) and other factors beyond the control of
the Company. The Company is exposed to the various types of litigation that may
be brought against a property owner or manager in the ordinary course.



                                      9


<PAGE>   12



RISKS OF RENOVATION, DEVELOPMENT AND ACQUISITIONS

     The Company has in the past renovated properties it acquired.  In
addition, in the event the Merger were to fail to occur, the Company may
develop new apartment properties if it determines that such development is
warranted, or acquire and renovate other properties.  In connection with any
renovation or development project, the Company will bear certain risks,
including the risks of construction delays or cost overruns that may increase
project costs and could make such project uneconomical, the risk that occupancy
or rental rates at a completed project will not be sufficient to enable the
Company to pay operating expenses or earn its targeted rate of return on its
investment, and the risk of incurrence of pre-development costs in connection
with projects that are not pursued to completion. In case of an unsuccessful
renovation or development project, the Company's loss could exceed its
investment in such project.  In the event the Merger fails to occur, the
Company intends to continue to acquire multifamily properties. Acquisitions
entail 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.

REGULATION

     The Company is subject to a number of Federal, state and local
regulations, such as the Americans with Disabilities Act and the Fair Housing
Amendments Act of 1988, and additional legislation may impose further burdens
or restrictions on owners of apartment communities.  The costs of compliance
with such laws may be substantial, and limits or restrictions on completion of
certain renovations may limit application of the Company's investment strategy
in certain instances or reduce overall returns on its investments.

COMPETITION

     There are numerous real estate companies which compete with the Company in
operating apartment communities and in seeking apartment properties for
acquisition and development, and for tenants to occupy such properties. The
Company may be competing with companies that have greater resources than the
Company and whose officers and directors or trustees have more experience than
the Company's officers and directors. In addition, the availability of
single-family housing and other forms of multifamily residential properties,
such as manufactured housing communities, provide alternatives to potential
tenants of apartment properties. These competitive factors could adversely
affect the income generated by the Properties.

ADVERSE TAX CONSEQUENCES OF 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.  As a result, such a failure could adversely affect
the Company's business, results of operations and financial condition, 


                                     10


<PAGE>   13


its ability to make distributions to its stockholders, and the market value
and marketability of the Common Stock. 

TEXAS FRANCHISE TAX

     The subsidiary partnerships that own property in Texas presently fall
outside of the jurisdiction of the Texas franchise tax, which currently only
applies to corporations and limited liability companies.  If such a Subsidiary
Partnership is determined to be taxable as a corporation or the Texas franchise
tax law is amended to apply to partnerships, such Subsidiary Partnership would
be subject to Texas franchise tax.

ITEM 2. PROPERTIES

     As of December 31, 1997, the Company owned 52 apartment complexes (the
"Properties") located in seven states.  The Properties consist of garden or
townhouse style apartments that appeal primarily to tenants with middle level
incomes.  Of the apartments, 2.2% are efficiency apartments, 59% are
one-bedroom apartments, 38.3% are two-bedroom apartments and the remaining .5%
are three-bedroom apartments.  The Properties typically consist of two-and
three-story buildings in a landscaped setting.  The size of the apartments
range from 400 to 2,000 square feet and average approximately 780 square feet.

     The average number of apartments per Property is 302 and the average
monthly rent per apartment and per square foot during the twelve months ended
December 31, 1997 was $567 and $0.72, respectively.

     Tenant leases at the Properties are generally for six to twelve-month
terms and require security deposits which range up to one month's rent.  The
Properties contain common area amenities, which may include swimming pools,
clubhouses, tennis courts, security gates and extensive landscaping, and
interior apartment amenities, such as vaulted ceilings, wood-burning
fireplaces, washers/dryers, ceiling fans, microwaves, mini blinds, cable
television connections and monitored security systems.  The Company believes
that the amenity packages at the Properties are comparable to those of
competitive multifamily properties in their respective markets.

     Fee title to each of the Properties is held in a property partnership (the
"Property Partnership") in which the Operating Partnership or another direct or
indirect subsidiary of the Company is a general partner.  The Company (or a
direct or indirect subsidiary of the Company) and the Operating Partnership own
100% of the partnership interests in, and control, the Property Partnerships
that own 37 of the Properties.  The Company (or a direct or indirect subsidiary
of the Company) and the Operating Partnership own a 1% general partnership
interest and 49.1% general partnership interest in two partnerships that own 9
and 4 properties, respectively, (Ambassador I, L.P. and Ambassador VII, L.P. as
further described, below).  The Company (or a direct or indirect subsidiary of
the Company) and the Operating Partnership own a 50% and 49.9% general
partnership interest, respectively, in the Property Partnerships that own the
Williamsburg Property and the Brook Run Property.  The third parties that own
the remaining interests in these Property Partnerships have 


                                     11



<PAGE>   14



equal voting rights with respect to certain significant decisions of such
partnerships.  The operations and results of these two Property Partnerships
are not consolidated in the Company's financial statements.

     The following table presents certain information concerning the Company's
Properties as of December 31, 1997:

<TABLE>
<CAPTION>
                                       PROFILE OF COMPANY'S PROPERTIES AT DECEMBER 31, 1997

                                                                             1996 Average        1997 Average     
                                                                            Monthly Rent (3)    Monthly Rent (3)                
                                                                            ----------------    ----------------                
                        Construction      Number        1996         1997          Per                Per                       
     Market Area/          Major            of        Average       Average      Square     Per      Square    Per              
    Property Name       Renovation(1)      Apts.    Occupancy(2)  Occupancy(2)    Foot      Apt.      Foot     Apt.             
------------------      -------------      -----    -----------   ------------    ----      ----      ----     ----             
<S>                      <S>               <S>         <S>           <S>       <C>        <C>      <C>        <C>               
TEXAS                                                                                                                           
Austin                                                                                                                          
Aspen Hills..........    1986/1997         344         89.50%        94.37%    $0.77      $627     $0.89      $726              
Royal Crest*.........    1973/1991         204         95.08         95.29      0.62       489      0.65       560              
Summit Creek ........    1985/1996         164         93.05         95.22      0.76       560      0.85       625              
Prime Crest.*........    1973/1991         148         92.43         92.79      0.62       492      0.66       540              
Bent Oaks............    1979/1994         146         97.35         96.97      0.77       563      0.87       635              
Broadmoor............    1980/1995         200         95.02         94.79      0.85       535      0.95       613              
Houston                                                                                                                         
The Mills*...........    1979/1995         708         89.45         92.06      0.50       431      0.57       494              
Trails of Ashford*...    1979/1996         514         90.73         93.63      0.54       409      0.60       458              
Sandalwood...........    1979/1996         352         90.25         93.59      0.51       349      0.56       382              
Westway Village......    1979/1996         326         94.97         94.47      0.60       428      0.68       486              
Cypress Ridge*.......    1979/1996         268         87.99         88.31      0.53       384      0.59       431              
San Antonio                                                                                                                     
Braesview*...........    1982/1993         396         92.22         94.27      0.58       561      0.65       626              
La Jolla.............    1975/1992         300         93.29         94.13      0.72       491      0.82       557              
Harbor Cove..........    1980/1992         256         95.10         94.40      0.65       430      0.73       485              
Cape Cod*............    1985/1996         244         95.89         94.52      0.67       482      0.75       535              
Eagle's Nest.........    1973/1997         226         93.62         92.83      0.59       406      0.66       451              
Mesa Ridge...........    1986/1996         200         92.44         95.42      0.63       461      0.70       515              
The Stratford........    1979/1995         269         93.50         89.69      0.50       557      0.60       660              
Shallow Creek*.......    1982/1996         208         90.52         93.97      0.62       455      0.68       501              
Cedar Creek(4)*......    1979/1998         392            --         76.38        --        --      0.67       463              
Windridge*...........    1983/1995         276         92.50         91.41      0.63       448      0.67       479              
ARIZONA                                                                                                                         
Phoenix/Mesa                                                                                                                    
Privado Park.........    1984/1995         352         95.51         95.72      0.63       468      0.72       538              
Vista Ventana........    1982/1996         275         96.38         93.84      0.62       425      0.70       480              
Crossroads*..........    1979/1996         316         93.60         91.29      0.64       408      0.75       483              
Shadow Creek.........    1984/1995         266         94.24         96.28      0.67       491      0.75       549              
Tatum Gardens*.......    1985/1996         128         95.00         96.53      0.57       611      0.63       676              
Pine Shadows.........    1983/1997         272         95.26         93.60      0.70       491      0.73       514              
Madera Point.........    1986/1997         256         92.60         94.70      0.67       500      0.75       572              
Heather Ridge........    1983/1997         252         94.16         94.54      0.67       448      0.70       469              
Tucson                                                                                                                          
Quail Ridge..........    1975/1994         253         92.55         91.62      0.77       501      0.86       559              
Tierrra Bonita.......    1986/1997         410         89.86         83.07      0.54       374      0.58       403              
Stonybrook...........    1983/1997         411         91.28         88.99      0.72       416      0.75       437              
LaJolla de Tucson*...    1978/1997         223         88.30         95.22      0.68       410      0.76       453              
ILLINOIS                                                                                                                        
Chicago                                                                                                                         
Williamsburg.........    1970/1992         329         94.63         95.27      0.72       768      0.83       883              
Brookdale Lakes......    1990              200         92.81         92.28      0.98       938      1.11     1,064              
Brook Run............    1986/1995         182         91.93         94.21      1.02       958      1.08     1,013              
FLORIDA                                                                                                                         
Tampa/Clearwater.....                                                                                                           
Coral Cove...........    1985/1996         200         94.08         96.24      0.66       514      0.71       555              
Hidden Lake..........    1983/1997         267         95.57         91.28      0.74       497      0.73       487              

                                                                12
</TABLE>



<PAGE>   15


<TABLE>
<CAPTION>
                                       PROFILE OF COMPANY'S PROPERTIES AT DECEMBER 31, 1997

                                                                             1996 Average        1997 Average     
                                                                            Monthly Rent (3)    Monthly Rent (3)              
                                                                            ----------------    ----------------              
                        Construction      Number        1996         1997          Per                Per                     
     Market Area/          Major            of        Average       Average      Square     Per      Square    Per            
    Property Name       Renovation(1)      Apts.    Occupancy(2)  Occupancy(2)    Foot      Apt.      Foot     Apt.           
------------------      -------------      -----    -----------   ------------    ----      ----      ----     ----           
<S>                      <S>               <S>         <S>           <S>       <C>        <C>      <C>        <C>             
The Woodlands........    1983/1997         416         92.93         91.63      0.73       472      0.73       474            
Palencia(4)*.........    1985/1997         420            --          92.70       --        --      0.78       600            
 Orlando                                                                                                                      
Sun Lake.............    1986              600         95.98         95.46      0.60       529      0.64       573            
 Daytona Beach                                                                                                                
Arbors...............    1988/1997         224         95.01         94.90      0.61       542      0.63       561            
Ocean Oaks...........    1988/1997         296         92.16         93.65      0.62       564      0.65       586            
 West Palm Beach                                                                                                              
Village Crossing.....    1986/1997         189         92.96         94.51      0.80       668      0.88       733            
Haverhill Commons....    1986/1998         222         94.30         93.20      0.71       594      0.78       647            
GEORGIA                                                                                                                       
 Atlanta/Norcross                                                                                                             
Falls of Bells Ferry.    1986/1996         720         96.13         94.41      0.71       588      0.76       625            
Park Colony(4)*......    1984/1998         352            --         95.37        --        --      0.64       650            
TENNESSEE                                                                                                                     
 Nashville                                                                                                                    
Crossings of Bellevue    1985/1998         300         91.51         90.80      0.74       636      0.78       675            
 Franklin                                                                                                                     
Franklin Oaks........    1986/1997         468         95.05         92.12      0.77       613      0.80       638            
COLORADO                                                                                                                      
 Greeley                                                                                                                      
Country Club West....    1986/1996         288         96.44         95.68      0.74       579      0.77       605            
 Fort Collins                                                                                                                 
Courtney Park........    1986/1996         248         95.32         95.28      0.77       641      0.83       689            
 Colorado Springs                                                                                                             
Mountainview.........    1985/1996         252         96.76         95.56      0.81       581      0.88       631            
                                        ------         -----         -----     -----      ----     -----      ----            
TOTAL/WEIGHTED                                                                                                                
 AVERAGE                                15,728         92.91%        92.91%    $0.66      $515     $0.72      $567            
                                        ======         =====         =====     =====      ====     =====      ====            
</TABLE>

  (1) Major renovation ("Major Renovation") is defined as a renovation of a
      Property that includes one or more of the following which, in total,
      involve an aggregate expenditure of an amount not less than $2,000 times
      the number of apartments in the Property: roof replacement; resurfacing of
      parking lots; exterior painting; structural or exterior repairs;
      replacement of appliances or carpeting; and installation, repair or
      replacement of Property-wide amenities.

  (2) Occupancy is defined as the number of occupied apartments divided by
      the total number of apartments, expressed as a percentage. Average
      occupancy for any period represents the average of the monthly occupancies
      over such period.  Occupancy for a month represents the occupancy as set
      forth on the rent roll as of the close of the monthly accounting period.
      "Occupied apartments" includes all apartments occupied by tenants under an
      effective lease.

  (3) Average monthly rent per apartment for any property for any period is
      defined as (a) the total gross potential rent rental revenue for the
      period divided by the number of months in the period, divided by (b) the
      product of (i) occupancy at the Property during such period (defined in
      note (2) above) times (ii) the number of apartments in the Property.

  (4) Properties purchased by the Company in 1997 did not have certain
      historical operating data for years prior to 1997.  Average occupancy and
      rental rates are computed based upon the number of months the property was
      owned by the Company.

  * These properties contain ACMs and or PCBs as described on page 7.

MORTGAGE AND BOND FINANCING

OVERVIEW

     As of December 31, 1997,  the aggregate indebtedness of the Company was
approximately $387.6 million, of which $313.1 million (80.8%) was long-term
bond financing (secured, directly 



                                      13




<PAGE>   16




or indirectly, by mortgages on the Properties). All of the Company's
long-term bond financing is considered non-recourse, although certain mortgages
are cross-defaulted or cross-collateralized with other mortgages or properties,
and there are certain aspects of the financing for which the lender has recourse
to the corporate credit of the Company.  The Properties are subject to mortgage
indebtedness in the aggregate principal amount of $415.9 million, which includes
$28.3 million of variable rate tax-exempt indebtedness secured by the two
Properties in which the Company has an approximately 50% general partnership
interest.  The results of the Property Partnerships owning these two Properties
are not consolidated in the Company's financial statements.  Of the debt of
unconsolidated Property Partnerships, 100% of the Williamsburg Property debt and
$10.0 million of the $11.8 million of Brook Run Property debt is nonrecourse to
the Company, the Operating Partnership or the relevant Property Partnership. 
See "Indebtedness of Unconsolidated Partnerships".  Below is a schedule
summarizing the Company's indebtedness.


<TABLE>
<CAPTION>

                                         INDEBTEDNESS OUTSTANDING AS OF DECEMBER 31, 1997
                                                      (DOLLARS IN THOUSANDS)
                                  Annual                                  Estimated        Maturity of
      Property Pledged           Interest    Fixed or       Principal    Annual Debt         Credit           Maturity of 
       as Collateral              Rate*     Variable**       Balance      Service***       Enhancements           Debt
       -------------              -----     ----------       -------      ----------       ------------       -----------
<S>                               <C>        <C>             <C>           <C>              <C>               <C>
BOND FINANCING:
Tax-Exempt Bonds:
Falls of Bells Ferry  (A)......   4.95%      Fixed           $28,335       $1,403           Feb.  2009        Feb.  2009
Aspen Hills....................   5.78%      Variable          9,800          737           Dec.  2021        Dec.  2021
Braesview......................   5.78%      Variable         20,500        1,542           Dec.  2021        Dec.  2021
Cape Cod.......................   5.78%      Variable          8,100          609           Dec.  2021        Dec.  2021
Eagle's Nest...................   5.78%      Variable          5,200          391           Dec.  2021        Dec.  2021
Brookdale Lakes................   5.78%      Variable         14,800        1,116           Dec.  2021        Dec.  2026
Harbor Cove....................   5.78%      Variable          5,900          444           Dec.  2021        Dec.  2021
LaJolla........................   5.78%      Variable         10,000          752           Dec.  2021        Dec.  2021
Mesa Ridge.....................   5.78%      Variable          5,100          384           Dec.  2021        Dec.  2021
Windridge......................   5.78%      Variable          6,270          480           Dec.  2021        Dec.  2021
The Stratford..................   5.78%      Variable          5,945          455           Dec.  2021        Dec.  2021
Prime Crest....................   5.78%      Variable          2,400          181           Dec.  2021        Dec.  2021
Royal Crest....................   5.78%      Variable          3,400          256           Dec.  2021        Dec.  2021
Bent Oaks......................   5.78%      Variable          4,400          337           Dec.  2021        Dec.  2023
Stonybrook (B).................  10.00%      Fixed             4,028          403           N/A               Oct.  2012
The Mills......................   5.78%      Variable         14,575        1,106           Dec.  2021        Dec.  2026
Trails of Ashford..............   4.88%      Variable          9,050          618           Dec.  2021        Dec.  2036
Shallow Creek..................   5.78%      Variable          2,300          174           Dec.  2021        Dec.  2026
Franklin Oaks..................   5.78%      Variable         17,700        1,332           Dec.  2021        Dec.  2021
Privado Park...................   5.78%      Variable          9,200          704           Dec.  2021        Dec.  2033
Vista Ventana..................   5.78%      Variable          6,400          490           Dec.  2021        Dec.  2033
Shadow Creek...................   5.78%      Variable          5,600          429           Dec.  2021        Dec.  2033
Palencia.......................   7.65%      Fixed            13,250        1,014           N/A               Mar.  2024
Quail Ridge....................   5.78%      Variable          6,400          490           Dec.  2021        Dec.  2033
Tierra Bonita..................   5.78%      Variable          6,000          459           Dec.  2021        Dec.  2033
Crossroads.....................   6.17%      Variable          6,000          474           Dec.  2021        Dec.  2036
Madera Point...................   6.60%      Fixed             7,180          474           Jun.  2026        Jun.  2026
Madera Point (B)...............  11.00%      Fixed               887           98           N/A               Jun.  2027
The Broadmoor..................   6.89%      Fixed             6,000          413           Jun.  2026        Jun.  2026
Cypress Ridge..................   7.09%      Fixed             4,250          301           Jun.  2026        Jun.  2026
Sun Lake.......................   6.49%      Fixed            15,287          992           Oct.  2025        Oct.  2025
Ocean Oaks.....................   6.70%      Variable         10,295          597           Oct.  2002        Oct.  2027
Arbors.........................   6.70%      Variable          7,605          441           Oct.  2002        Oct.  2027
Haverhill Commons..............   6.70%      Variable          9,100          528           Oct.  2002        Oct.  2027
Village Crossing...............   6.70%      Variable          7,000          406           Oct.  2002        Oct.  2027
Crossings of Bellevue..........   4.87%      Variable          8,540          530           Dec.  2021        Dec.  2027
                                  ----                       -------       ------   
Subtotal.......................   6.02%                      306,797       21,560
Taxable Bonds:                   
Shallow Creek..................   7.02%      Variable          2,300          197           Dec.  2021        Dec.  2026

</TABLE>

                                      14




<PAGE>   17


<TABLE>
<CAPTION>

                                         INDEBTEDNESS OUTSTANDING AS OF DECEMBER 31, 1997
                                                      (DOLLARS IN THOUSANDS)
                                  Annual                                  Estimated        Maturity of
      Property Pledged           Interest    Fixed or       Principal    Annual Debt         Credit           Maturity of 
       as Collateral              Rate*     Variable**       Balance      Service***       Enhancements           Debt
       -------------              -----     ----------       -------      ----------       ------------       -----------
<S>                               <C>        <C>            <C>            <C>              <C>               <C>
Sandalwood.....................   6.84%      Variable          4,000          332           Dec.  2021        Dec.  2036
                                  ----                      --------      -------
Subtotal.......................   6.90%                        6,300          529
                                  ----                      --------      -------
Total..........................   6.04%                     $313,097      $22,089
                                  ====                      ========      =======
Conventional Financing:          
Tatum Gardens..................   7.88%      Fixed          $  3,456      $   300           N/A               Apr.  2026
Westway Village................   7.88%      Fixed             4,888          424           N/A               Apr.  2026
Coral Cove.....................   7.88%      Fixed             3,999          347           N/A               Apr.  2026
Summit Creek...................   7.88%      Fixed             3,555          308           N/A               Apr.  2026
Courtney Park..................   8.08%      Fixed            10,050          862           N/A               Mar.  2027
Country Club West..............   8.08%      Fixed            11,344          973           N/A               Mar.  2027
Secured Line of Credit (C).....   7.46%      Variable         35,250        2,630           N/A               Dec.  1998
Unsecured Line of Credit (D)...   8.22%      Variable          2,010          165           N/A               May  1998
                                  ----                      --------      -------
Total                             7.75%                     $ 74,552      $ 6,009                             
                                  ====                      ========      =======
Indebtedness of                  
  Unconsolidated Limited           
  Partnerships - Tax               
  Exempt Bonds:                    
-------------------------------
Williamsburg...................   5.78%      Variable       $ 16,500      $ 1,023           Dec.  2021        Dec.  2021
Brook Run......................   5.37%      Fixed            11,800          690           Dec.  2004        Dec.  2007
                                  ----                      --------      -------
Total..........................   5.61%                     $ 28,300      $ 1,713
                                  ====                      ========      =======
Grand Total                      
-------------------------------
Average All-In Interest Cost...   6.37%
Weighted Average Maturity
  of Indebtedness..............   19.2 Yrs.
Weighted Average Maturity
  of Credit Enhancement........   19.8 Yrs.
</TABLE>

*    Includes interest at fixed rate or at swap rate under applicable hedge
     agreements, fees for credit enhancement, remarketing, servicing and
     trustee services.

**   All bonds with variable interest rates are protected with interest rate
     swaps or caps.

***  Annual debt service includes interest and deposits to reserve funds for
     bond financing and actual debt amortization for conventional financing.
     $237,172,000 of the $387,649,000 of total indebtedness is fully amortizing
     on amortization schedules ranging from 25 to 30 years.

(A)  The Falls of Bells Ferry Bonds are twenty five year bonds whose interest
     rate is reset annually.

(B)  These bonds are owned by a trust in which the Company, through the
     Operating Partnership, is a member of an LLC that is a partner in such
     trust.  The Company receives interest in excess of distributions paid to
     other certificate holders in the trust, who receive tax-exempt interest
     at 9.5%.

(C)  The Secured Line of Credit from Nomura Asset Capital Corporation ("NACC")
     bears interest at LIBOR plus 1.50%.  The properties included as
     collateral under the Secured Line of Credit 



                                      15



<PAGE>   18
\

     as of December 31, 1997 are Pine Shadows, Heather Ridge, LaJolla De 
     Tucson, Hidden Lakes, Legend Oaks, and Cedar Creek.

(D)  The Unsecured Line of Credit from CLNY bears interest at the Prime rate
     plus 1.25% or, at the option of the Company, the Eurorate plus 2.25% or
     LIBOR plus 2.25%.

BOND FINANCING

     The interest rates on approximately $233.9 million of the Company's total
variable rate bond financing as of December 31, 1997 are determined weekly by a
remarketing agent to equal the minimum interest rate necessary for the bonds to
be remarketed at par.  While these bonds are remarketed at variable rates, the
Company has entered into interest rate protection agreements to protect itself
against increases in interest rates (See "Interest Rate Protection").  Each
issue of variable rate bonds is secured by a letter of credit or similar
instrument (referred to as "credit enhancement") issued by a bank or other
financial institution (a "credit enhancer"). The purpose of the credit
enhancement is to secure the borrower's obligation to pay principal and
interest on the bonds and to permit the bonds to receive an investment-grade
rating, thereby lowering the Company's interest costs from those of an unrated
debt instrument.  If a credit enhancer advances money under its credit
enhancement commitment to pay principal and interest on the bonds, the related
Property Partnership will be obligated to reimburse the credit enhancer, which
obligation generally will be secured by a mortgage on the related property.  If
the Property Partnership fails to so reimburse a credit enhancer, the credit
enhancer may foreclose on the Property that secures that reimbursement
obligation. Each credit enhancement agreement terminates on a specified date
that is at or prior to the maturity date of the related bonds. When the
existing credit enhancement expires and if the Property Partnership does not
obtain replacement credit enhancement prior to that date, the variable rate
bonds will be subject to a mandatory tender. Furthermore, if the credit rating
of a credit enhancer is lowered, the interest cost of the bonds affected will
increase or the bonds evidencing the debt could become unmarketable.

     A bondholder may tender the bonds during the variable rate interest period
and receive principal, plus accrued interest through the tender date.  Upon
tender, the remarketing agent will immediately remarket the bonds.  In the
event the remarketing agent fails to remarket any of the bonds, the Partnership
is obligated to purchase those bonds for which they may draw on the credit
enhancement.  The remarketing agent receives a fee of 0.08% per annum on the
outstanding bonds' balance, payable quarterly in arrears on $233.9 million of
variable bonds which are reset weekly, and 0.325% per annum on $28.3 million of
fixed rate, tax-exempt bonds which are reset annually.  Such fees are included
as financing fees in the consolidated statements of operations.

     At December 31, 1997, the Company had approximately $79.2 million of fixed
rate, tax-exempt bond financing as described in the table above.



                                      16



<PAGE>   19




CREDIT ENHANCEMENT OF BONDS

     Of the Company's total $341.4 million in bonds outstanding (including
$28.3 million of unconsolidated debt relating to joint ventures of the Company)
as of December 31, 1997, $323.3 million are credit enhanced by one of five
credit enhancement providers.  $17.4 million are credit enhanced by Financial
Security Assurance ("FSA") for a term through June, 2026; $216.4 million are
credit enhanced by FNMA for a term through December, 2021; $28.3 million are
credit enhanced by Guardian Federal Savings Bank through February, 2009; $11.8
million are credit enhanced by Financial Guarantee Insurance Company ("FGIC")
through November 2004; $34.0 million are credit enhanced by CLNY through
October, 2002; and an additional $15.3 million are guaranteed by FNMA through
October, 2025.  These credit enhancement facilities are described in more
detail below.  The remaining $18.1 million of bonds are not credit enhanced.

     FSA has provided credit enhancement, through Insurance and Indemnity
Agreements, for the Cypress Ridge and Broadmoor bonds in the amount of $4.3
million and $6.0 million, respectively.  FSA has also provided $7.2 million of
credit enhancement for the benefit of the Madera Point bonds (the "Class A
Madera Bonds"), which allowed the Company to sell the bonds that it purchased
when it acquired the Madera Point Property on February 9, 1996.  The credit
enhancement provides the bonds with 30 years of AA rated credit enhancement.
Under the terms of the credit enhancement agreements, the Company was required
to prepay 10 years of credit enhancement fees (approximately $776,000), which
is included in other assets and is being expensed over a ten year period.  At
the end of the tenth year, an annual insurance premium will be due in the
amount of 0.6% per annum payable monthly in advance on the face amount of the
Cypress Ridge and Broadmoor bonds and the Madera Point bonds.  The Insurance
and Indemnity Agreements have expiration dates consistent with the redemption
dates of the bonds themselves, which begin on June 1, 2006 with final maturity
of the bonds on June 1, 2026.  The Company used $8.7 million of the proceeds
from the Cypress Ridge and Broadmoor bonds to repay the NACC Revolving Loan
and the remaining $1.6 million to fund issuance costs associated with the
transaction and capital improvements on the two properties.  Proceeds from the
sale of the Madera Point bonds were used to augment working capital.

     As of December 31, 1997, the Company had credit enhanced approximately
$216.4 million of existing variable rate bonds  associated with 28 of its
properties (including Williamsburg) with a single facility (the  "FNMA
Facility") issued by FNMA.  FNMA has established three separate mortgage pools
as collateral for providing credit enhancement on the bonds.  The first
collateral pool consists of $149.7 million of variable rate bonds relating to
18 properties owned by Ambassador VIII, L.P.  The second collateral pool
consists of $50.2 million of variable rate tax-exempt bonds relating to nine
Properties owned by Ambassador I, L.P.  The third collateral pool consists of
$16.5 million of variable rate tax-exempt bonds relating to the Williamsburg
Property.  FNMA is entitled to credit enhancement fees on the FNMA Facility at
a weighted average rate of 1.04% per annum of the outstanding bond amount, less
any cash collateral.  FNMA also receives a reserve fee of 0.38% per annum on
the amount of cash collateral posted with respect to the FNMA Facility.  The
credit enhancement and reserve fees are payable monthly in advance.  As of
December 31, 1997, the Company posted additional collateral in the form of a
Standby Commitment (see "Recent 



                                      17



<PAGE>   20


Developments") and a $6.0 million cash deposit into an interest bearing escrow
account.  The Company is also making monthly principal reserve payments
(approximately $326,000 during 1997) to FNMA which may be used to redeem bonds. 
The FNMA Facility matures on December 1, 2021.

BONDS ISSUED IN 1997

     The Company pursues a strategy of financing its property acquisitions and
rehabilitation costs from the proceeds of bonds issued by local government
authorities.  Proceeds of bonds issued in 1997 were primarily used by the
Company to reimburse it for acquisition costs of the Properties and expenses
incurred with respect to renovation costs.  The renovation of these properties
consists generally of roof repairs, siding, painting and carpeting of
apartments, parking lot repair and appliance replacements.

     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 the 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.

     Commencing on January 1, 1998 and on each April 1, July 1, October 1 and
January 1, thereafter, the Company is obligated to deposit, as additional
collateral for the CLNY letters of credit, cash into a sinking fund equal to
the principal portion of the quarterly amortization payment which would be due
on each such date on a loan in the amount of the aggregate stated amount of
such letters of credit being amortized over a term of twenty-five years with an
interest rate of 8.00% per annum.

     Concurrently with the issuance of the Florida Bonds, the Company redeemed
$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 held 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 quarter
ended September 30, 1997, the prior Florida Bonds, and correspondingly, the
trust certificates were subject to a $300,000 partial redemption, thereby
leaving an aggregate outstanding balance of $38.7 million in Prior Florida
Bonds, and correspondingly trust certificates.  On December 1, 1997, when the
Prior Florida Bonds were redeemed, the Company redeemed the Class G
certificates in TEB and reimbursed the credit 



                                      18


<PAGE>   21




enhancer for the Class A certificates on its direct pay letter of credit
with respect to the Class A certificates.  In addition, the Class B certificate
holders put their certificates to the Company at a price equal to their par
value plus a $555,687 premium.  A representative of the Class B certificate
holders executed a release of the Company and its affiliates in connection with
the transaction.

     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 under the FNMA Facility.  The Crossroads
Bonds mature  on December 15, 2036.

     On April 17, 1997, the Company refinanced $8.5 million of fixed-rate,
tax-exempt bonds issued by the Industrial Development Board of the Metropolitan
Government of Nashville and Davidson County (the "Bellevue Bonds") for the
benefit of the Crossings of Bellevue property.  The Bellevue 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 Bellevue Bonds are
credit enhanced by the FNMA Facility, issued by FNMA.  The Bellevue Bonds
mature on December 15, 2027.

     On April 25, 1997, the Harris County Housing Finance Corporation issued
$4.0 million of 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 under the FNMA Facility.  The Sandalwood Bonds mature on
December 15, 2036.

     Also, on April 25, 1997, the Harris County Housing Finance Corporation
issued $9.1 million in 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 under the FNMA Facility.  The Ashford Bonds mature on
December 15, 2036.

     On September 18, 1997, the 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 the FNMA Facility and mature on December 15, 2026.

TEB MUNICIPAL TRUST II

     On May 1, 1997, the Company sold at par approximately $4.0 million of
tax-exempt bonds (the "Stonybrook Bonds") and approximately $900,000 of
tax-exempt subordinate bonds (the "Class B 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 



                                      19


<PAGE>   22



limited liability company of which the Company is a member ("G.P.       
Holdings").  The interest rate on the $4.0 million of fixed rate tax-exempt
Stonybrook Bonds is 10% per annum.  The Stonybrook Bonds are collateralized by
the Stonybrook property and mature on October 1, 2012.  The interest rate on
approximately $900,000 of tax-exempt Class B Madera Bonds is fixed at 11% per
annum.  The Class B Madera Bonds are collateralized by the Madera Point property
and mature on June 1, 2027.

     Concurrent with its purchase of the bonds, TEB II sold a $4.9 million
Class A Receipt of beneficial interest in TEB II at a fixed rate of 9.5% per
annum, payable monthly.  G.P. Holdings holds an approximately $14,500 Class G
Receipt, which is entitled to a distribution in an amount equal to the excess
of interest earned by TEB II from its ownership of the Class B Madera Bonds and
the Stonybrook Bonds over the distributions paid to the Class A Receipt
holders.  Under the terms of certain agreements between members of G.P.
Holdings, the Company receives 100% of any excess cash flows, as defined, from
G.P. Holdings.

ASSUMPTION OF TAX-EXEMPT BONDS IN 1997

     On March 11, 1997, the Company acquired the Palencia property  located in
Tampa, Florida, for $15.4 million.  The Company financed the acquisitions by
assuming $13.3 million of fixed-rate tax-exempt bonds (the "Palencia Bonds").
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 a first mortgage on the Palencia property.

     Upon the request of Banc One Capital Funding Corporation ("BOCFC"), the
current holder of the Palencia Bonds, the Company may be required to purchase
the Palencia Bonds from BOCFC, on or after April 1, 1997, at a price equal to
the outstanding balance of the Palencia Bonds, plus accrued interest, and any
other amounts due BOCFC under the terms of a Put Agreement.  The obligation
under the Put Agreement is considered to be recourse to the Company.

INTEREST RATE PROTECTION

     The Company has adopted a policy regarding the hedging of total variable
rate debt (see "Management's Discussion and Analysis-Liquidity and Capital
Resources-Sources and Uses of Cash-Derivatives").  This policy which provides
that at no time will the Company have more than 30% of its variable rate debt
not hedged by an interest rate cap, swap or other interest rate protection
agreement.  In addition, the Company will maintain a 1.3 times debt service
coverage ratio based upon (a) hedged debt at the applicable interest rate cap
and swap strike prices and (b) unhedged debt at a rate of 10% per annum.  This
policy may be changed from time to time by the Board of Directors in its
discretion.  As of December 31, 1997 and March 17, 1998, the Company had $37.3
million and $35.1 million, respectively, in variable rate debt that was not
hedged by any interest rate protection, and was in compliance with the
foregoing policies.  This represented 13.0% and 12.0% of the Company's variable
rate debt at December 31, 1997 and March 17, 1998, respectively.  With respect
to all variable rate debt outstanding as of December 31, 1997, an increase in
short-term interest rates of 1% per annum for a period of one year would
decrease annual net income by 



                                      20



<PAGE>   23




approximately $535,000 based on outstanding variable rate debt balances at
December 31, 1997 (after taking into consideration the effect of the interest
rate protection agreements).

     As of December 31, 1997, the Company has hedged against fluctuations in
interest rates on  all of the Company's $233.9 million of variable rate bonds.
On December 9, 1996, the Company entered into a swap transaction with CLNY in
which the Company pays a fixed rate of 4.636% on a notional amount of $186.5
million (including $16.5 million of debt related to the Williamsburg bonds
issued to an unconsolidated joint venture of the Company).  Under the CLNY
swaps, the Company receives a floating rate based upon the PSA Municipal Swap
Index.  These swap agreements mature on December 9, 2003.

     On October 3, 1996, the Company entered into a swap transaction with
Goldman Sachs to hedge against fluctuations in the variable interest rate on
the Class A Receipts in TEB which have been redeemed.  Under the swap
transaction, the Company pays a fixed rate of 6.83% on a notional amount of
$26.5 million (which due to the relationship between the LIBOR rate and the
J.J. Kenny Index, hedges approximately $36.6 million of variable rate bonds)
and receives a floating rate equal to 90 day LIBOR.  Management believes that
there is a reasonable correlation between changes in the LIBOR rate (on which
the fixed rate the Company pays was based) and the J.J. Kenny Index (an index
of AA rated, variable rate tax exempt bonds).  This swap agreement matures on
October 3, 2003.

     In order to hedge against variations in the relationship between LIBOR and
the Kenny Index the Company entered into a three year swap on March 14, 1996
with Nomura Capital Securities, Inc.  in which the Company pays a floating rate
equal to 72.5% of 90 day LIBOR and receives a floating rate equal to the J.J.
Kenny Index on a notional amount of $130 million (the "Basis Risk Swap").  On
November 26, 1996 this swap was assigned from Nomura Capital Securities, Inc.
to Salomon Brothers Holding Company.  As a result of the cancellation of
certain swaps in December 1996, the notional amount of $103.3 million of the
Basis Risk Swap no longer provides the Company a hedge against interest rate
risk.

     The excess in notional amount of swaps ($2.6 million LIBOR and $103.5
million in Basis Risk Swap) is currently unallocated and may be used to hedge
against variable interest rate risk on future bond indebtedness.

     Effective March 3, 1997, the Company entered into a swap transaction with
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.

     Effective April 17, 1997, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $756,370 to protect against interest
rate fluctuations with respect to the Bellevue Bonds and the Ashford Bonds.
Pursuant to the terms of such interest rate cap agreement, 



                                      21



<PAGE>   24



the 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.

     Effective April 25, 1997, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $234,000 to protect against interest
rate fluctuations with respect to the Sandalwood Bonds.  Pursuant to the terms
of such interest rate cap agreement, the 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.

     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.

     Below is a summary of the transactions which protect the Company from
fluctuations in interest rates.

<TABLE>
                                INTEREST RATE PROTECTION
                              YEAR ENDED DECEMBER 31, 1997  
     ---------------------------------------------------------------------------
                                              Notional  Hedged
       Transaction Date                Type    Amount   Amount  Termination Date
     -------------------------------   ----    ------   ------  ----------------
     <S>                               <C>     <C>     <C>      <C>
     December 19, 1996..............   Swap    $170.0  $ 170.0  December 2003
     October 3, 1996................   Swap      26.5     36.6  October 2003
     March 3, 1997..................   Swap       6.0      6.0  March 2004
     April 17, 1997.................   Cap       17.6     17.6  April 2004
     April 25, 1997.................   Cap        4.0      4.0  April 2004
     September 11, 1997.............   Cap        2.3      2.3  September 2002
                                                       -------
     TOTAL INTEREST RATE PROTECTION                    $ 236.5
     Total variable rate Bonds......                    (233.9)
                                                       -------
     UNALLOCATED EXCESS HEDGE       
       AMOUNT ......................                   $   2.6
                                                       =======
</TABLE>

RECOURSE OBLIGATIONS

     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 December 31, 1997, six properties
were pledged as collateral under the NACC Revolving Loan, and approximately
$35.3 million was outstanding.  As of December 31, 1997, the collateral value
of the six properties pledged as collateral would have permitted an additional
$2.6 million of borrowings under the NACC Revolving Loan.  The NACC Revolving
Loan originally had a maturity date of December 31, 1997; however, on 


                                      22



<PAGE>   25



September 30, 1997, the Company amended the NACC Revolving Loan to extend
the maturity date to December 31, 1998.

     On May 28, 1997, the Company entered the CLNY Unsecured Line of Credit for
$25.0 million 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, is due and payable 120 days following
the date of any advance under the CLNY Unsecured Line of Credit.  As of
December 31, 1997, there was approximately $2.0 million 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 January 30,1998, the Company further amended the CLNY
Unsecured Line of Credit as described in "Recent Developments".

INDEBTEDNESS OF UNCONSOLIDATED PARTNERSHIPS

     As of December 31, 1997, the unconsolidated Property Partnerships had
total debt outstanding of $28.3 million, all of which is long-term tax-exempt
financing (secured, directly or indirectly, by mortgages on the related
Properties). The Property Partnership that owns the Williamsburg Property has
outstanding $16.5 million of which 100% is nonrecourse.  The Property
Partnership that owns the Brook Run Property has outstanding $11.8 million of
bonds that bear interest at a fixed rate of 5.05% per annum, with an all-in
cost of approximately 5.375%. This debt is marketed based on credit enhancement
that is supported by a recourse standby purchase agreement provided by
Lumbermens Mutual Casualty Company. The credit enhancement expired on November
30, 1995 and the Property Partnership acquired $11.8 million of the tax-exempt
bonds.  A general partner of the Property Partnership provided the financing to
enable it to acquire such bonds.  On May 22, 1997, the Company entered into an
agreement with FGIC to provide credit enhancement for bonds secured by the
Brook Run Property.  The bonds were remarketed and the proceeds were used to
repay the loan from the general partner of the Property Partnership.  Under the
terms of the insurance agreement, the Property Partnership was required to
prepay the premium payment of $183,947, which is amortized over the term of the
insurance agreement.  The agreement terminates on January 1, 2004.  The standby
purchase agreement expires on November 30, 2003.  The standby purchase provider
will have recourse to the Operating Partnership (or the Company, if the
Operating Partnership ceases to exist) for any loss to it with respect to the
$11.8 million of bonds, but this recourse will be limited to one-half of 30% of
the principal amount of the bonds relating to the Brook Run property, as such
amount may be reduced by redemption or other early repayment other than in
connection with the application of proceeds of any collateral securing such
bonds or credit enhancement, plus one-half of 30% of all accrued and unpaid
interest due and owing with respect to such bonds plus all costs and expenses
of enforcing such recourse obligation.

ITEM 3. LEGAL PROCEEDINGS

     There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company is a party
or of which any of its property is the subject.



                                      23



<PAGE>   26



ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation
of proxies or otherwise.


                                      24




<PAGE>   27




                                   PART II

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

     Since December 27, 1995, the Company's shares have been listed on the New
York Stock Exchange ("NYSE") under the symbol "AAH". The following table sets
forth for the periods indicated, the dividends and the high and low sale prices
for the Company's Common Stock as reported by the NYSE.


<TABLE>
<CAPTION>


               1997               High       Low          Dividends Paid
     ------------------------  ---------   ---------      --------------
     <S>                       <C>         <C>                <C>
     Fourth Quarter..........  $23 13/16   $ 19 9/16          $0.40
     Third Quarter...........   24 3/4       20 3/4            0.40
     Second Quarter..........   24 7/8       22 1/2            0.40
     First Quarter...........   25 7/8       23 1/8            0.40

               1996
     ------------------------  
     Fourth Quarter..........   24           17 7/8            0.40
     Third Quarter...........   18 3/4       15 7/8            0.40
     Second Quarter..........   18 3/4       16                0.40
     First Quarter...........   20 1/8       16 7/8            0.40

</TABLE>

     In order to qualify to be taxed as a REIT, the Company must make annual
distributions to stockholders of at least 95% of its REIT taxable income.  The
holders of Common Stock are entitled to receive dividends when and as declared
by the Board of Directors.  The declaration of dividends in the future will be
reviewed by the Board of Directors in light of the Company's earnings,
financial condition and capital requirements.  The Company expects to be able
to maintain its current level of dividends and to distribute at least 95% of
its REIT taxable income.

     In addition to its regular quarterly dividends, if the Merger occurs, the
Company will declare a special dividend, with a record date prior to the
Effective Time, which will result in its stockholders receiving an amount per
share equal to the product of (x) the difference between (a) the Company's most
recent quarterly dividend amount (appropriately adjusted by any stock splits
and the like) and (b) the product of the Conversion Ratio (as determined
pursuant to the Merger Agreement)  and AIMCO's most recent quarterly dividend
amount (approximately adjusted for any stock splits and the like) and (y)  the
number of days which shall have elapsed through and including the day
immediately prior to the day of  the Effective Time since the end of the most
recent calendar quarter (as of the Effective Time) for which the Company's
dividend record date has then occurred, divided by 91.  For example, if the
Effective Time occurs on May 1, 1998, it is anticipated that the Company will
declare a regular quarterly dividend of $.40 per share to holders of record
shortly before that date.  In such event, and assuming AIMCO's most recent
quarterly dividend at that time is $.5625, the amount of its first quarter
dividend, then the Company would declare a special dividend of approximately
$0.0238 per share (assuming the Conversion Ratio is 0.583).  Concurrent and
equivalent per unit distributions for the benefit of the holders of Common
Units shall be made in connection with the special dividend.

     At March 17, 1998, there were approximately 2,500 holders of record of the
Common Stock.


                                      25




<PAGE>   28






     In June 1997, the Company registered 2.5 million shares of Common Stock
pursuant to an equity shelf registration statement (the "Equity Shelf
Registration") of which 1.3 million registered Common Shares were sold on June
30, 1997 (the "Shelf Offering") at prices between $22.375 and $22.625.  The
Company received gross proceeds of approximately $29.3 million and net proceeds
of approximately $28.8 million in connection therewith.  The Company used $20.7
million of the net proceeds received from the 1997 Offering to acquire the
Cedar Creek and Park Colony apartments, $3.1 million to repay funds borrowed
under the CLNY Unsecured Line of Credit and the remainder to repay additional
principal outstanding under the NACC Revolving Loan.

     The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer Company.

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected financial and operating
information on a historical basis for the Company and Prime Properties, the
combined predecessor properties of the Company (collectively, the
"Predecessor").  The following information should be read in conjunction with
all of the financial statements and notes thereto included elsewhere in this
Form 10-K.  The historical operating data for the years ended December 31,
1997, 1996, 1995, 1994, and 1993 have been derived from the historical
Financial Statements of the Company and the Predecessor.

     "Funds from Operations" (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview") does not represent
cash flow from operating activities in accordance with GAAP and is not
indicative of cash available to fund all of the Company's cash needs. Funds
from Operations should not be considered as an alternative to net income or any
other GAAP measure as an indicator of performance and should not be considered
as an alternative to cash flows as a measure of liquidity or ability to make
distributions.  In addition, the Company believes that the book value of the
Properties, which reflects historical costs of such real estate assets less
accumulated depreciation, is not necessarily indicative of the current market
value of the Properties.



                                      26




<PAGE>   29

<TABLE>
<CAPTION>
                                                                 
                                                      SELECTED FINANCIAL DATA
                                           AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND
                                         PRIME PROPERTIES (THE PREDECESSOR TO THE COMPANY)
                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                     THE COMPANY                         PREDECESSOR
                                                    ---------------------------------------------  ------------------------   
                                                                                      AUGUST 31    JANUARY 1                
                                                       YEAR ENDED  DECEMBER 31,        THROUGH      THROUGH      YEAR ENDED  
                                                    -------------------------------  DECEMBER 31,  AUGUST 30,    DECEMBER 31, 
                                                      1997       1996       1995         1994         1994         1993
                                                    ---------  ---------  ---------     ---------    --------      --------  
<S>                                                   <C>        <C>        <C>         <C>           <C>         <C>
OPERATING DATA:    
Total revenue......................................   $93,329    $70,194    $53,381       $14,680     $20,434       $20,024
Property operating expenses........................    36,088     27,465     21,574         5,745       9,069         9,016
General and administrative expenses................     6,868      5,225      5,078         1,459         298           164
Property management fees...........................        --         --         --            --       1,109         1,184
Depreciation                                           18,979     13,430      8,894         2,101       3,190         3,271
Amortization of deferred financing fees............     1,393      1,829      2,792           622         333           262
(Income) losses from unconsolidated real estate
  limited partnerships.............................      (405)      (233)       320           162          --            --
Merger related costs...............................       524         --         --            --          --            --
                                                    ---------  ---------  ---------     ---------    --------      --------  
Income from operations.............................    29,882     22,478     14,723         4,591       6,435         6,127
Interest expense...................................    25,594     17,417      9,487         1,738       5,776         5,748
                                                    ---------  ---------  ---------     ---------    --------      --------  
Income before minority interest, gain on sale of
  rental property, loss on sale of investment,
  loss on sale of interest rate cap and
  extraordinary item...............................     4,288      5,061      5,236         2,853         659           379
Income allocated to minority interest (1)..........    (1,237)    (1,883)      (615)         (332)         --            --
                                                    ---------  ---------  ---------     ---------    --------      --------  
Income before gain on sale of rental property,
  loss on sale of investment, loss on sale
  of interest rate cap and
  extraordinary item...............................     3,051      3,178      4,621         2,521         659           379
Gain on sale of rental property, net of minority
  interest.........................................        --         --        966            --          --            --
                                                    ---------  ---------  ---------     ---------    --------      --------  
Income before loss on sale of investment, loss on
  sale of interest rate cap and extraordinary
  item.............................................     3,051      3,178      5,587         2,521         659           379
Loss on sale of investment, net of minority
  interest.........................................      (509)        --         --            --          --            --
                                                    ---------  ---------  ---------     ---------    --------      --------  
Income before loss on sale of interest rate cap
  and extraordinary item...........................     2,542      3,178      5,587         2,521         659           379
Loss on sale of interest rate cap, net of minority
  interest.........................................        --     (2,084)        --            --          --            --
                                                    ---------  ---------  ---------     ---------    --------      --------  
Income before extraordinary item...................     2,542      1,094      5,587         2,521         659           379
Extraordinary item, net of minority interest.......    (1,384)    (4,653)     4,360          (772)         --            --
                                                    ---------  ---------  ---------     ---------    --------      --------  
Net income (loss)..................................     1,158     (3,559)     9,947         1,749         659           379
Income allocated to preferred stockholders.........     2,296        851         --            --          --            --
                                                    ---------  ---------  ---------     ---------    --------      --------  
Net (loss) income applicable to common
  shareholders.....................................   $(1,138)   $(4,410)    $9,947        $1,749        $659          $379
                                                    =========  =========  =========     =========    ========      ========
Basic Earnings Per Share: (5)
(Loss) income per weighted average share of
  common stock outstanding:
Before extraordinary item..........................     $0.02      $0.03      $0.62         $0.28
Extraordinary item ................................     (0.14)     (0.52)      0.49         (0.09)
                                                    ---------  ---------  ---------     ---------     
Net (loss) income..................................    $(0.12)    $(0.49)     $1.11         $0.19
                                                    =========  =========  =========     =========
Weighted average shares of common stock
  outstanding - basic:............................. 9,834,710  8,958,525  8,958,525     8,847,547
Diluted Earnings Per Share: (5)
(Loss) income per weighted average share of
  common stock outstanding:
Before extraordinary item..........................     $0.03      $0.03      $0.62         $0.28
Extraordinary item.................................     (0.14)     (0.52)      0.49         (0.09)
                                                    ---------  ---------  ---------     ---------     
Net (loss) income..................................    $(0.11)    $(0.49)     $1.11         $0.19
                                                    =========  =========  =========     =========
Weighted average shares of common stock
  outstanding - dilutive:.......................... 9,935,873  9,012,110  8,958,525     8,847,547
</TABLE>


                                      27
<PAGE>   30

<TABLE>
<CAPTION>
                                                      SELECTED FINANCIAL DATA
                                           AMBASSADOR APARTMENTS, INC. (THE COMPANY) AND
                                         PRIME PROPERTIES (THE PREDECESSOR TO BE COMPANY)
                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                   The Company                         Predecessor
                                                  --------------------------------------------   ------------------------  
                                                                                      August 31   January 1                
                                                      Year Ended  December 31,         through     through    Year Ended   
                                                  ------------------------------     December 31, August 30,  December 31, 
                                                    1997       1996       1995          1994        1994         1993
                                                  --------   --------   --------      --------    --------     ---------
<S>                                               <C>        <C>        <C>        <C>           <C>         <C>
Net cash provided by operating activities......   $ 20,732   $ 19,087   $ 21,592      $  5,245    $  4,935      $  4,807
Net cash used in investing activities..........   $(39,029)  $(79,975)  $(58,530)     $(80,438)   $ (1,731)     $(64,155)
Net cash provided by (used in) financing
     activities................................   $ 18,743   $ 59,620   $39, 784      $ 77,667    $ (2,405)     $ 60,669
SUPPLEMENTAL INFORMATION:
Funds from Operations (2)......................   $ 24,659   $ 20,762   $ 15,672      $  5,093    $  3,849      $  3,650
Per share funds from operations (2) (6)........   $   1.90      $1.85   $   1.57      $   0.51    $   0.39      $   0.37
Distributions/dividends per share..............   $   1.60      $1.60   $   1.20      $  0.538          --            --
Number of apartment units at end of period.....     15,728     14,564     10,636         8,185 (3)   5,090         5,090
Number of  Properties at end of period (3).....         52         49         36            30          21            21
BALANCE SHEET DATA:
Rental property before accumulated depreciation   $551,754   $495,292   $343,869      $235,916    $168,164      $166,433
Net rental property............................   $449,435   $461,952   $323,959      $224,436    $157,689      $159,148
Total assets...................................   $557,176   $514,784   $359,989      $244,511    $187,316      $166,407
Total debt (4).................................   $387,694   $359,329   $229,981      $112,800    $182,300      $163,900
Total equity (deficit).........................   $108,048   $ 90,448   $109,173      $109,962    $ (1,781)      $(2,422)
</TABLE>

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

 (1)  Reflects allocation of income to minority interests (Limited Partners of
      the Operating Partnership, Jupiter - I, L.P. and Jupiter - II, L.P.).

 (2)  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 Financial
      Statements.  Industry analysts generally consider FFO an appropriate
      measure of performance of an equity REIT.  FFO is defined by the National
      Association of Real Estate Investment Trusts ("NAREIT") as net income
      (loss) computed in accordance with generally accepted accounting
      principles ("GAAP"), excluding gains or (losses) from debt restructuring
      or sales of property plus (i) real estate depreciation, (ii) amortization
      of capitalized leasing expenses and tenant allowances or improvements,
      and (iii) adjustments for unconsolidated partnerships and joint ventures.

 (3)  Subsequent to the initial offering, includes unconsolidated property
      partnerships.

 (4)  Subsequent to the initial offering, excludes indebtedness in the
      aggregate amount of $28,300 of bonds payable by the unconsolidated
      partnerships.

 (5)  The earnings per share amounts prior to 1997 have been reported as
      required to comply with Statement of Financial Accounting Standards No.
      128, "Earnings per Share".  No restatement of prior reported amounts was
      required.  For further discussion of earnings per share and the impact of
      Statement No. 128, see the notes to the consolidated financial statements.
 
 (6)  The year ended December 31, 1997 assumes 9,834,710 weighted average
      common shares outstanding, conversion of all weighted average Common
      Units (904,466), Jupiter - I, L.P. and Jupiter -  II, L.P. (1,018,422),
      and conversion of Class A Preferred Stock (1,246,402).  The year ended
      December 31, 1996 assumes 8,958,525 weighted average common shares
      outstanding, conversion of all weighted average Common Units (963,983),
      Jupiter - I, L.P. and Jupiter - II, L.P. (910,365), and conversion of
      weighted average Class A Preferred Stock (420,127).



                                      28
<PAGE>   31

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

     OVERVIEW

     The following discussion should be read in conjunction with "Selected
Financial and Operating Information" and the Consolidated Financial Statements
and notes thereto appearing elsewhere in this Form 10-K.  As of December 31,
1997, the Company owned 52 multifamily residential properties, including
interests held in two unconsolidated joint ventures.

     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 Financial
Statements.  Industry analysts generally consider FFO an appropriate measure of
performance of an equity REIT.  FFO is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") as net income (loss) computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains or (losses) from debt restructuring or sales of property plus (i) real
estate depreciation, (ii) amortization of capitalized leasing expenses and
tenant allowances or improvements, and (iii) adjustments for unconsolidated
partnerships and joint ventures.  All years presented conform to the current
NAREIT definition of 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 or the ability to make distributions.

     Reconciliation of income before minority interest, gain on sale of rental
property, loss on sale of investment, loss on sale of interest rate cap, and
extraordinary item to FFO is as follows:



<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,      
                                                               ----------------------------
                                                                 1997     1996      1995   
                                                               -------- --------  ---------
     <S>                                                       <C>      <C>       <C>
     Income before minority interest, gain on sale of rental                                   
       property, loss on  sale of investment, loss on sale of                                  
       interest rate cap, and  extraordinary item............   $4,288    $5,061    $5,236     
     Real estate depreciation................................   18,864    13,265     8,819     
     Adjustment to joint ventures............................      800      1139       547     
     Other non-recurring FFO adjustments.....................      707(1)  1,297(2)  1,070(3)    
                                                               -------   -------   -------
     Total FFO...............................................  $24,659   $20,762   $15,672  
                                                               =======   =======   =======
</TABLE>

(1)  Represents costs incurred, such as legal, accounting and other expenses
     relating to the Merger ($524,001) and payments to a former senior
     executive of the Company in connection with the termination of his
     employment and associated legal and other costs ($182,709).


                                      29
<PAGE>   32

(2)  The non-recurring adjustment relates to costs incurred with respect to
     (i) resignation of executive officer ($182,886), (ii) changing the name of
     the Company ($229,666), (iii) increased interest costs as a result of
     replacing remarketing agents ($259,678), (iv) cash collateralized letters
     of credit for Cypress Ridge and Broadmoor until permanent credit
     enhancement was obtained ($90,544), (v) moving share listing to the New
     York Stock Exchange ($84,696), (vi) fire/flood damage in excess of
     experience ($148,387), (vii) final costs pertaining to 1995 purchase of
     the Company's  fixed rate bonds ($71,641), and (viii) closing costs for
     the preferred stock issuance, formation of Jupiter-I, L.P. and the FNMA
     credit enhancement facility ($229,548).

(3)  Represents cost incurred with respect to the purchase of the Company's
     fixed rate bonds.

RESULTS OF OPERATIONS

     COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996

     During 1997, the Company acquired three Properties comprising 1,164 units
(the "1997 Acquired Properties").  During 1996, the Company acquired thirteen
Properties comprising 3,928 units (the "1996 Acquired Properties").  Thus, the
Company's results for the year ended December 31, 1997 include a full twelve
months of operations for the 1996 Acquired Properties.  However, the Company's
results for the year ended December 31, 1996 include only partial operations
from these thirteen properties.  The 1997 Acquired Properties and the 1996
Acquired Properties are collectively referred to as the "Additional
Properties."

     The acquisition of Palencia in March 1997 resulted in the assumption of
$13.3 million of tax-exempt bonds.  The acquisition of The Crossings of
Bellevue and Sun Lake in October 1996 and November 1996, respectively, resulted
in the assumption of $24.1 million of tax-exempt bonds.

     Two separate issuances of new tax-exempt bonds totaling $15.1 million and
two separate issuances of new taxable bonds totaling $6.3 million
(collectively, the "1997 Bonds") occurred during 1997 to partially fund
acquisition costs and to provide funds for renovation of the Properties that
encumber the respective bond issues.  Tax-exempt bonds were issued in March
1997 for $6.0 million for the benefit of the Crossroads property and in April
1997 for $9.1 million for the benefit of the Trails of Ashford property.
Taxable bonds were issued in April 1997 for $4.0 million for the benefit of the
Sandalwood property and in September for $2.3 million for the benefit of the
Shallow Creek property.

     Additionally, the Company's results for the year ended December 31, 1997,
include a full twelve months of interest expense for the 1996 Bonds (defined
below).  The Company's results for the year ended December 31, 1996, include
less than a full twelve months of interest expense from these four bonds.  The
1997 Bonds and 1996 Bonds are collectively referred to as the "New Bonds."

     On May 1, 1997, the Company sold at par $4.0 million of tax-exempt bonds
(the Stonybrook Bonds and approximately $900,000 of the Class B Madera Bonds to
TEB II.  The Company has an approximately 1% ownership interest in TEB II
through G.P. Holdings.  The Stonybrook Bonds bear interest at 10% per annum,
mature on October 1, 2012, and are collateralized by the Stonybrook 


                                      30
<PAGE>   33

property. The Class B Madera Bonds bear interest at 11% per annum, mature on    
June 1, 2027, and are collateralized by the Madera Point 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, the Class A Madera
Bonds and the Class B Madera Bonds (collectively, the "Madera Bonds") included
in the consolidated financial statements accounted for the significant changes
in operating results for the twelve-month period ended December 31, 1997,
compared to the same period in 1996.

     For the twelve-month period ended December 31, 1997, income before
minority interest, gain on sale of rental property, loss on sale of investment,
loss on sale of interest rate cap, and extraordinary item decreased by
approximately $773,000, or 15.3%, to $4.3 million for the twelve-month period
ended December 31, 1997, 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 $23.1 million, or 33.0%, to $93.3 million, for
the twelve-month period ended December 31, 1997, when compared to the same
period in 1996.  Of this increase, approximately $20.7 million is attributable
to the acquisition of the Additional Properties.

     Total expenses (exclusive of depreciation, amortization of deferred
financing fees, and interest expense) increased $10.4 million, or 29.0%, to
$46.1 million for the twelve months ended December 31, 1997, when compared to
the same period in 1996.  Property operating expenses increased $6.4 million,
of which approximately $5.8 million is due to the acquisition of the Additional
Properties.  Real estate taxes increased $1.7 million, which is primarily
attributable to the purchase of the Additional Properties.  General and
administrative expenses increased $1.6 million.  This increase was due
primarily to increased administrative costs incurred in connection with the
Company increasing the size of its portfolio late 1996 and in 1997, increased
expenses in training employees to reduce turnover, and in marketing costs to
increase resident renewals.  Additionally, the Company incurred in 1997
approximately $524,000 of costs associated with the proposed Merger.  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 $247,000, primarily as a result of the Company
replacing its credit enhancement on approximately $186.5 million of variable
rate, tax-exempt bonds with the FNMA Facility.  Income from unconsolidated real
estate limited partnerships increased $172,000, primarily as a result of the
Company's investment in G.P. Holdings.

     Depreciation and amortization increased $5.1 million, or 33.5%, to $20.4
million for the twelve-month period ended December 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.
The increase in depreciation is partially offset by lower amortization charges
as a result of a longer amortization period for those costs incurred in
connection with the FNMA 


                                      31
<PAGE>   34

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 credit enhancement transaction costs written off
in the fourth quarter of 1996.

     Interest expense increased $8.4 million, or 59.6%, to $22.6 million for
the twelve-month period ended December 31, 1997, when compared to the same
period in 1996.  This increase is primarily attributable to costs associated
with the bonds assumed by the Company in connection with the acquisition of the
Additional Properties ($4.1 million); the issuance of the New Bonds ($1.5
million); 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 ($1.8 million); the December 1996 remarketing
of $7.2 million of Class A Madera Bonds, the sale of the Stonybrook Bonds and
the Class B Madera Bonds ($726,000); and an increase of swap interest expense
($691,000).  The increases are partially offset by a $806,000 reduction in
interest expense associated with the Company's secured line of credit, due to
lower average balances and lower interest rates in 1997 compared to 1996.

COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995

     In connection with the 1996 acquisitions of Madera Point, Stonybrook and
the Florida Properties, the Company acquired $8.1 million, $4.1 million and
$39.0 million in face amount, respectively, of tax-exempt bonds. The
acquisition of the Crossings of Bellevue and Sun Lake resulted in the
assumption of $8.6 million and $15.5 million, respectively, of variable rate
tax-exempt bonds.

     Four separate issuances of new tax-exempt bonds (the "1996 Bonds")
totaling $27.2 million occurred during 1996 to partially fund acquisition costs
and to provide funds for renovation of the Properties that are encumbered by
respective bond issues.  $4.3 million in bonds were issued in April 1996 with
respect to Cypress Ridge, $6.0 million were issued in May 1996 with respect to
Broadmoor, and $14.6 million and $2.3 million were issued in November 1996 with
respect to The Mills and Shallow Creek, respectively.  Additionally, in
December 1996 the Company sold $7.2 million of Class A Madera Bonds.

     The acquisition of the 1996 Acquired Properties,  the corresponding
assumption of variable rate tax-exempt bonds and the issuance of additional
variable rate tax-exempt bonds resulted in significant changes in operating
results for the twelve month period ended December 31, 1996 compared to the
same period in 1995.

     For the twelve month period ended December 31, 1996, income before
minority interest, gain on sale of rental property, loss on sale of interest
rate cap and extraordinary item decreased by approximately $175,000, or 3.3%,
to $5.1 million for the twelve month period ended December 31, 1996 when
compared to the same period in 1995.  While total revenues increased
significantly, this 


                                      32
<PAGE>   35

increase was more than offset by increases in depreciation, interest expense    
and financing fees.  These items are discussed in greater detail below.

     Total revenues increased $16.8 million, or 31.5%, to $70.2 million for the
twelve month period ended December 31, 1996 when compared with the same period
in 1995.  Of this increase, $8.0 million was associated with the 1996 Acquired
Properties.  Of the remaining $8.8 million increase in total revenue, $1.8
million related to increases in total revenue at Properties owned by the
Company during all of 1995 and 1996 ("same store sales") and $7.0 million
related to owning  Properties acquired in 1995 for a full 12 months in 1996.

     Total expenses exclusive of depreciation, amortization of deferred
financing fees and interest expense increased $8.2 million, or 29.7%, to $35.7
million for the twelve month period ended December 31, 1996 when compared with
the same period in 1995.  Property operating expenses increased $3.4 million
primarily due to the acquisition of the 1996 Acquired Properties.
Approximately $600,000 of the $1.1 million increase in real estate taxes
related to the 1996 Acquired Properties, and the remaining $500,000 increase in
real estate taxes related to properties acquired prior to 1996.  General and
administrative expenses increased $1.6 million, also reflective of the 1996
Acquired Properties.  Financing fees increased $1.8 million for the twelve
month period ended December 31, 1996, when compared to the same period in 1995
reflecting the full year impact of fees associated with certain credit
enhancement agreements which were entered into during September 1995.  These
credit enhancement agreements were canceled and replaced in December 1996 as a
result of the Company entering into the FNMA Facility.

     Depreciation increased $4.5 million, or 50.6%, to $13.4 million for the
twelve month period ended December 31, 1996 when compared with the same period
in 1995.  This increase is primarily related to an increase in depreciable
assets associated with the acquisition of the 1996 Acquired Properties and a
full year's depreciation of the Properties acquired in 1995.

     Interest expense increased $5.2 million, or 58.4%, to $14.1 million for
the twelve month period ended December 31, 1996 when compared to the same
period in 1995.  This increase includes approximately $2.2 million in interest
expense associated with the 1996 Acquired Properties and approximately $239,000
in interest expense in connection with the 1996 Bonds.  Approximately $1.3
million of the increase reflects a full year of interest paid with respect to
the financing of the acquisition of the properties acquired in 1995.
Furthermore, the Company paid an additional $550,000 of interest on the
revolving loan agreements in 1996 compared to 1995, due to higher average
balances on the NACC Revolving Loan in 1996 compared to 1995.

     Amortization of deferred financing fees declined by $1.0 million, or
35.7%, to $1.8 million primarily as a result of a write-off of deferred
financing fees related to the credit enhancement agreements which were replaced
by the FNMA Facility and deferred financing fees associated with the Company's
Secured Line of Credit were fully amortized as of June 1, 1996.

                                      33
<PAGE>   36

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH

Shelf Registration

     In June 1997, the Company registered 2.5 million shares of Common Stock of
which 1.3 million registered Common Shares were sold on June 30, 1997 at prices
between $22.375 and $22.625.  The Company received gross proceeds of
approximately $29.3 million and net proceeds of approximately $28.8 million in
connection therewith.  The Company used $20.7 million of the net proceeds
received from this offering to acquire the Cedar Creek and Park Colony
apartments, $3.1 million to repay funds borrowed under the CLNY Unsecured Line
of Credit and the remainder was used to repay additional principal outstanding
under the NACC Revolving Loan.

TEB II

     On May 1, 1997, the Company sold at par the Stonybrook Bonds and the Class
B Madera Bonds to TEB II.  The Company has an approximately 1% ownership
interest in TEB II through G.P.  Holdings.  The interest rate on the $4.0
million of fixed rate tax-exempt Stonybrook Bonds is 10% per annum.  The
Stonybrook Bonds are collateralized by the Stonybrook property and mature on
October 1, 2012.  The interest rate on approximately $900,000 of  Class B
Madera Bonds is fixed at 11% per annum.  The Class B Madera Bonds are
collateralized by the Madera Point property and mature on June 1, 2027.

     Concurrent with its purchase of the bonds, TEB II sold a $4.9 million
Class A Receipt of beneficial interest in TEB II at a fixed rate of 9.5% per
annum, payable monthly, through 2007.  G.P. Holdings holds an approximately
$14,500 Class G Receipt, which is entitled to a distribution in an amount equal
to the excess of interest earned by TEB II from its ownership of the Class B
Madera Bonds and the Stonybrook Bonds over the distributions paid to the Class
A Receipt holders.  Under the terms of certain agreements between members of
G.P. Holdings, the Company receives 100% of any excess cash flows, as defined,
from G.P. Holdings.  During 1997, G.P. Holdings received distributions of
approximately $5,000 with respect to the Class G Receipts.

FLORIDA REFINANCING

     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 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



                                      34
<PAGE>   37

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 redeemed
$38.7 million  of the Prior Florida Bonds owned by TEB, in which an
unconsolidated subsidiary of the Company held an approximate $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 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.  On
December 1, 1997, the Company redeemed the Class G certificates in TEB and
reimbursed the credit enhancer for the Class A certificates on its direct pay
letter of credit with respect to the Class A certificates.  In addition, the
Class B certificate holders put their certificates to the Company at a price
equal to their par value plus a $555,687 premium.  A representative of the
Class B certificate holders executed a release of the Company and its
affiliates in connection with the transaction.


RECENTLY ISSUED TAX-EXEMPT BONDS

     Nine properties received new bond financings or refinancings totaling
approximately $64.0 million during 1997.  See "Properties - Mortgage and Bond
Financing - Bonds Issued in 1997" for additional information.



<TABLE>
<CAPTION>
                                                                  (In 000's)   Credit
Date of Issue            Issuer*                  Property          Amount    Enhancer
--------------  --------------------------  ------------------    ----------  --------
<S>             <C>                         <C>                    <C>         <C>
March 6, 1997   IDA of the City of Phoenix  Crossroads             $   6,000    FNMA
April 17, 1997  IDB of the Metropolitan     Crossings of               8,540    FNMA
                Government of Nashville     Bellevue
                and Davidson County
April 25, 1997  Harris County HFC           Sandalwood                 4,000    FNMA
April 25, 1997  Harris County HFC           Trails of Ashford          9,050    FNMA
Sept. 18, 1997  Bexar County HFC            Shallow Creek              2,300    FNMA
Oct. 27, 1997   HFA of Palm Beach County    Haverhill Commons          9,100    CLNY
Oct. 27, 1997   HFA of Palm Beach County    Village Crossings          7,000    CLNY
Oct. 27, 1997   HFA of Palm Beach County    Arbors                     7,605    CLNY
Oct. 27, 1997   HFA of Palm Beach County    Ocean Oaks                10,295    CLNY
</TABLE>



                                      35
<PAGE>   38


* HFC denotes Housing Finance Corporation
  IDA denotes Industrial Development Authority
  IDB denotes Industrial Development Board
  HFA denotes Housing Finance Authority

SCHEDULED DEBT MATURITIES

     The Company is required to make an annual sinking fund payment on the
bonds collateralized by The Falls of Bells Ferry property.  At December 31,
1997, the Company had pledged $2.7 million as collateral for this obligation, a
portion of which be released in each of the next four years as sinking fund
payments become due.  There are no other balloon maturities of the Company's
tax-exempt or taxable bond issues over the next five years.

     At December 31, 1997, the Company makes monthly principal reduction
payments or principal reserve payments of $326,000 on approximately $216.4
million, or 69.1%, of its bonds payable.

REVOLVING CREDIT AGREEMENTS

     On May 28, 1997, the Company entered into 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, are due and payable 120 days following the
date of any advance 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.  At December 31, 1997 and
March 17, 1998, the outstanding balance under the CLNY Unsecured Line of Credit
is approximately $2.0 million and $3.5 million, respectively.  Pursuant to the
terms of the CLNY Unsecured Line of Credit agreements, the Company is subject
to certain financial covenants, including a 2.0 to 1.0 consolidated interest
coverage ratio, as defined, and a consolidated EBITDA to debt service ratio of
1.75 to 1.0, as defined.  The interest coverage ratio was waived for the
quarter ended December 31, 1997, with the provision that it exceed 1.90 to 1.0.
On January 30, 1998, the CLNY Unsecured Line of Credit was further amended as
described in "Recent Developments".

     On June 22, 1997, the Company entered into 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 December 31, 1997, six properties were pledged as collateral
under the NACC Revolving Loan, and approximately $35.3 million was outstanding.
As of December 31, 1997, the six properties pledged as collateral would have
permitted approximately$2.6 million of additional borrowings under the NACC
Revolving Loan.  The NACC Revolving Loan originally 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.  Pursuant to
the terms of the NACC Revolving Loan agreements, the 


                                      36
<PAGE>   39

Company is subject to certain financial covenants including a 1.40 to 1.0 debt  
service coverage ratio, as defined.

DERIVATIVES

     As of December 31, 1997, the Company has hedged against fluctuations in
interest rates on all of the Company's  $233.9 million of its variable rate
bonds.  On December 9, 1996, the Company entered into a swap transaction with
CLNY in which the Company pays a fixed rate of 4.636% on a notional amount of
$186.5 million (including $16.5 million of debt related to the Williamsburg
bonds issued to an unconsolidated joint venture of the Company).  Under the
CLNY swaps, the Company receives (in three swaps of $119.8 million, $50.2
million and $16.5 million notional amount) a floating rate based upon the PSA
Municipal Swap Index.  These swap agreements mature on December 9, 2003.

     On October 3, 1996, the Company entered into a swap transaction with
Goldman Sachs to hedge against fluctuations in the variable interest rate on
the Class A Receipts previously owned by TEB, which have been redeemed.  Under
this swap transaction, the Company pays a fixed rate of 6.84% on a notional
amount of $26.5 million (which due to the relationship between the LIBOR rate
and the J.J. Kenny Index, hedges approximates $36.6 million of variable rate
bonds) and receives a floating rate equal to 90 day LIBOR.  Management believes
that there is a reasonable correlation between changes in the LIBOR rate (on
which the fixed rate the Company pays was based) and the J.J. Kenny Index (an
index of AA rated variable rate tax exempt bonds).  This swap agreement matures
on October 3, 2003.

     The Company is obligated under the terms of the Goldman Sachs swap
agreement to deposit with Goldman Sachs as collateral the net market related
amount (i.e. market value) of the Company's position, less $500,000, but only
if the net market related amount for such position exceeds $500,000.  The
collateral may consist of the following types of securities: U.S. Government
Securities, GNMA, FNMA, FHLMC notes; GNMA, FNMA, or FHLMC mortgage backed
securities, including single and multi-class pass-through certificates and
active tranches of collateralized mortgage obligations but excluding REMIC's
"interest-only", "principal-only", and "residual" interests; or such other
uncertified securities as the parties may mutually agree upon.  In lieu of
collateral, the Company may deliver to Goldman Sachs one or more letters of
credit from a list of financial institutions to be provided by Goldman Sachs
upon request.

     In order to hedge against variations in the relationship between LIBOR and
the Kenny Index the Company entered into two three-year swaps on March 14, 1996
with NCSI in which the Company pays a floating rate equal to 72.5% of 90 day
LIBOR and receives a floating rate equal to the J.J. Kenny Index on a notional
amount of $130 million ($55 million and $75 million notional amount for each
swap agreement)  (the "Basis Risk Swap").  On November 26, 1996, this swap was
assigned from NCSI to Salomon Brothers Holding Company.  The Basis Risk Swap
matures on February 26, 1999.  As a result of the cancellation of certain swaps
in December 1996, the notional of $103.3 million of the Basis Risk Swap no
longer provides the Company a hedge against interest 


                                      37
<PAGE>   40

rate risk and has, therefore, been recorded at its fair value.  The fair value  
of the $103.3 million notional amount was approximately $588,000 and $798,000
at December 31, 1997 and  1996, respectively, and is included in other
liabilities in the consolidated balance sheets.  In 1997, a fair value
adjustment of approximately $140,000 was recorded in general and administrative
expenses in the consolidated statements of operations.

     The Company is obligated under the terms of each of the two separate swap
agreements that compose the Basis Risk Swap to deliver collateral to Salomon
equal to the net market related amount (i.e. market value) of the Company's
position, less $250,000, for each swap, but only if, in each case, the current
calculated net market related amount for such position exceeds $250,000.  This
collateral may be in the form of cash and/or U.S. Government securities.  At
December 31, 1997 and 1996, respectively, the Company had approximately $1.5
million and $4.2 million posted as collateral with respect to the Basic Risk
Swap.

     The excess in notional amount of swaps ($2.6 million LIBOR and $103.5
million in Basis Risk Swap) is currently unallocated and may be used to hedge
against variable interest rate risk on future bond indebtedness.

     Effective March 3, 1997, the Company entered into a swap transaction with
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 pays a fixed rate of 4.85% per annum on a notional amount of $6.0
million and receives a variable rate based on the PSA Municipal Index.  The
swap agreement terminates on March 3, 2004.

     Effective April 17, 1997, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $756,370 to protect against interest
rate fluctuations with respect to the Bellevue Bonds and the Ashford Bonds.
Pursuant to the terms of such interest rate cap agreement, the 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.

     Effective April 25, 1997, the Company entered into an interest rate cap
agreement with CLNY at a purchase price of $234,000 to protect against interest
rate fluctuations with respect to the Sandalwood Bonds.  Pursuant to the terms
of such interest rate cap agreement, the 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.

     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.


                                      38
<PAGE>   41

     For each of the four swap agreements entered into between the Company and
CLNY, the Company entered into a separate ISDA Credit Support Agreement.  Under
each ISDA Credit Support Agreement, the Company is obligated to provide
collateral to CLNY based on the computed market value (negative value) to the
Company of each swap to the extent that the computed market value of such swap
equals or exceeds of $100,000.  Under each agreement, if the $100,000 threshold
is met or exceeded, the Company is required to provide collateral to CLNY for
an amount equal to the computed market value of the applicable agreement.  Cash
and treasury bills are acceptable collateral, at 100% of the amount required.
If other securities are posted, an amount in excess of 100% of the required
amount must be posted.

     The Company estimates that for every .25% decrease in the LIBOR interest
rate yield curve, it will be required to post approximately$2.0 million of
additional collateral to the swap providers.  The Company anticipates meeting
any future collateral calls by borrowing under its NACC Revolving Loan and
utilizing cash flows from operations.

     As of December 31, 1997, and March 17, 1998, the Company had successfully
hedged all of its variable rate bond financing through interest rate protection
agreements.  The Company has adopted a policy regarding the hedging of total
variable rate debt.  This policy provides that at no time will the Company have
more than 30% of its variable rate debt is not hedged by an interest rate cap,
swap or other interest rate protection agreement.  In addition, the Company
will maintain a 1.3 times debt service coverage ratio based upon (a) hedged
debt at the applicable interest rate cap and swap strike prices and (b)
unhedged debt at a rate of 10% per annum.  This policy may be changed from time
to time by the Board of Directors in its discretion.  As of December 31, 1997,
and March 17, 1998, the Company had $37.3 million and $35.1  million,
respectively, in variable rate debt that was not hedged by any interest rate
protection and was in compliance with the foregoing policies.  With respect to
all variable rate debt outstanding as of December 31, 1997, an increase in
short-term rates of 1% would decrease net income by approximately $535,000
based on outstanding variable rate debt balances at December 31, 1997 (after
taking into consideration the effect of the interest rate protection agreement
and swap transaction).

Short-term Liquidity Needs

     The Company expects to meet its short-term liquidity requirements
generally through its net cash provided by operating activities.  Management
believes that the Properties have been properly maintained on a current and
regular basis, and therefore does not anticipate any extraordinary capital
expenditures over the next twelve months.  Management believes that cash flows
from operating activities and the Company's lines of credit will be sufficient
to meet the Company's working capital requirements, including projected capital
expenditures (and any increases in interest expense on the Company's variable
rate debt).

Long-term Liquidity Needs


                                      39
<PAGE>   42

     The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities, future property acquisitions and capital
improvements, by a combination of long-term collateralized or uncollateralized
borrowings, issuance of equity securities, and cash flow reserves from
operating activities.

     A portion of the renovation costs to upgrade certain properties has been
obtained through the issuance of variable rate bonds.  As a result of these
bonds issuances, the Company has remaining funds of approximately $250,000 at
December 31, 1997 which the Company is required to spend on rehabilitating
these certain properties.  This amount will be released to the Company as
actual costs are incurred, subject to the maintenance of certain covenants
relating to the specific properties.

Impact of the Year 2000

     In the year 2000, many existing computer programs that use only two digits
(rather than four) to identify a year in the date field could fail or create
erroneous results if not corrected.  This computer program flaw is expected to
affect virtually all companies and organizations.  The Company cannot quantify
the potential costs and uncertainties associated with this computer program
flaw at this time, but does not anticipate that the effect of this computer
program flaw on the operations of the Company will be significant.  However,
the Company may be required to spend time and monetary resources addressing any
necessary computer program changes.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1996

     Cash and cash equivalents increased $446,000 to $4.4 million at December
31, 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 $1.6 million to $20.7
million for the twelve-month period ended December 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.

     Net cash used in investing activities decreased $40.9 million to $39.0
million for the twelve-month period ended December 31, 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 twelve-month period ended December 31,
1997 (1,164 units) when compared to the same period in 1996 (3,928 units).
This decrease was partially offset by an increase in improvements to rental
properties during 1997.

     Net cash provided by financing activities decreased $40.9 million to $18.7
million for the twelve-month period ended December 31, 1997, when compared to
the same period in 1996.  This  decrease is primarily attributable to a
decrease in proceeds from equity transactions, a decrease in 


                                      40
<PAGE>   43


proceeds received from the Company's short-term borrowings, and an increase in  
the repayment of bonds payable.  These decreases were partially offset by an
increase in proceeds received from new bond issues.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and schedules required under Regulation S-X
promulgated under the Securities Act of 1933 are identified in Item 14 and are
incorporated herein by reference.







                                      41
<PAGE>   44

QUARTERLY FINANCIAL DATA

     The following unaudited quarterly data has been prepared on the basis of a
December 31 year end:


<TABLE>
<CAPTION>
                                                                   1997
                                                -------------------------------------------
                                                  First     Second      Third       Fourth
                                                 Quarter    Quarter    Quarter     Quarter
                                               ---------  ---------  ----------  ----------
<S>                                             <C>        <C>        <C>         <C>
Total revenues................................ $  21,781  $  22,705  $   24,259  $   24,584
                                               =========  =========  ==========  ==========
Net operating income (a)...................... $  13,725  $  14,058  $   14,513  $   14,945
                                               =========  =========  ==========  ==========
Funds from Operations (b)..................... $   6,332  $   6,118  $    6,055  $    6,154
                                               =========  =========  ==========  ==========
Income before minority interest, loss
  on sale of investment and
  extraordinary item.......................... $   1,777  $   1,344  $      757  $      410
Income allocated to minority interest.........      (396)      (347)       (261)       (233)
Loss on sale of investment, net of
  minority interest...........................        --         --          --        (509)
                                               ---------  ---------  ----------  ----------
Income (loss) before extraordinary item.......     1,381        997         496        (332)
Extraordinary item net of minority interest...        --       (900)         --        (484)
                                               ---------  ---------  ----------  ----------
Net income (loss).............................     1,381         97         496        (816)
Income allocated to preferred shareholders....      (568)      (567)       (576)       (585)
                                               ---------  ---------  ----------  ----------
Net income (loss) allocated to common
  shareholders................................ $     813  $    (470) $      (80) $   (1,401)
                                               =========  =========  ==========  ==========
Basic and Diluted Earnings per Share:

Earnings per share of Common Stock before
  extraordinary item.......................... $    0.09  $    0.05  $    (0.01) $    (0.09)
                                               =========  =========  ==========  ==========

Earnings per share of Common Stock............ $    0.09  $   (0.05) $    (0.01) $    (0.13)
                                               =========  =========  ==========  ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                   1996
                                                -------------------------------------------
                                                 First     Second      Third       Fourth
                                                Quarter    Quarter    Quarter     Quarter
                                               ---------  ---------  ----------  ----------
<S>                                              <C>        <C>       <C>         <C>
Total revenues................................ $  15,625  $  16,235  $   17,483  $   20,851
                                               =========  =========  ==========  ==========
Net operating income (a)...................... $   8,428  $   8,993  $    9,293  $   10,790
                                               =========  =========  ==========  ==========
Funds from Operations (b)..................... $   4,315  $   4,344  $    4,634  $    5,019
                                               =========  =========  ==========  ==========
Income (loss) before minority interest, loss
  on sale of interest rate cap and
  extraordinary item.......................... $   1,355  $   1,280  $    1,638  $      788
Income allocated to minority interest.........      (195)      (282)       (555)       (851)
Loss on sale of interest rate cap, net of
  minority interest...........................    (2,084)        --          --          --
                                               ---------  ---------  ----------  ----------
(Loss) income before extraordinary item.......      (924)       998       1,083         (63)
Extraordinary item (net of Minority Interest).        --         --          --      (4,653)
                                               ---------  ---------  ----------  ----------
Net (loss) income.............................      (924)       998       1,083      (4,716)
Income allocated to preferred shareholders....        --         --        (283)       (568)
                                               ---------  ---------  ----------  ----------
Net (loss) income allocated to common
  shareholders................................ $    (924) $     998  $      800  $   (5,284)
                                               =========  =========  ==========  ==========
Basic and Diluted Earnings per Share:

Earnings per share of Common Stock before
  extraordinary item.......................... $   (0.10) $    0.11  $     0.09  $   (0.07)
                                               =========  =========  ==========  ==========

Earnings per share of Common Stock............ $   (0.10) $    0.11  $     0.09  $   (0.59)
                                               =========  =========  ==========  ==========
</TABLE>


                                      42
<PAGE>   45

(a)  Net operating income is defined as total revenues less property operating,
     real estate tax expense, advertising and marketing, repairs and 
     maintenance and bad debt expenses.  Operating income is a measure of the
     performance of the operations of the properties before the effects of
     depreciation, amortization, financing fees, losses from unconsolidated
     real estate limited partnerships and interest expense.  Operating income
     is not necessarily an indication of the performance of the Company or a
     measure of liquidity.

(b)  See Note (2) to Selected Financial data.


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

         None.




                                      43
<PAGE>   46

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

     The Board of Directors currently consists of eight members who are divided
into three classes generally serving staggered three-year terms.  One class
consists of two directors whose current term expires in 1998, one class
consists of three directors whose term expires in 1999 and one class consists
of three directors whose term expires in 2000.

     The information below sets forth, as of March 17, 1998, for each director
of the Company such director's name, business experience during the past five
years, other directorships held, age, the year first elected a director of the
Company and the year such director's term expires.



<TABLE>
<CAPTION>
                                  Year First Elected                      
  Name of Director        Age          a Director        Term Expires      
--------------------     -----     ------------------    ------------      
<S>                      <C>            <C>               <C>             
Norman R. Bobins         55               1994              2000          
Debra A. Cafaro          40               1997              1998          
David M. Glickman        46               1994              1999          
David B. Heller          65               1994              1999          
Matthew W. Kaplan        34               1996              2000          
Richard F. Levy          67               1994              1999          
Jane R. Patterson        39               1994              1998          
Michael W. Reschke       42               1994              2000          
</TABLE>

NORMAN R. BOBINS.  Director of the Company since August 1994.  Mr. Bobins is
President and Chief Executive Officer of LaSalle National Bank and LaSalle
National Corporation, a subsidiary of ABN AMRO Bank N.V.  From 1981 to 1990,
Mr. Bobins held various senior positions at The Exchange National Bank, prior
to it being acquired by LaSalle National Corporation.  He is on the boards of
the Federal Reserve Advisory Council, the Federal Home Loan Bank of Chicago,
the Chicago Public Schools, the Chicago Teachers' Pension Fund and the
University of Chicago Hospitals.

DEBRA A. CAFARO.  Director and President of the Company since April 1997.  Ms.
Cafaro was an initial member of the Chicago law firm of Barack Ferrazzano
Kirschbaum Perlman and Nagelberg, becoming a partner in 1987,  where her areas
of concentration were finance (including tax-exempt debt) and real estate.  Ms.
Cafaro is admitted to the Bar in Illinois and Pennsylvania.  She is a member of
the National Multihousing Council, the National Association of Real Estate
Investment Trusts and both the American and Chicago Bar Associations.


                                      44
<PAGE>   47

DAVID M. GLICKMAN.  Chief Executive Officer of the Company since August 1994
and Chairman of the Board since March 1995.  From May 1992 to August 1994, Mr.
Glickman served as Executive Vice President of The Prime Group, Inc. and was a
member of The Prime Group, Inc. 's Executive Committee.  For more than 20 years
prior to joining The Prime Group, Inc., Mr. Glickman was employed by Heitman
Financial, Ltd., and from 1983 to 1992 served as President and a director of
Heitman Advisory Corporation, a registered investment advisor specializing in
real estate asset management on behalf of tax-exempt and other institutional
investors.  Mr. Glickman is a member of the National Association of Real Estate
Investment Trusts, and a former Director of the Pension Real Estate Association
and the National MultiHousing Council.

DAVID B. HELLER.  Director of the Company since August 1994.  Mr. Heller has
served as President and as a director of Advisory Research, Inc., an investment
advisory firm, since 1973.  Mr. Heller is a director of Lands' End, Inc. and
was a Governor of the Midwest Stock Exchange and the Chicago Board of Options
Exchange and a member of the Central Market Advisory Committee to the
Securities and Exchange Commission.

MATTHEW W. KAPLAN.  Director of the Company since August 1996.  Mr. Kaplan is
Managing Director of Rothschild Realty, Inc. ("Rothschild Realty") where he is
responsible for its securities investment activities.  Mr. Kaplan is also a
manager of Rothschild Realty Investors II L.L.C., the sole managing member of
Five Arrows Realty Securities L.L.C.  From 1990 to 1992, Mr. Kaplan served in
the Corporate Finance Department of Rothschild Realty's affiliate Rothschild,
Inc.  From 1988 until 1990, Mr. Kaplan was a management consultant with Touche
Ross & Co.

RICHARD F. LEVY.  Director of the Company since August 1994.  Mr. Levy's
professional corporation has been a  partner in the law firm of Altheimer &
Gray, Chicago, Illinois, since May 1996.  Until that time, his professional
corporation was a partner in the law firm of Kirkland & Ellis, Chicago,
Illinois.  Mr. Levy is a director of Amalgamated Investments Company, the
parent of Amalgamated Bank of Chicago.

JANE R. PATTERSON.  Director of the Company since August 1994.  Ms. Patterson
has been Executive Director of the Illinois State Board of Investment since
1991.  Ms. Patterson was Director of Corporate Finance and Director of
Investments of Sara Lee Corporation during 1991 and from 1988,  until 1991,
respectively.  From 1987 to 1988, Ms. Patterson was Director of Pensions and
Investments at CBS Records, Inc. and from 1985 to 1987 was Manager of
Investment Administration and then Director of Equity Planning at CBS, Inc.

MICHAEL W. RESCHKE.  Director of the Company since August 1994 and the Chairman
of the Board of Directors of the Company from August 1994 to March 1995.  Mr.
Reschke founded The Prime Group, Inc. ("Prime Group") in 1981 and, since that
time, has served as its Chairman of the Board and Chief Executive Officer.  Mr.
Reschke also is the Chairman of Prime Group's Executive Committee and is
Chairman of the Boards of Prime Retail, Inc., a real estate investment trust
that develops and owns factory outlet malls; Prime Group Realty Trust, an
office and industrial real estate investment trust; and Brookdale Senior Living
Communities, Inc., a senior and assisted living  

                                      45
<PAGE>   48

facilities corporation.  Mr. Reschke is a licensed attorney in the State of     
Illinois and is a Certified Public Accountant.

     The Company's Articles of Incorporation provide that so long as Five
Arrows Realty Securities L.L.C. ("Five Arrows") or an affiliate or successor is
the holder of at least 675,675 shares of Class A Preferred Stock or an amount
of Class A Preferred Stock which if converted into Common Stock would exceed 5%
of the Common Stock on a fully diluted basis, the holders of the Class A
Preferred Stock shall have the special right, voting separately as a single
class, to elect one director or two directors if certain dividend or earnings
levels are not met.  As of the March 17, 1998, Five Arrows owned more than
675,675 shares of Class A Preferred Stock and such dividend and earnings levels
had been satisfied through December 31, 1997, and thus the holders of the Class
A Preferred Stock are entitled, voting separately as a single class, to elect
one Class A Director.  The remainder of the directors are to be elected holders
of the Common Stock and the Class A Preferred voting together as a single
class.  Mr. Kaplan currently serves as the Class A Director.

BOARD COMMITTEES

     In accordance with the By-Laws of the Company, the Board of Directors has
established an Executive Committee, an Audit Committee, a Compensation and
Benefits Committee, a Nominating Committee and a Plan Committee.  No member of
these committees, other than the Executive Committee, is an employee of the
Company.

     The Executive Committee is currently composed of Messrs. Glickman, Heller
and Kaplan.  The function of the Executive Committee is to exercise all the
powers and authority of the Board.  However, no action may be taken by the
Executive Committee unless it unanimously certifies, concurrently with the
taking of such action, that in its opinion an emergency exists that makes it
impossible or impractical to submit to the entire Board the issue requiring
such action.  The Executive Committee did not meet in 1997.

     The Audit Committee is currently composed of Ms. Patterson, Mr. Kaplan and
Mr. Reschke.  The functions of the Audit Committee are to recommend to the
Board of Independent public accountants to be engaged by the Company; to review
with the independent public accountants the plans and results of the audit
engagement; to approve professional services provided by the independent public
accountants and review their independence; and to consider the range of audit
and non-audit fees and review any recommendations made by the Company's
auditors regarding the Company's accounting methods and the adequacy of its
systems of internal control.  No member of the Audit Committee is an employee
of the Company.  The Audit Committee met once in 1997.

     The Compensation and Benefits Committee is currently composed of Messrs.
Bobins,  Kaplan and Levy.  The functions of the Compensation and Benefits
Committee are to make recommendations to the Board with respect to compensation
of executive officers of the Company, to administer the Company's bonus plans
and to make recommendations to the Board with respect 


                                      46
<PAGE>   49

to the Company's compensation policies.  No member of the Compensation and      
Benefits Committee is an employee of the Company.  The Compensation and
Benefits Committee met twice in 1997.

     The nominating committee is currently composed of Messrs. Heller, Kaplan,
Reschke and Ms. Patterson.  The function of the Nominating Committee is to
nominate persons for election to the Board.  The Nominating Committee will
consider nominees recommended by stockholders.  No member of the Nominating
Committee is an employee of the Company.  The Nominating Committee met once in
1997.

     The plan committee is currently composed of Ms. Patterson, Mr. Bobins and
Mr. Kaplan.  The function of the Plan Committee is to administer the Company's
stock incentive plans.  No member of the Plan Committee is an employee of the
Company.  The Plan Committee did not meet in 1997.

EXECUTIVE OFFICERS

     The information below sets forth, as of December 31, 1997, for each
executive officer of the Company such officer's name, business experience
during the past five years, age and year first elected an executive officer.



<TABLE>
<CAPTION>
                                                           Year First Elected
Name of Executive Officer          Position           Age  an Officer
-------------------------  -------------------------  ---  ------------------
<S>                        <C>                        <C>      <C>
David M. Glickman          Chairman of the Board and   46         1994
                           Chief Executive Officer
Debra A. Cafaro            Director and President      40         1997
                           of the Company
Thomas J. Coorsh           Senior Vice President,      48         1996
                           Interim Chief Financial
                           Officer, Secretary
</TABLE>

     Information regarding Mr. Glickman and Ms. Cafaro is set forth under
"Board of Directors" above.

THOMAS J. COORSH.  Senior Vice President since June 1996, Secretary of the
Company since December 1996 and Interim Chief Financial Officer since August
1997.  From November 1993 until joining the Company in June of 1996, Mr. Coorsh
was the Chief Financial Officer for the Brauvin Real Estate Funds, a Chicago
based syndicator of real estate limited partnerships.  From March 1992 until
November 1993, Mr. Coorsh was self-employed as a business consultant.  From
1990 to 1992 Mr. Coorsh was the Senior Vice President of Finance and Chief
Accounting Officer for Lexington Homes, then Illinois' largest home builder.
Mr. Coorsh is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants and the Illinois CPA Society.



                                      47

<PAGE>   50

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "Commission") and
The New York Stock Exchange, as required.  These persons are required by
regulation of the Commission to furnish the Company with copies of all Section
16(a) forms they file.
     Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during the year ended
December 31, 1997, the Company's officers, directors and greater than ten
percent beneficial owners complied with all applicable Section 16(a) filing
requirements.

ITEMS 11. EXECUTIVE COMPENSATION

OVERVIEW

COMPENSATION OF EXECUTIVE OFFICERS

     The following table sets forth information with respect to the cash
compensation paid by the Company for services rendered during the fiscal years
ended December 31, 1997, 1996 and 1995, to Mr. Glickman, the Company's Chief
Executive Officer, and the Company's other executive officers (the "Named
Executives").



<TABLE>
<CAPTION>
                                           SUMMARY COMPENSATION TABLE
                                     Annual Compensation           Long-Term Compensation Awards
                                -----------------------------      -----------------------------
                                                                   Restricted                                All Other
                                                  Other Annual       Stock        Securities          LTIP     Compen-
        Name and                Salary    Bonus   Compensa-          Awards       Underlying        Payouts    sation
   Principal Position     Year    ($)      ($)    tion ($)(2)         ($)       Options/SARs (#)      ($)       ($)
-----------------------  -----  -------   -----   -----------      ----------   ----------------    -------   ---------
<S>                       <C>  <C>       <C>       <C>              <C>           <C>               <C>       <C>
David M. Glickman (1)     1997  250,000  200,000      --              --                  --          --            --              
Chief Executive Officer   1996  200,000  150,000      --              --            80,000/0          --            --              
                          1995  200,000       --      --              --                  --          --            --              


Debra A. Cafaro,          1997  160,096       --      --              --            47,010/0          --       325,000              
President (1) (3)         1996       --       --      --              --                  --          --            --              
                          1995       --       --      --              --                  --          --            --              
                                                                                                                                    
Thomas J. Coorsh (1) (4)  1997  142,692   30,000      --              --                  --                        --              
Senior Vice President,    1996   65,000       --      --              --            25,000/0          --            --              
Interim Chief Financial   1995       --       --      --              --                  --          --            --              
Officer, Secretary      
</TABLE>



                                      48
<PAGE>   51

<TABLE>
<S>                       <C>   <C>      <C>          <C>        <C>     <C>           <C>      <C>
Adam D. Peterson  (5)     1997  115,385  100,000        --         --           --       --    136,538 
Executive Vice            1996  140,000   50,000        --         --     45,000/0       --         -- 
President, Chief          1995  118,000       --        --         --           --       --         -- 
Financial Officer                                                                                      
</TABLE>

 (1)  Effective as of January 1, 1998, the 1998 annual salaries of Mr. Glickman
      Ms. Cafaro and Mr. Coorsh were increased to $275,000, $247,500 and
      $154,000 per year, respectively.  See "Employment Agreements."

 (2)  Excludes perquisites and other personal benefits, securities or property;
      the aggregate amount of such compensation received by any Named Executive
      did not exceed the lesser of $50,000 or 10% of the total of annual salary
      and bonus for such officer.

 (3)  Ms. Cafaro joined the Company as President effective April 7, 1997 at an
      annual salary of $225,000.  Other Compensation reflects a $325,000
      retention payment made to Ms. Cafaro in December 1997 - see "Employment
      Agreements" below.

 (4)  Mr. Coorsh's salary was increased to an annual rate of $150,000 effective
      September 13, 1997.

 (5) Mr. Peterson resigned  effective August 19, 1997.  Other Compensation
     reflects $136,538 paid to Mr. Peterson in August 1997 in connection with 
     his resignation.

     The following table sets forth the number of shares of Common Stock
subject to options granted to the Named Executives during the last fiscal year
and certain related information.



                      OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>

                                           Individual Grants
                        -------------------------------------------------------               Potential Realizable Value at
                          Number of              % of Total                                   Assumed  Annual Rates of Stock
                         Securities             Options/SARs                                  Price Appreciation for  Option 
                         Underlying              Granted to         Exercise or                            Term   
                        Options/SARs            Employees in          Base        Expiration  ------------------------------    
        Name               Granted              Fiscal Year           Price          Date         5%             10%
--------------------    ------------         ---------------       ------------   ----------  ---------    -----------------
<S>                    <C>                   <C>                   <C>             <C>         <C>           <C>
David M. Glickman                -                      -                  -       -                  -                 - 
Debra A. Cafaro             47,010                  64.38%            $24.25       4/6/2007    $716,935        $1,816,854 
Thomas J. Coorsh                 -                      -                  -       -                  -                 - 
Adam D. Peterson (1)             -                      -                  -       -                  -                 - 
</TABLE>


(1)  Mr. Peterson resigned effective August 19, 1997.





                                      49
<PAGE>   52

     The following table sets forth the number of shares of Common Stock
subject to options exercised by the Named Executives during the last fiscal
year and the number and value of unexercised options as of the end of the last
fiscal year.


                AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
                  YEAR AND FISCAL YEAR END OPTION/SAR VALUES

<TABLE>
<CAPTION>

                                                             Number                                        
                                                          of Securities                                    
                                                     Underlying Unexercised       Value of Unexercised     
                                                         Options/SARs at       In-the-Money Options/ SARs  
                                                     Fiscal Year-End (#) (1)  at Fiscal Year-End($) (1) (2)
                                                     ------------------------    --------------------------
                      Shares Acquired     Value           Exercisable/                Exercisable/
        Name          on Exercise (#)  Realized ($)       Unexercisable               Unexercisable
--------------------  --------------- ------------   ------------------------     --------------------------
<S>                      <C>            <C>              <C>                           <C>
David M. Glickman           -0-             --                     170,000/0                      472,500/0
Debra A. Cafaro             -0-             --                 11,753/35,257                            0/0
Thomas J. Coorsh            -0-             --                      25,000/0                       45,938/0
Adam D. Peterson (3)      62,000         301,944                         0/0                            0/0
</TABLE>

(1)  On April 7, 1997, in connection with the execution of new employment
     agreements, all then unvested options for Messrs. Glickman, Peterson
     and Coorsh became vested.

(2)  Market value of underlying securities at year-end ($20-9/16 per share) 
     price minus the exercise price.

(3)  On August 22, 1997, and August 28, 1997, Mr. Peterson exercised the
     options reported herein.  On November 20, 1997, Mr. Peterson's
     unexercised options with respect to 25,000 expired and were canceled.

EMPLOYMENT AGREEMENTS

     The Company entered into employment agreements with each of Messrs.
Glickman, and Peterson on August 31, 1994, in connection with the Offering, and
with Mr. Coorsh on May 21, 1996.  The agreements establish base salaries of
$200,000, $100,000 and $130,000 for Messrs. Glickman, Peterson and Coorsh,
respectively.  Mr. Peterson's salary was increased to $125,000 per year
effective March 20, 1995 and to $140,000 per year effective January 23, 1996.
The employment agreements provided for an initial three-year term for Messrs.
Glickman, and an initial two-year term for Mr. Peterson and an initial
six-month term for Mr. Coorsh.  The term of each agreement would have
automatically extended for an additional year after expiration of the initial
term and any extension period unless either the Company or the executive
officer provided the other with at least 120 days' prior written notice that
such term shall not be extended.  If the agreements were terminated by the
Company "without cause" or are terminated by the executive after a "Change of
Control" or for "Good Reason" (as such terms are defined in the agreements),
the executive would have been entitled to a lump sum payment.  With regard to
Mr. Glickman, such payment would have been an amount equal to the greater of
his annual base salary or 50 percent of the remaining aggregate base salary due
under his employment agreement.  With regard to Messrs. Peterson and Coorsh,
such payment would have been an amount equal to 50 percent of such executive's
annual base salary.


                                      50
<PAGE>   53

     On April 7, 1997, the Company entered into a new employment agreement with
Mr. Glickman, the Company's Chief Executive Officer, terminating his existing
employment agreement executed in August 1994, which was scheduled to expire on
August 31, 1997.  The new employment agreement provides for an initial term
ending December 31, 1999, and extends automatically for additional one-year
periods unless terminated by either the Company or the executive with at least
180 days' prior written notice.  The employment agreement provides for a salary
of not less than $250,000 in 1997, increasing each year thereafter by 10% per
year over the prior year's minimum (and accordingly increased to $275,000 on
January 1, 1998), bonuses to be paid at the discretion of the Board and the
immediate vesting of all his then outstanding unvested options.  In the event
there is a Change of Control (as defined in the employment agreement) during
the term of his employment or within 6 months after the termination of his
employment by the Company without Cause or for Disability or by the executive
for Good Reason (each as defined in the employment agreement), whether or not
his employment is terminated in connection therewith, Mr. Glickman shall
receive a lump sum payment equal to the lesser of $2,595,000 and 2.99 times his
"base amount" as defined by Section 280G of the Internal Revenue Code
(generally equal to his prior five-year average compensation), and in the event
such payment is subject to excise tax under Section 4999, an additional amount
such that the actual net after-tax amount received including such excise tax is
equal to the hypothetical amount that he would have received if there were no
excise tax imposed and he did not receive the additional payment.  In such
event, the Company would lose the deduction for income tax purposes for amounts
paid to Mr. Glickman in connection with the Change of Control in excess of his
base amount.  In addition, if Mr. Glickman's employment is terminated by the
Company without Cause or for Disability or by the executive for Good Reason, he
shall receive a lump sum termination payment equal to his annual base salary
then in effect for a period equal to the greater of six months or one-half of
the remaining employment term, unless he has received or within seven months
after the date of termination receives the Change of Control payment described
above.  Upon termination of his employment, Mr. Glickman will receive a lump
sum payment equal to $900,000, for which he has agreed during the one-year
period following such termination not to compete with the Company in its
principal markets and to provide the Company with consulting services.  The
Company's sole recourse if Mr. Glickman breaches his non-compete or consulting
arrangements is liquidated damages in the amount of $75,000 for each month
remaining in such one-year period after such breach.

     On April 7, 1997, the Company also entered into new employment agreements
with each of Adam D. Peterson, the Company's Executive Vice President and Chief
Financial Officer, and Thomas J. Coorsh, the Company's Senior Vice President
and Secretary.  The new employment agreements of Mr. Peterson and Mr. Coorsh
are substantially identical to the employment agreement of Mr. Glickman except
that the initial minimum salary for Mr. Peterson was $150,000 and for Mr.
Coorsh was $140,000; the amount of the Change of Control compensation shall not
exceed $310,000 for Mr. Peterson and $385,000 for Mr. Coorsh and neither is
entitled to gross-up payments in the event that such payment would be subject
to excise tax; the noncompete/consulting services payment is $440,000 for Mr.
Peterson (in addition, Mr. Peterson's consulting period is eighteen months) and
$215,000 for Mr. Coorsh, and the liquidated damages amount for breach of the


                                      51
<PAGE>   54

noncompete/consulting arrangement is $24,444 per month for Mr. Peterson and
$17,917 per month for Mr. Coorsh.

     On August 20, 1997, Mr. Peterson resigned from the Company.  In connection
with his resignation, the Company paid Mr. Peterson $136,538 in August 1997.
On August 20, 1997, Mr. Coorsh was appointed to the position of  Interim Chief
Financial Officer and on September 13, 1997,  Mr. Coorsh's salary was increased
to $150,000.  Effective January 1, 1998, in accordance with the terms of his
employment contract, Mr. Coorsh's salary was increased to $154,000.

     On April 7, 1997, the Company entered into an employment agreement with
Debra A. Cafaro, the Company's new President.  The employment agreement
provides for an initial term ending December 31, 1999, and extends
automatically for additional one-year periods unless terminated by either the
Company or the executive with at least 180 days' prior written notice.  The
employment agreement provides for an annualized salary of not less than
$225,000 in 1997, increasing each year thereafter by 10% per year over the
prior year's minimum (and accordingly, was increased to $247,500 effective
January 1, 1998); a bonus in 1997 of 90% of the bonus paid to Mr. Glickman for
1997 (no such bonuses were paid to Mr. Glickman for 1997) and bonuses at the
discretion of the Board thereafter; and options to purchase 47,010 shares of
Common Stock which vest one-fourth each six months and immediately upon a
Change of Control or termination of her employment as a result of her death, by
the Company without Cause or for Disability or by the executive for Good Reason
(each as defined in the agreement).  The employment agreement also provides
that the Company will lend to Ms. Cafaro $700,000 in connection with the
purchase of 32,990 of Common Units in the Operating Partnership, of which the
Company is the sole general partner, at a price of $24.25 per Common Unit.  The
loan bears interest at 6.38% and matures on the earlier of June 30, 2000, and
six months after the termination of her employment with the Company other than
as a result of her death, by the Company without Cause or for Disability or by
executive for Good Reason and is extended for so long as she is prohibited from
exchanging her Common Units and publicly selling the Common Stock received in
exchange for such Common Units, but not later than June 30, 2000.

     On December 19, 1997 Ms. Cafaro's employment agreement was amended.
Pursuant to the amendment, Ms. Cafaro received a retention payment of $325,000
in December 1997.  Seventy-five percent of the retention payment must be
returned by Ms. Cafaro if she voluntarily resigns on or before March 1, 1998;
50 percent on or before April 1, 1998; and 25 percent if on or before May 1,
1998.  After May 1, 1998, and if Ms. Cafaro's employment with the Company
terminates for any reason other than voluntary resignation, she retains all of
the retention payment.  The Amendment also modified the terms of Ms. Cafaro's
Change of Control Compensation.  In the event there is a Change of Control (as
defined in the employment agreement) during 1998 or within 6 months after the
termination of her employment by the Company without Cause or for Disability or
by the executive for Good Reason whether or not her employment is terminated in
connection therewith, Ms. Cafaro shall receive a lump sum payment equal to
twice the sum of (i) her annualized prior year's salary and (ii) all bonus and
retention payments paid or payable to her within the twelve month 


                                      52
<PAGE>   55


period prior to such Change of Control (which lump sum payment as of December   
19, 1997, totals $1.1 million).

     If Ms. Cafaro's employment is terminated by the Company without Cause or
for Disability or by the executive for Good Reason, she shall receive a lump
sum payment equal to a lump sum payment her equal to annual base salary then in
effect for a period equal to the greater of six months or one-half of the
remaining employment term unless she has received or within seven months after
the date of termination receives the Change of Control payment described above.
Upon termination of her employment other than without Cause, for Good Reason
or for Disability, Ms. Cafaro has agreed during the one-year period following
such termination not to compete with the Company in its principal markets for
which she will receive no additional compensation.  Ms. Cafaro may shorten the
duration of her noncompetition period by up to ten months in exchange for
$36,000 per month.  In addition, Ms. Cafaro has the option of canceling a
portion of the Change of Control payment and accepting in lieu thereof the
termination compensation she otherwise would have received or extending the
term of her noncompetition period and receiving additional noncompetition
payments in an amount equal to $24,000 for each of the first twelve months of
such extension and $12,000 for each of the second twelve months of such
extension.

     In addition, the current employment agreements of Mr. Glickman and Ms.
Cafaro provide that each will be nominated for election to the Board.

     The consummation of the proposed Merger between Ambassador Apartments,
Inc. and Apartment Investment and Management Company ("AIMCO") would constitute
a Change of Control under each of the employment agreements described in this
section.  Assuming the Merger is consummated on May 1, 1998, Mr. Glickman, Ms.
Cafaro and Mr. Coorsh will receive payments with respect to the resulting
Change of Control and the noncompete/consulting services equal to $3,459,000,
$1,100,000 and $600,000, respectively.

     Pursuant to resolutions adopted by the Board of Directors, each of David
Heller, Richard Levy, Norman Bobins, Michael Reschke and Jane Patterson,
directors of the Company, will receive a payment of $25,000 upon consummation
of the Merger.

DIRECTORS' COMPENSATION

     Directors, other than the Class A Director and directors who are employees
of the Company, receive cash or, at the director's election, pursuant to the
Company's deferred compensation plan (as described below) a deferred amount
equal to an annual fee of $10,000, plus a fee of $2,500 for each meeting of the
Board attended,  a fee of $500 for each committee meeting attended in person,
and out-of-pocket expenses for each Board or committee meeting attended in
person.  The deferred compensation plan for non-employee directors of the
Company provides, for bookkeeping purposes only, amounts otherwise payable as
cash compensation into a deferred compensation cash account ("Cash Account")
through which directors can purchase shares of the Company's Common Stock in
their deferred compensation stock account ("Stock Account").  The directors may
purchase shares 


                                      53
<PAGE>   56

in the Stock Account on the 10th calendar day following each calendar quarter   
at the current market price of the Company's Common Stock on that date.

     The Stock Account is increased for any dividends deemed to be paid on the
stock in the same manner as dividends are paid on the Company's Common Stock.
The foregoing accounts are for bookkeeping purposes only and do not represent
actual cash or shares of the Company's Common Stock.  All distributions from
the deferred compensation plan are made in cash at the expiration of the
director's term or other such date as the director may request.  Two of the
non-employee directors (Mr. Heller and Mr. Levy) are participants in the
deferred compensation plan for non-employee directors.

     Pursuant to the Company's 1994 Stock Incentive Plan, each non-employee
director (other than Mr. Reschke and Mr. Kaplan) received an option to acquire
up to 7,500 shares of Common Stock upon his or her initial election to the
Board.  Mr. Reschke received an option to acquire 90,000 shares of Common Stock
upon his election to the Board.  All of these options are exercisable at a
price of $16.00 per share, vest in installments at a rate of 33-1/3% per year
over the three-year period commencing August 31, 1995 (33-1/3% on August 31,
1995 and 1/12 of 33-1/3% monthly thereafter), and have a term of ten years.
See "Compensation of Executive Officers - Stock Incentive Plans", and earlier
upon a Change of Control.

     On December 19, 1996, pursuant to the 1996 Stock Incentive Plan, the Plan
Committee awarded each non-employee director (other than Mr. Kaplan), subject
to stockholder approval of such plan, an option to acquire up to 7,500 shares
of Common Stock.  All of these options are exercisable at a price of $22.00 per
share, vest in equal installments at a rate of 25% per year over the four-year
period commencing December 19, 1996 (1/48 monthly), earlier upon a Change of
Control, and have a term of ten years.

BENEFIT PLANS

     The Company's employee incentive programs include three stock option plans
and the 401(k) plan.

STOCK INCENTIVE PLANS

     The Company has three stock option plans.  The 1994 Stock Incentive Plan
for Officers, Directors and Key Employees of Ambassador Apartments, Inc.,
Ambassador Apartments, L.P. and Subsidiaries, as originally adopted by the
Board and approved by the stockholders in 1994, provided for the issuance of
options with respect to up to 425,000 shares of Common Stock.  In 1996, the
Board approved an amendment to this plan (as so amended, the "1994 Stock
Incentive Plan") that increased the number of shares of Common Stock with
respect to which options may be granted thereunder to 469,000.  As of March 17,
1998, the Board granted options with respect to the 44,000 shares of Common
Stock covered by the amendment.  The 1996 Stock Incentive Plan for Officers,
Directors and Key Employees of Ambassador Apartments, Inc., Ambassador
Apartments, L.P. and



                                      54
<PAGE>   57

Subsidiaries, was originally adopted by the Board in December 1996, provided    
for the issuance of options with respect to up to 200,000 shares of Common
Stock.  In March 1997, prior to its approval by the stockholders, the Board
amended this plan to cover 250,000 shares of Common Stock (such plan, as
amended, the "1996 Stock Incentive Plan").  As of March 17, 1998, the Board has
granted options with respect to 195,510 shares of Common Stock under the 1996
Stock Incentive Plan.  The 1997 Stock Incentive Plan for Officers, Directors
and Key Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P.
and Subsidiaries (the "1997 Stock Incentive Plan" and, together with the 1994
Stock Incentive Plan and the 1996 Stock Incentive Plan, the "Stock Incentive
Plans"), was adopted by the Board in March 1997 and provided for the issuance
of options with respect to up to 1,600,000 shares of Common Stock.  As of March
17, 1998, the Board had not granted any options under the 1997 Stock Incentive
Plan.  The amendment to increase the maximum number of options issuable under
the 1994 Stock Incentive Plan and each of the grants made pursuant to the
amendment to the 1994 Stock Incentive Plan, the 1996 Stock Incentive Plan and
each of the grants made pursuant to the 1996 Stock Incentive Plan, and the 1997
Stock Incentive Plan were approved by the stockholders at the annual
shareholders meeting of May 15, 1997.

     On April 7, 1997, in connection with the execution of the new employment
agreements for Messrs. Glickman, Peterson and Coorsh, all of their outstanding
unvested options became fully vested.  In addition, on April 7, 1997, pursuant
to the terms of the 1996 Stock Incentive Plan the Board granted 47,010 options
to Ms. Cafaro in connection with the execution of her employment agreement.
The options granted to Ms. Cafaro have a ten-year term, carry an exercise price
of $24.25 per share and vest one-fourth at the end of each six-month period
commencing April 7, 1997 and ending April 6, 1999, and earlier upon a Change of
Control.

BONUSES

     A portion of the total compensation for the Named Executives consists of
bonuses awarded at the discretion of the Board.  Such bonuses are intended to
identify and to reward superior performance and to provide a competitive
compensation component for attracting and retaining high quality managers.



                                      55
<PAGE>   58

     On January 4, 1997, the Company paid discretionary bonuses pursuant to the
Chief Executive Officer and the Named Executives as described below.  No
bonuses were paid in 1998.



<TABLE>
<CAPTION>
                                                         Bonus Paid  
                                                          in 1997    
                                                         ----------     
     <S>                                                 <C>         
     David M. Glickman, Chief Executive Officer            $200,000  
     Debra A. Cafaro, President (1)                               -  
     Thomas J. Coorsh, Interim Chief Financial Officer,              
      Senior Vice President and Secretary                   $30,000  
     Adam D. Peterson, Executive Vice President and                  
      Chief Financial Officer (2)                          $100,000  
</TABLE>

(1)  Ms. Cafaro joined the company on April 7, 1997.  She was paid a retention
     payment of $325,000 in December 1997 (see Item 11 Executive Compensation,
     Employment Agreements).

(2)  Mr. Peterson resigned from the company on August 19, 1997.

     The Company has approved the grant of up to a total of 5,000 shares of
Common Stock to non-executive employees of the Company and its affiliates for
payment of bonuses.  During 1997, no such shares were granted to non-executive
officer employees.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     DIRECTORS AND OFFICERS

     The following table sets forth, as of March 17, 1998, certain information
regarding the ownership of shares of Common Stock of the Company and common
units ("Common Units") of the Operating Partnership.  The Common Units are
exchangeable for shares of Common Stock on a one-for-one basis, subject to
adjustment in certain circumstances.  If all Common Units had been exchanged on
March 17, 1998 (on a one-for-one basis) for shares of Common Stock, the number
of outstanding shares of Common Stock would have increased from 10,708,430 to
11,447,498.




                                      56
<PAGE>   59

     The table sets forth the number of shares of Common Stock and Common Units
beneficially owned by each director of the Company, by each executive officer
of the Company and by all directors and executive officers of the Company as a
group.  Unless otherwise indicated, the persons indicated below have sole
voting power and investment power with respect to the Common Stock and Common
Units shown as beneficially owned by them.



<TABLE>                                                               
<CAPTION>
                                                            NUMBER OF                                 PERCENT OF        
                                 SHARES OF COMMON         COMMON UNITS                               COMMON STOCK       
                                 STOCK BENEFICIALLY       BENEFICIALLY          PERCENT OF            AND COMMON        
BENEFICIAL OWNER                     OWNED (1)              OWNED            COMMON STOCK (2)          UNITS (3)        
----------------------           ------------------    ------------------    -----------------     ------------------   
<S>                              <C>                   <C>                   <C>                   <C>                  
David M. Glickman (4)                 329,350                     0                 3.03%                 2.83%
Thomas J. Coorsh (5)                   25,000                     0                 *                     *
Michael W. Reschke (6)                703,105               555,605                 6.19%                 6.09%
Norman R. Bobins (7)                   16,500                     0                 *                     *
Richard F. Levy (7)                    27,000                     0                 *                     *
Jane R. Patterson (7)                  16,000                     0                 *                     *
David B. Heller (7) (8)               509,400                     0                 4.55%                 4.27%
Debra A. Cafaro (9)                    80,000                32,990                 *                     *
Matthew W. Kaplan                          --                    --                 *                     *
All directors and
executive officers as
a group (9 persons)
(10)                                1,706,355               588,595                15.36%                14.40%
</TABLE>


*    Less than 1%

(1)  Number of shares includes those options currently exercisable,
     options which will become exercisable immediately prior to the
     Effective Time (including options which, absent the Merger, would
     become exercisable within 60 days of March 17, 1998) and Common
     Units beneficially owned by such person.

(2)  Assumes exchange only of those Common Units beneficially owned by
     such person,  exercise of  options currently exercisable and
     exercise of options which will become exercisable immediately prior
     to the Effective Time (including options which, absent the Merger,
     would become exercisable within 60 days of March 17, 1998)
     beneficially owned by such person.

(3)  Assumes the exercise of  options currently exercisable and exercise
     of options which will become exercisable immediately prior to the
     Effective Time (including options which, absent the Merger, would
     become exercisable within 60 days of March 17, 1998) beneficially
     owned by such person.

(4)  The number of shares of Ambassador Common Stock beneficially owned
     includes 170,000 shares of Common Stock issuable upon the exercise
     of currently exercisable options.

(5)  The number of shares of Ambassador Common Stock beneficially owned
     includes 25,000 shares of Ambassador Common Stock issuable upon the
     exercise of currently exercisable options.

(6)  The number of shares of Ambassador Common Stock and number of
     Common Units beneficially owned includes the Common Units owned by
     Prime Group Inc. (310,105 Common Units); and Prime Group IV, L.P.
     ("PGIV") (215,995 Common Units).  PGIV is affiliated with Prime
     Group (and, collectively with Prime Group and its affiliates,
     referred to as "Prime"), of which Mr. Reschke is Chairman, President
     and Chief Executive Officer and owns approximately 43.1% of the
     outstanding equity interests.  The number of shares of Ambassador
     Common Stock beneficially owned includes 92,656 shares of Ambassador
     Common Stock issuable upon the exercise of options held by Mr.
     Reschke that are exercisable within 60 days of March 17, 1998, and
     includes 4,844 shares of 


                                      57
<PAGE>   60

     Ambassador Common Stock issuable upon the exercise of options whose        
     vesting will be accelerated by a Change of Control.  Includes 402,982
     Common Units which are subject to pledges.

(7)  Includes 10,156 shares of Common Stock issuable upon the exercise
     of options that are exercisable within 60 days of March 17, 1998 and
     includes 4,844 shares of Common Stock issuable upon the exercise of
     options whose vesting will be accelerated by a Change of Control.

(8)  The number of shares of Ambassador Common Stock includes 474,400
     shares of Ambassador Common Stock owned by investment advisory
     clients of Mr. Heller, as to which he has voting and dispositive
     power.

(9)  All of the 32,990 Common Units owned by Ms. Cafaro are pledged to
     the Operating Partnership to secure the repayment of a $700,000 loan
     made by the Operating Partnership to Ms. Cafaro to enable her to
     purchase such Common Units.  See "Certain Transactions -- Loan to
     Ms. Cafaro."  The number of shares of Common Stock beneficially
     owned includes 23,505 shares of Common Stock issuable upon the
     exercise of options that are exercisable within 60 days of March 17,
     1998, and includes 32,990 shares of Common Stock issuable upon the
     exchange of Common Units and includes 23,505 shares of Common Stock
     issuable upon the exercise of options whose vesting will be
     accelerated by a Change of Control.

(10) The number of shares of Common Stock beneficially owned includes
     351,785 shares of Common Stock issuable upon the exercise of options
     that are exercisable within 60 days of March 17, 1998, and includes
     588,595 shares of Common Stock issuable upon the exchange of Common
     Units, and includes 47,725 shares of common Stock issuable upon the
     exercise of options whose vesting will be accelerated by a Change of
     Control.  See footnotes (6) through (9) above.

     CERTAIN BENEFICIAL OWNERS

     To the best of the Company's knowledge, the following persons are the only
persons who are beneficial owners of more than five percent of the Common Stock
(assuming as to any person, exchange of Common Units held by such person for
shares of Common Stock) or Class A Preferred Stock as of March 17, 1998.
Unless otherwise indicated, the persons indicated below have sole voting power
and investment power with respect to the Common Stock and Common Units shown as
beneficially owned by them.



                                      58
<PAGE>   61


<TABLE>
<CAPTION>
                                                                                                                      
                                Shares of Common      Number of  Common     Shares of Class A         Percent of      
Name and Business Address       Stock Beneficially    Units Beneficially     Preferred Stock            Class A       
  of Beneficial Owner               Owned (1)               Owned           Beneficially Owned     Preferred Stock    
----------------------------   ------------------    -------------------    ------------------    ------------------  
<S>                              <C>                   <C>                    <C>                   <C>               
Five Arrows Realty                                                                                                    
Securities L.L.C.                                                                                                     
Rothschild Realty Investors                                                                                           
II L.L.C                                                                                                              
1251 Ave. of the Americas                                                                                             
New York, NY 10020                 1,351,351 (4)              0                 1,351,351                100%         

AIMCO Properties, L.P.                                                                                                
1873 S. Bellaire St.                                                                                                  
17th Floor                                                                                                            
Denver Colorado 80222                886,600                  0                     0                     0%          

Merrill Lynch Global                                                                                                  
Allocation Fund, Inc                                                                                                  
800 Scudders Mills Road                                                                                               
Plainsboro, NJ 08536                 872,900                  0                     0                     0%          

Merrill Lynch & Co., Inc. (5)                                                                                         
World Financial Center,                                                                                               
North Tower                                                                                                           
250 Vesey St.                                                                                                         
New York, NY 10281                   905,400 (5)              0                     0                     0%          

Michael W. Reschke (6)                                                                                                
77 West Wacker Drive                                                                                                  
Suite 3900                                                                                                            
Chicago, IL  60601                   703,105               555,605                  0                     0%          

The Prime Group, Inc. (7)                                                                                             
77 West Wacker Drive                                                                                                  
Suite 3900                                                                                                            
Chicago, IL  60601                   526,100               526,100                  0                     0%          

Franklin Resources, Inc                                                                                               
777 Mariners Island Blvd.                                                                                             
San Mateo, CA 94404                  862,500                  0                     0                     0%          

Brinson Partners, Inc. (8)                                                                                            
209 South LaSalle St                                                                                                  
Chicago, IL 60604                    567,700                  0                     0                     0%          
</TABLE>


<TABLE>
<CAPTION>
                                                             Percent of
                                     Percent  of          Common Stock and
Name and Business Address             Common                  Common
  of Beneficial Owner                 Stock (2)              Units (3)
----------------------------        -------------         ----------------
<S>                                  <C>                   <C>
Five Arrows Realty             
Securities L.L.C.              
Rothschild Realty Investors    
II L.L.C                       
1251 Ave. of the Americas      
New York, NY 10020                    11.21%               10.56%

AIMCO Properties, L.P.         
1873 S. Bellaire St.           
17th Floor                     
Denver Colorado 80222                  8.28%                7.74%

Merrill Lynch Global           
Allocation Fund, Inc           
800 Scudders Mills Road        
Plainsboro, NJ 08536                   8.15%                7.63%

Merrill Lynch & Co., Inc. (5)  
World Financial Center,        
North Tower                    
250 Vesey St.                  
New York, NY 10281                     8.46%                7.91%

Michael W. Reschke (6)         
77 West Wacker Drive           
Suite 3900                     
Chicago, IL  60601                     6.19%                6.09%

The Prime Group, Inc. (7)      
77 West Wacker Drive           
Suite 3900                     
Chicago, IL  60601                     4.68%                4.60%

Franklin Resources, Inc        
777 Mariners Island Blvd.      
San Mateo, CA 94404                    8.05%                7.53%

Brinson Partners, Inc. (8)     
209 South LaSalle St           
Chicago, IL 60604                      5.30%                4.96%
</TABLE>


 (1)  Number of shares of Common Stock beneficially owned includes those
      options that will become exercisable immediately prior to the Effective
      Time,  exchange of Common Units beneficially owned by such person and
      conversion of Class A Preferred Stock beneficially owned by such person.

 (2)  Assumes exchange only of the Common Units beneficially owned by such
      person, Conversion of the Class A Preferred Stock beneficially owned by
      such person and exercise of options beneficially owned by such person
      that will become exercisable immediately prior to the Effective Time.

 (3)  Assumes conversion of Class A Preferred Stock beneficially owned by such
      person and exercise of options beneficially owned by such person that
      will become exercisable immediately prior to the Effective Time.


                                      59
<PAGE>   62

(4)   As the managing member of Five Arrows Realty Securities L.L.C.,
      Rothschild Realty Investors I L.L.C. is also deemed to be the beneficial
      owner of such 1,351,351 shares of Class A Preferred Stock owned by Five
      Arrows and the 1,351,351 shares of Common Stock issuable upon conversion
      of such shares.

(5)   In addition to Merrill Lynch & Co., Inc, Merrill Lynch Group, Inc., World
      Financial Center, North Tower, 250 Vesey St., New York, NY 10281;
      Princeton Services Inc., 800 Scudders Mills Road, Plainsboro, New Jersey
      08536 and; Merrill Lynch Asset Management, L.P. 800 Scudders Mills Road,
      Plainsboro, New Jersey 08536; are each beneficial owners of 905,400
      shares of Ambassador Common Stock.  This beneficial ownership includes
      the 872,900 shares beneficially owned by Merrill Lynch Global Allocation
      Fund, Inc.

(6)   The number of shares of Common Stock and the number of Common Units
      beneficially owned include the 526,100 Common Units owned by Prime.  The
      number of shares of Ambassador Common Stock beneficially owned also
      includes 92,656 shares of Common Stock issuable upon the exercise of
      options held by Mr. Reschke that are exercisable within 60 days of March
      17, 1998 and includes 4,844 shares of Common Stock issuable upon the
      exercise of options whose vesting will be accelerated by a Change of
      Control.  Includes 402,982 Common Units subject to a pledge.

(7)   The number of shares of Ambassador Common Stock and the number of Common
      Units beneficially owned include Common Units owned by Prime Group, Inc.
      (310,105 Common Units) and PGIV (215,995 Common Units).  Does not include
      50,000 shares of Ambassador Common Stock and 29,505 Common Units and the
      exercise of 97,500 options owned by Michael W. Reschke who owns a 43.1%
      general partnership interest in Prime.  Includes 402,982 Common Units
      subject to pledges.

(8)   In addition to Brinson Partners, Inc., Brinson Holdings, Inc., 209 South
      LaSalle St., Chicago, Illinois 60604; SBC Holding (USA), Inc., 222
      Broadway, New York, New York 10038 and; Swiss Bank Corporation,
      Aeschenplatz 6 CH-4002. Basel, Switzerland are each beneficial owners of
      these 567,700 shares of Ambassador Common Stock.

ITEM 13. RELATIONSHIPS AND RELATED TRANSACTIONS

WILLIAMSBURG PARTNERSHIP AGREEMENT

     In 1994, prior to the completion of the Offering, Prime sold a 50%
partnership interest in the partnership that owns the Williamsburg Apartments
located in Chicago, Illinois (the "Williamsburg Property"), to an executive
officer of Prime and an entity affiliated with him; the purchaser owns both
general and limited partnership interests.  Simultaneously with such sale,
Prime contributed its remaining 50% general partnership interest in such
partnership to the Operating Partnership in connection with the Formation.  The
Operating Partnership is the managing general partner; the purchaser has equal
voting rights with respect to certain significant decisions of the partnership,
and has a 50% interest in the partnership's profits and losses.  Net cash flow
will be distributed as follows:  First, to the Operating Partnership until the
Operating Partnership has received a cumulative return of $250,000 per year;
and the balance pro rata to the partners.

PROPERTY MANAGEMENT AGREEMENTS

     Upon completion of the Offering, the Operating Partnership entered into a
property management agreement with the owner of Brookdale Village Apartments,
an apartment complex located in Chicago, Illinois, containing 252 apartments.
Brookdale Village Apartments was developed by Prime in 1986 and was sold in
1987 to a partnership in which an affiliate of Kemper Corporation is the
general partner.  Prime had managed this property since its opening.  The



                                      60
<PAGE>   63

Operating Partnership entered into similar forms of property management
agreements with the owner of Brookdale Village as with the unconsolidated
partnerships that own the Williamsburg Property and the Brook Run Apartments (a
182-apartment complex located in Arlington Heights, Illinois) and are
unconsolidated for financial reporting purposes.

     Under these agreements, the Operating Partnership receives a management
fee equal to 5% of the gross revenues of the applicable property. The property
management services performed by the Operating Partnership include leasing,
data processing, maintenance, accounting, marketing and promotion.  The Company
does not intend to perform any asset or property management services that would
cause the Company to lose its status as a REIT.  The property management
agreements provide that the applicable property owner will indemnify the
Operating Partnership and the Company for any liability incurred in performing
such services except in certain circumstances.  The agreements have terms of
four to five years, subject to either party's right to cancel upon at least 30
days' notice.

EXCHANGE RIGHTS AGREEMENT

     Pursuant to the Exchange Rights Agreement, dated as of August 31, 1994 (as
amended the "Exchange Rights Agreement"), among the Company, the Operating
Partnership and each existing and future limited partners of the Operating
Partnership (the "Limited Partners"), and subject to certain conditions,
following the first anniversary of the completion of the Offering, each Common
Unit held by a Limited Partner may be exchanged for one share of Common Stock
(subject to adjustment) or, at the option of the Company, cash equal to the
fair market value of a share of Common Stock at the time of exchange.  However,
no Limited Partner may exchange any Common Units into shares of Common Stock if
such Limited Partner's actual or constructive ownership of such shares of
Common Stock would violate the limitations on ownership with respect to the
Common Stock.  The Limited Partners have agreed not to exchange their Common
Units for Common Stock unless the Operating Partnership receives an opinion of
counsel reasonably satisfactory to the Company that upon such exchange, the
Operating Partnership will not cease to qualify as a partnership for Federal
income tax purposes.  In March 1997, Mr. Cavenaugh and LG Trust exchanged the
17,280 and 84,375 Common Units, respectively, owned by them for an equal number
of shares of Common Stock pursuant to the terms of the Exchange Rights
Agreement.  In March 1998, Mr. Glickman exchanged all of his 156,250 Common
Units in the Operating Partnership for shares of Common Stock in the Company.

REGISTRATION RIGHTS AGREEMENT

     Generally, persons who are "affiliates" of the Company under the
Securities Act (individuals or entities that control, are controlled by, or are
under common control with the Company, and may include certain officers,
directors and principal stockholders of the Company), are permitted to sell
their shares of Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemption afforded by Section
4(1) and Rule 144 thereunder.  In general, under Rule 144 as 



                                      61
<PAGE>   64

currently in effect, an affiliate (or affiliates whose shares are aggregated),  
and a person who has beneficially owned restricted shares for at least one
year, is entitled to sell within any three-month period a number of shares that
does not exceed the greater of 1% of the then outstanding shares of the same
class (for a sale of Common Stock, approximately105,521shares) or the average
weekly trading volume for that class on all national securities exchanges or in
the over-the-counter market during the four calendar weeks preceding such sale.
Sales under Rule 144 must be made in unsolicited "brokers' transactions" (as
defined in Rule 144) and are also subject to certain manner of sale provisions,
notice requirements, and the availability of current public information about
the Company.

     The Company entered into a Registration Rights Agreement (as amended the
"Registration Rights Agreement") with Prime and Messrs. Reschke, Glickman,
Cavenaugh and Peterson in August 1994.  The Registration Rights Agreement
grants them certain "demand" and "piggyback" registration rights with respect
to their respective shares of Common Stock owned by them or acquired by them
upon exchange of Common Units for shares of Common Stock.  These registration
rights became effective generally on August 31, 1997, except that the
registration rights with respect to the shares of Common Stock purchased
directly from the Company by Prime and Mr. Reschke and the Common Units
purchased by Messrs. Cavenaugh and Peterson became effective on August 31,
1995.  The Registration Rights Agreement grants Prime and Mr. Glickman the
right to demand registration of all or any portion of their restricted shares
of Common Stock up to two times in each calendar year and grants Prime and
Messrs. Reschke, Glickman, Cavenaugh and Peterson the right to have their
restricted shares of Common Stock registered incidentally to any registration
being conducted by the Company of Common Stock or of any securities of the
Company substantially similar to Common Stock.  The Company will bear expenses
arising from the exercise of registration rights, except that the Company will
not pay any underwriting discounts or commissions, Securities and Exchange
Commission and blue sky registration fees and transfer taxes relating to such
shares.  Pursuant to the terms of the Registration Rights Agreement, in March
1997, the Company registered 101,655 shares of Common Stock owned directly and
indirectly by Mr. Cavenaugh that were issued upon exchange of Common Units.

LOAN TO MR. GLICKMAN

     Upon completion of the Offering, the Operating Partnership made a limited
recourse loan of $1.0 million to Mr. Glickman, which he has used to pay the
taxes due in connection with the transfer by Prime to him of 156,250 Common
Units in consideration for his interest in Prime.  The loan was secured by a
pledge of these Common Units.  Interest on the loan accrued at a rate of 8% per
annum, and was payable only to the extent of any distributions paid by the
Operating Partnership in respect of the Common Units pledged by Mr. Glickman.
The loan was to mature in December 1999.  The largest aggregate principal
amount outstanding on such loan at any time during the Company's last fiscal
year was $1,000,000.  On December 29, 1997, Mr. Glickman repaid the loan in
full.

LOAN TO MR. PETERSON


                                      62
<PAGE>   65

     In connection with the Formation, the Operating Partnership made a
recourse loan of $250,000 to Mr. Peterson.  Mr. Peterson used such loan
proceeds to acquire 15,625 Common Units at the Offering price of the Common
Stock.  The loan is secured by a pledge of the Common Units acquired with the
proceeds thereof (the "Peterson Pledged Units").  Interest on the loan accrues
at a rate of 0.5% per annum above the prime rate announced, from time to time,
by The First National Bank of Chicago, and interest and principal are payable
prior to maturity to the extent of any distributions paid by the Operating
Partnership in respect of the Peterson Pledged Units.  The loan matures on the
earlier to occur of (i) August 31, 2004 and (ii) the first anniversary of the
termination of Mr. Peterson's employment with the Company for any reason.  The
largest aggregate principal amount outstanding on such loan at any time during
the Company's last fiscal year was $250,000.  As of March 17, 1998, the amount
of principal outstanding was approximately $240,000 and the interest rate was
prime plus .50% (9.0%).

LOAN TO MS. CAFARO

     In connection with her employment, on April 7, 1997, the Company made a
non-recourse loan of $700,000 to Ms. Cafaro.  Ms. Cafaro used such loan
proceeds to acquire 32,990 Common Units of the Operating Partnership at a price
of $24.25 per Common Unit.  The loan is secured by a pledge of the Common Units
acquired with the proceeds thereof (the "Cafaro Pledged Units").  Interest on
the loan accrues at the rate of 6.38% per annum.  The loan matures  on the
earlier to occur of (i) June 30, 2000 and (ii) six months after the termination
of Ms. Cafaro's employment with the Company other than as a result of her
death, by the Company without Cause or for Disability or by executive for Good
Reason (as defined in her employment agreement) and is extended for so long as
she is prohibited from exchanging her Common Units and publicly selling the
Common Stock received in exchange for such Common Units, but not later than
June 30, 2000.  The largest aggregate principal amount outstanding on such loan
at any time during the Company's last fiscal year was $700,000.  As of March
17, 1998, the principal amount outstanding on such loan was $700,000.

RELATIONSHIP WITH MR. LEVY'S LAW FIRM

     Mr. Levy's professional corporation is a partner in the law firm of
Altheimer & Gray.  Altheimer and Gray has in the past performed and is expected
in the future to perform legal services for the Company.

RELATIONSHIPS WITH MR. KAPLAN

     Mr. Kaplan is a Managing Director of Rothschild Realty Inc.  Mr. Kaplan is
also a manager of Rothschild Realty Investors II L.L.C., the sole managing
member of Five Arrows Realty Securities L.L.C.  On August 16, 1996, Five Arrows
purchased from the Company 1,351,351 newly issued shares of Class A Preferred
Stock for $25 million.  In connection with such purchase, the Company agreed to
appoint Mr. Kaplan as a director of the Company and to appoint Mr. Kaplan or
another Class A Director to each committee of the Board.



                                      63
<PAGE>   66

                                   PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) and (a)(2) Financial Statements and Financial Statement Schedules

       See Index to Financial Statements at page F-1.

       All schedules, other than those included herein, are omitted because they
are not applicable or the required information is shown in the financial
statements or notes.

(a)(3) Exhibits

  3.1  Form of Amended and Restated Charter of Ambassador Apartments, Inc.,
       formerly Prime Residential, Inc. ("Ambassador") (incorporated by
       reference to Exhibit 3.1 to Ambassador's Registration Statement on Form
       S-11 (Registration No. 33-77972) ("Registration Statement 33-77972"))
  3.2  Articles of Amendment to Amended and Restated Articles of
       Incorporation of Ambassador (incorporated by reference to Exhibit 3.3 to
       Ambassador's Current Report on Form 8-K dated May 29, 1996)
  3.3  Compiled Charter of Ambassador as of June 1, 1996 (incorporated by
       reference to Exhibit 3.4 to Ambassador's Current Report on Form 8-K
       dated May 29, 1996)
  3.4  Articles Supplementary Classifying 1,351,351 Shares of Preferred
       Stock as Class A Senior Cumulative Convertible Preferred Stock and
       1,351,351 Shares of Excess Stock as Excess Class A Preferred Stock of
       Ambassador (incorporated by reference to Exhibit 3.5 to Ambassador's
       Current Report on Form 8-K dated August 16, 1996)
  3.5  Form of Amended and Restated Bylaws of Ambassador  (incorporated by
       reference to Exhibit 3.1 to Registration Statement 33-77972)
  4.1  Specimen Common Stock Certificate (incorporated by reference to
       Exhibit 4.4 to Ambassador's Registration Statement on Form S-3
       (Registration No. 333-22199))
 10.1  Form of Amended and Restated Agreement of Limited Partnership of the
       Operating Partnership (incorporated by reference to Exhibit 10.1 to
       Registration Statement 33-77972)
 10.2  Amendment No. 1 to Amended and Restated Agreement of Limited
       Partnership of the Operating Partnership (incorporated by reference to
       Exhibit 10.45 to Ambassador's Current Report on Form 8-K dated August 16,
       1996)
 10.3  Amendment No. 2 to Amended and Restated Agreement of Limited
       Partnership of the Operating Partnership (incorporated by reference to
       Exhibit 10.46 to Ambassador's Current Report on Form 8-K dated August 16,
       1996)
 10.4  Amendment No. 3 to Amended and Restated Agreement of Limited
       Partnership of the Operating Partnership (incorporated by reference to
       Exhibit 10.47 to Ambassador's Current Report on Form 8-K dated August 16,
       1996)


                                      64
<PAGE>   67

 10.5 Contribution Agreement, dated April 18, 1994, among Ambassador, Prime
      and Richard F. Cavenaugh (incorporated by reference to Exhibit 10.2 to
      Registration Statement 33-77972)
 10.6 Form of First Amendment to Contribution Agreement among Ambassador,
      Prime and Richard F. Cavenaugh (incorporated by reference to Exhibit
      10.2(A) to Registration Statement 33-77972)
 10.7 Form of Agreement to Purchase Interests among Ambassador, the Operating
      Partnership, KILICO Realty Corporation and KFC Portfolio Corp.
      (incorporated by reference to Exhibit 10.3 to Registration Statement
      33-77972)
 10.8 Form of Property Management Agreement between the Operating Partnership
      and Brookdale Village Partners, Ltd. (incorporated by reference to
      Exhibit 10.4 to Registration Statement 33-77972)
 10.9 Form of Property Management Agreement between the Operating Partnership
      and Fairways Partners Limited Partnership (incorporated by reference to
      Exhibit 10.5 to Registration Statement 33-77972)
10.10 Form of Property Management Agreement between the Operating Partnership
      and Williamsburg Limited Partnership (incorporated by reference to Exhibit
      10.34 to Registration Statement 33-77972)
10.11 Form of Property Management Agreement between Quail Run Associates, Ltd.
      and the Operating Partnership (re: Brook Run Property) (incorporated by
      reference to Exhibit 10.36 to Registration Statement 33-77972)
10.12 Form of Noncompetition Agreement among Ambassador, the Operating
      Partnership, Michael W. Reschke and PGI (incorporated by reference to
      Exhibit 10.10 to Registration Statement 33-77972)
10.13 Form of Registration Rights Agreement among Ambassador, Prime, Richard
      F. Cavenaugh and LG Trust (incorporated by reference to Exhibit 10.13 to
      Registration Statement 33-77972)
10.14 Interest Rate Protection Agreement, dated August 24, 1994, between the
      Company and Nomura Capital Services, Inc. (incorporated by reference to
      Exhibit 10.15 to Registration Statement 33-77972)
10.15 Agreement of Sale and Purchase of Partnership Interests, dated May 25,
      1994, by and between Prime Group Limited Partnership, Richard J. Brown and
      Cambridge Homes, Inc. (incorporated by reference to Exhibit 10.16 to
      Registration Statement 33-77972)
10.16 Letter Agreements, dated July 6, 1994 and July 15, 1994, amending
      Agreement of Sale and Purchase of Partnership Interests by and between
      Prime Group Limited Partnership, Richard J. Brown and Cambridge Homes,
      Inc. (incorporated by reference to Exhibit 10.16(A) to Registration
      Statement 33-77972)
10.17 Form of Exchange Rights Agreement among the Company and the Limited
      Partners of the Operating Partnership (incorporated by reference to
      Exhibit 10.17 to Registration Statement 33-77972)
10.18 Form of Purchase Option Agreement and Right of First Refusal between the
      Operating Partnership and Fairways Partners Limited Partnership
      (incorporated by reference to Exhibit 10.18 to Registration Statement
      33-77972)



                                      65
<PAGE>   68

10.19 Form of Amended and Restated Agreement of Partnership of Williamsburg
      Limited Partnership (incorporated by reference to Exhibit 10.19 to
      Registration Statement 33-77972)
10.20 Form of Amended and Restated Agreement of Partnership of Brook Run
      Associates, L.P. (incorporated by reference to Exhibit 10.20 to
      Registration Statement 33-77972)
10.21 Form of Environmental Remediation and Indemnity Agreement (entered into
      by the Operating Partnership with respect to certain Property
      Partnerships) (incorporated by reference to Exhibit 10.22 to Registration
      Statement 33-77972)
10.22 Form of ADA Indemnity Agreement (entered into by the Operating
      Partnership with respect to certain Property Partnerships) (incorporated
      by reference to Exhibit 10.23 to Registration Statement 33-77972)
10.23 Form of Assignment and Assumption Agreement among The Prime Group, Inc.,
      Prime Multifamily of Illinois and the Operating Partnership (environmental
      indemnity with respect to the Williamsburg Property) (incorporated by
      reference to Exhibit 10.25 to Registration Statement 33-77972)
10.24 Form of Multi-Family Assets Sharing Agreement among the Operating
      Partnership, Prime, David M. Glickman, Richard F. Cavenaugh, KILICO Realty
      Corporation and KFC Portfolio Corp. (incorporated by reference to Exhibit
      10.32 to Registration Statement 33-77972)
10.25 Form of Investment Safekeeping Securities Custody Agreement between Bank
      One, Arizona, N.A. and Ambassador I, L.P. (formerly Prime MFP Limited
      Partnership) (incorporated by reference to Exhibit 10.29 to Registration
      Statement 33-77972)
10.26 Form of Pledge and Security Agreement between Prime and Kemper Investors
      Life Insurance Company (incorporated by reference to Exhibit 10.33 to
      Registration Statement 33-77972)
10.27 Form of Lock-up Agreement between Prime, PGLP and Friedman, Billings,
      Ramsey & Co., Inc. ("FBR") (incorporated by reference to Exhibit 10.28(A)
      to Registration Statement 33-77972)
10.28 Form of Lock-up Agreement between David M. Glickman and FBR
      (incorporated by reference to Exhibit 10.28(B) to Registration Statement
      33-77972)
10.29 Form of Lock-up Agreement between Richard F. Cavenaugh, LG Trust and FBR
      (incorporated by reference to Exhibit 10.28(C) to Registration Statement
      33-77972)
10.30 Form of Lock-up Agreement between Adam D. Peterson and FBR (incorporated
      by reference to Exhibit 10.28(D) to Registration Statement 33-77972)
10.31 Form of Officers and Directors Indemnification Agreement (incorporated
      by reference to Exhibit 10.14 to Registration Statement 33-77972)
10.32 Form of Employment Agreement between Ambassador and David M. Glickman
      (incorporated by reference to Exhibit 10.7 to Registration Statement
      33-77972)
10.33 Form of Employment Agreement between Ambassador and Richard F. Cavenaugh
      (incorporated by reference to Exhibit 10.6 to Registration Statement
      33-77972)
10.34 Form of Employment Agreement between Ambassador and Adam D. Peterson
      (incorporated by reference to Exhibit 10.9 to Registration Statement
      33-77972)
                                      66
<PAGE>   69

10.35 Form of Note, Pledge and Security Agreement, and letter re:
      distributions between the Operating Partnership and David M. Glickman
      (incorporated by reference to Exhibit 10.30 to Registration Statement
      33-77972)
10.36 Form of Note, Pledge and Security Agreement, and letter re:
      distributions among the Operating Partnership, Richard F. Cavenaugh and LG
      Trust (incorporated by reference to Exhibit 10.27 to Registration
      Statement 33-77972)
10.37 Form of Note, Pledge, and Security Agreement, and letter re:
      distributions between the Operating Partnership and Adam D. Peterson
      (incorporated by reference to Exhibit 10.35 to Registration Statement
      33-77972)
10.38 Employment Agreement, dated as of May 21, 1996, between Ambassador and
      Thomas J. Coorsh
10.39 Resignation and Release, dated December 20, 1996, between Ambassador and
      Richard F. Cavenaugh
10.40 The 1994 Stock Incentive Plan for Officers, Directors and Key Employees
      of Ambassador Apartments, Inc., Ambassador Apartments, L.P. and
      Subsidiaries (incorporated by reference to Exhibit 4.1 to Ambassador's
      Registration Statement on Form S-3 (Registration No. 333-20713))
10.41 Amendment to The 1994 Stock Incentive Plan for Officers, Directors and
      Key Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P.
      and Subsidiaries.
10.42 The 1996 Stock Incentive Plan for Officers, Directors and Key Employees
      of Ambassador Apartments, Inc., Ambassador Apartments, L.P. and
      Subsidiaries, as amended March 20, 1997
10.43 Loan Agreement and collateral documents, dated August 31, 1994 among
      Nomura, the Operating Partnership and Ambassador (incorporated by
      reference to Exhibit 10.24 to Ambassador's Annual Report on Form 10-K for
      the year ended December 31, 1994)
10.44 Amended and Restated Note Agreement dated February 15, 1995 and
      collateral documents among Nomura, the Operating Partnership and
      Ambassador (incorporated by reference to Exhibit 10.24A to Ambassador's
      Annual Report on Form 10-K for the year ended December 31, 1994)
10.45 First Amendment to Amended and Restated Note Agreement dated August 16,
      1995, among Nomura, the Operating Partnership and Ambassador (incorporated
      by reference to Exhibit 24B to Ambassador's Quarterly Report on Form 10-Q
      for the quarter ended September 30, 1995)
10.46 SWAP Transaction Agreement dated May 24, 1995 between Ambassador and
      Nomura Capital Services Inc. (incorporated by reference to Exhibit 10.37
      to Ambassador's Quarterly Report on Form 10-Q for the quarter ended June
      30, 1995)
10.47 Credit Agreement dated as of September 20, 1995 by and between the
      Operating Partnership and Credit Lyonnais, New York Branch (incorporated
      by reference to Exhibit 10.38 to Ambassador's Quarterly Report on Form
      10-Q for the quarter ended September 30, 1995)
10.48 Agreement of Limited Partnership of Jupiter-I, L.P. dated as of March
      27, 1996 (incorporated by reference to Exhibit 10.38 to Ambassador's
      Quarterly Report on Form 10-Q for the quarter ended March 31, 1996)


                                      67
<PAGE>   70

10.49 Agreement of Limited Partnership of Jupiter-II, L.P. dated as of March
      27, 1996 (incorporated by reference to Exhibit 10.38(A) to Ambassador's
      Quarterly Report on Form 10-Q for the quarter ended March 31, 1996)
10.50 Agreement and Undertaking, dated as of March 27, 1996, among Ambassador,
      Yugenkaisha Sanko Sekiyu, Jupiter-I, L.P. and AJ One Limited Partnership
      (incorporated by reference to Exhibit 10.39 to Ambassador's Quarterly
      Report on Form 10-Q for the quarter ended March 31, 1996)
10.51 Agreement and Undertaking, dated as of March 27, 1996, among Ambassador,
      Makoto Maki, Jupiter-II, L.P. and AJ Two Limited Partnership (incorporated
      by reference to Exhibit 10.39(A) to Ambassador's Quarterly Report on Form
      10-Q for the quarter ended March 31, 1996)
10.52 Credit Agreement, dated June 26, 1996, between Ambassador II, L.P. and
      Bank One, Arizona, N.A. (incorporated by reference to Exhibit 10.40 to
      Ambassador's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1996)
10.53 Promissory Note, dated June 26, 1996, by Ambassador II, L.P. to Bank
      One, Arizona, N.A. (incorporated by reference to Exhibit 10.41 to
      Ambassador's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1996)
10.54 Investment Agreement, dated as of August 15, 1996, among Ambassador, the
      Operating Partnership and Five Arrows Realty Securities L.L.C.
      (incorporated by reference to Exhibit 10.42 to Ambassador's Current Report
      on Form 8-K dated August 16, 1996)
10.55 Supplemental Agreement, dated as of August 16, 1996, between Ambassador
      and Five Arrows Realty Securities L.L.C. (incorporated by reference to
      Exhibit 10.43 to Ambassador's Current Report on Form 8-K dated August 16,
      1996)
10.56 Registration Rights Agreement, dated as of August 16, 1996, between
      Ambassador and Five Arrows Realty Securities L.L.C. (incorporated by
      reference to Exhibit 10.44 to Ambassador's Current Report on Form 8-K
      dated August 16, 1996)
10.57 Master Reimbursement Agreement by and between Federal National Mortgage
      Association and Ambassador VIII, L.P. dated as of December 1, 1996
      (incorporated by reference to Exhibit 10.49 to Ambassador's Current Report
      on Form 8-K dated December 18, 1996)
10.58 The 1997 Stock Incentive Plan for Officers and Key Employees of the
      Company (incorporated by reference to exhibit of the same of the Company's
      Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)
10.59 Swap transaction agreement dated December 18, 1996, in the amount of
      $119.8 million by and between the Company and CLNY (incorporated by
      reference to exhibit of the same to the Company's Quarterly Report on Form
      10-Q for the quarter ended March 31, 1997).
10.60 Swap transaction agreement dated December 18, 1996, in the amount of
      $50.2 million by an between the Company and CLNY (incorporated by
      reference to exhibit of the same to the Company's Quarterly Report on Form
      10-Q for the quarter ended March 31, 1997)
10.61 Swap transaction agreement dated December 18, 1996, in the amount of
      $16.5 million by and between the Company and CLNY (incorporated by
      reference to exhibit of the same to the Company's Quarterly Report on Form
      10-Q for the quarter ended March 31, 1997)
10.62 Loan Agreement dated March 5, 1997, in the amount of $21.5 million by
      and between the Company and Nomura Asset Capital Corporation (incorporated
      by reference to exhibit of 


                                      68
<PAGE>   71

      the same to the Company's Quarterly Report on Form 10-Q for the quarter 
      ended March 31, 1997)
10.63 Interest rate cap agreement dated April 10, 1997, for a notional amount
      of $17.6 million by and between the Company and CLNY (incorporated by
      reference to exhibit of the same to the Company's Quarterly Report on Form
      10-Q for the quarter ended June 30, 1997)
10.64 Interest rate cap agreement dated April 10, 1997, for a notional amount
      of $4.0 million by and between the Company and CLNY (incorporated by
      reference to exhibit of the same to the Company's Quarterly Report on Form
      10-Q for the quarter ended June 30, 1997)
10.65 Revolving Credit Agreement dated May 28, 1997, in the amount of $25.0
      million by and between the Company and CLNY (incorporated by reference to
      exhibit of the same to the Company's Quarterly Report on Form 10-Q for the
      quarter ended June 30, 1997)
10.66 Amendment to CLNY Revolving Credit Agreement, dated June 27, 1997, by
      and between the Company and CLNY (incorporated by reference to exhibit of
      the same to the Company's Quarterly Report on Form 10-Q for the quarter
      ended June 30, 1997)
10.67 Note Agreement dated June 22, 1997, in the amount of  $75.0 million by
      and between the Company and Nomura Asset Capital Corporation (incorporated
      by reference to exhibit of the same to the Company's Quarterly Report on
      Form 10-Q for the quarter ended June 30, 1997)
10.68 First Amendment to Nomura Note Agreement dated June 26, 1997, by and
      between the Company and Nomura Asset Capital Corporation (incorporated by
      reference to exhibit of the same to the Company's Quarterly Report on Form
      10-Q for the quarter ended June 30, 1997)
10.69 Employment Agreement dated April 7, 1997, by and between the Company and
      David M. Glickman (incorporated by reference to exhibit of the same to the
      Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1997)
10.70 Employment Agreement dated April 7, 1997, by and between the Company and
      Debra A. Cafaro (incorporated by reference to exhibit of the same to the
      Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1997)
10.71 Employment Agreement dated April 7, 1997, by and between the Company and
      Adam D. Peterson (incorporated by reference to exhibit of the same to the
      Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1997)
10.72 Employment Agreement dated April 7, 1997, by and between the Company and
      Thomas J. Coorsh (incorporated by reference to exhibit of the same to the
      Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1997)
10.73 Secured non-recourse promissory note dated April 7, 1997, by and between
      the Company and Debra A. Cafaro (incorporated by reference to exhibit of
      the same to the Company's Quarterly Report on Form 10-Q for the quarter
      ended June 30, 1997)
10.74 Amendment number 4 dated April 7, 1997, to the Amended and Restated
      Agreement of Limited Partnership of Ambassador Apartments, L.P.
      (incorporated by reference to exhibit of the same to the Company's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 1997)


                                      69
<PAGE>   72

10.75 Amendment Number 1 dated April 7, 1997, to the Exchange Rights Agreement
      (incorporated by reference to exhibit of the same to the Company's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 1997)
10.76 Deferred compensation agreement dated May 1, 1995 (incorporated by
      reference to exhibit of the same to the Company's Quarterly Report on Form
      10-Q for the quarter ended June 30, 1997)
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
      (incorporated by reference to exhibit of the same to the Company's
      Quarterly Report on Form 10-Q for the quarter ended September 30, 1997)
10.78 The Second Amendment to Revolving Credit Agreement dated September 30,
      1997, by and between the Company and CLNY (incorporated by reference to
      exhibit of the same to the Company's Quarterly Report on Form 10-Q for the
      quarter ended September 30, 1997)
10.79 Amendment to Note Agreement dated September 30, 1997, between the
      Company and Nomura Asset Capital Corporation (incorporated by reference to
      exhibit of the same to the Company's Quarterly Report on Form 10-Q for the
      quarter ended September 30, 1997)
10.80 Amendment to Note Agreement dated September 30, 1997, between the
      Company and Nomura Asset Capital Corporation (incorporated by reference to
      exhibit of the same to the Company's Quarterly Report on Form 10-Q for the
      quarter ended September 30, 1997)
10.81 Amendment Number 1 to Employment Agreement dated December 19, 1997 by
      and between the Company and Debra A. Cafaro
 21.1 List of subsidiaries
 23.1 Consent of Ernst & Young LLP
 27.1 Financial Data Schedule
 99.1 Amended and Restated Certificate of Limited Partnership of the Operating
      Partnership (incorporated by reference to Exhibit 99.3 to Ambassador's
      Current Report on Form 8-K dated August 16, 1996)

(b)   Reports on Form 8-K

      The Company's current report on Form 8-K dated December 23, 1997,
      reporting under item 5 that the Company entered into an Agreement and
      Plan of Merger providing for the Merger of the Company with and into
      Apartment Investment and Management Company.


                                      70
<PAGE>   73

                                  SIGNATURES


     Pursuant to the requirements of Section 13 and 15(d) 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.
Dated:  March 19, 1998

                                        By: /s/ David M. Glickman        
                                            ---------------------------------
                                            David M. Glickman                
                                            Chairman of the Board and        
                                            Chief Executive Officer          
                                                                         
                                                                         
                                        By: /s/ Thomas J. Coorsh         
                                            ---------------------------------
                                            Thomas J. Coorsh                 
                                            Interim Chief Financial Officer, 
                                            and Secretary                    



                                      71
<PAGE>   74

     Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



<TABLE>
<CAPTION>
      Signature                  Title                    Date
---------------------   ----------------------       -------------
<S>                     <C>                          <C>
                        
/s/ David M. Glickman   Chairman of the Board and    March 19, 1998
---------------------   Chief Executive Officer
David M. Glickman                                

/s/ Debra A. Cafaro     President                    March 19, 1998 
---------------------                                               
Debra A. Cafaro                                                     
                                                                    
/s/ Norman R. Bobins    Director                     March 19, 1998  
---------------------                                                
Norman R. Bobins                                                     
                                                                     
/s/ David B. Heller     Director                     March 19, 1998  
---------------------                                                
David B. Heller                                                      
                                                                     
/s/ Richard F. Levy     Director                     March 19, 1998  
---------------------                                                
Richard F. Levy                                                      
                                                                     
/s/ Jane R. Patterson   Director                     March 19, 1998  
---------------------                                                
Jane R. Patterson                                                    
                                                                     
/s/ Michael W. Reschke  Director                     March 19, 1998  
---------------------                                                
Michael W. Reschke                                                   
                                                                     
/s/ Matthew W. Kaplan   Director                     March 19, 1998  
---------------------                                                
Matthew W. Kaplan                                               
</TABLE>


                                      72
<PAGE>   75

                          AMBASSADOR APARTMENTS, INC.

                         INDEX TO FINANCIAL STATEMENTS
                                      AND
                          FINANCIAL STATEMENT SCHEDULE
                          (ITEMS 14(a)(1) AND (a)(2))



<TABLE>
<CAPTION>


(a)(1) FINANCIAL STATEMENTS                                                     PAGE
                                                                                ----
<S>                                                                             <C>
Report of Independent Auditors ................................................ F-2

Consolidated balance sheets as of December 31, 1997 and 1996 .................. F-3

Consolidated statements of operations for the years ended
 December 31, 1997, 1996 and 1995 ............................................. F-4

Consolidated statements of changes in stockholders' equity for the years ended
 December 31, 1997, 1996 and 1995 ............................................. F-5

Consolidated statements of cash flows for the years ended
 December 31, 1997, 1996  and 1995 ............................................ F-6

Notes to consolidated financial statements .................................... F-8

(a)(2) FINANCIAL STATEMENT SCHEDULE

Schedule III - Real Estate and Accumulated Depreciation as of
 December 31, 1997 ............................................................ S-1
</TABLE>

Schedules, other than those listed, are omitted for the reason that they are
not applicable or equivalent information has been included elsewhere herein.


                                      F-1


<PAGE>   76


                         REPORT OF INDEPENDENT AUDITORS



Stockholders and Board of Directors
Ambassador Apartments, Inc.


     We have audited the accompanying consolidated balance sheets of Ambassador
Apartments, Inc. (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.  Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)(2) . These financial statements and schedule are the responsibility
of the Company's management.  Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ambassador Apartments, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.  Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.





                                                        Ernst & Young LLP

Chicago, Illinois
January 30, 1998
except for Note 19, as to which the date
is March 5, 1998



                                      F-2



<PAGE>   77

                         AMBASSADOR APARTMENTS, INC.
                         CONSOLIDATED BALANCE SHEETS
                          DECEMBER 31, 1997 AND 1996
             (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                              1997                  1996
                                                                       -------------         -------------
ASSETS
<S>                                                                    <C>                   <C>
Rental property:                                                                                          
   Land........................................................         $     88,610         $      82,124
   Buildings and improvements..................................              456,071               407,002
   Furniture and equipment.....................................                7,073                 6,166
                                                                       -------------         -------------
                                                                             551,754               495,292
Accumulated depreciation.......................................              (52,319)              (33,340)
                                                                       -------------         -------------
                                                                             499,435               461,952
Cash and cash equivalents......................................                4,448                 4,002
Escrow deposits - restricted...................................               30,588                30,897
Escrowed bond funds - restricted...............................                  250                   549
Note receivable - officer......................................                   --                 1,000
Accounts receivable............................................                1,586                 1,870
Investment in and advances to unconsolidated real estate       
   limited partnerships........................................                1,243                 4,549
Deferred financing costs, net..................................               15,404                 9,640
Other..........................................................                4,222                 1,325
                                                                       -------------         -------------
Total assets...................................................        $     557,176         $     515,784
                                                                       =============         =============

LIABILITIES AND EQUITY                                         
Bonds payable..................................................        $     313,097         $     279,355
Notes payable..................................................               74,552                79,974
Accrued interest...............................................                  554                   913
Real estate taxes payable......................................                2,348                 3,837
Tenant security deposits.......................................                2,480                 2,231
Accounts payable and other liabilities.........................                2,827                 2,138
Distributions/dividends payable................................                  867                   750
                                                                       -------------         -------------
Total liabilities..............................................              396,725               369,198
                                                                       -------------         -------------
Minority interest..............................................               28,271                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   
     December 31, 1997 and 1996, respectively..................                  106                    90
   Additional paid-in capital..................................              147,414               112,975
   Dividends in excess of accumulated earnings.................              (39,472)              (22,617)
                                                                       -------------         -------------
Total stockholders' equity.....................................              108,048                90,448
                                                                       -------------         -------------
Total liabilities and equity...................................        $     557,176         $     515,784
                                                                       =============         =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
</TABLE>

                                     F-3

<PAGE>   78
                                       
                          AMBASSADOR APARTMENTS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
                                       
<TABLE>
<CAPTION>



                                                                          YEAR ENDED             YEAR ENDED            YEAR ENDED 
                                                                          DECEMBER 31,           DECEMBER 31,          DECEMBER 31,
                                                                              1997                   1996                  1995
                                                                         -------------          -------------         -------------
REVENUES:
<S>                                                                      <C>                    <C>                   <C>
Rental........................................................           $    86,183            $   64,842            $   49,966
Other.........................................................                 7,146                 5,352                 3,415
                                                                         -------------          -------------         -------------
Total revenues................................................                93,329                70,194                53,381
Expenses:
Property operating............................................                23,241                16,853                13,477
Real estate taxes.............................................                 8,016                 6,327                 5,255
General and administrative....................................                 6,868                 5,225                 3,612
Depreciation..................................................                18,979                13,430                 8,894
Advertising and marketing.....................................                 1,701                 1,329                 1,088
Repairs and maintenance.......................................                 2,914                 2,522                 1,754
Financing fees................................................                 3,025                 3,272                 1,466
Bad debt......................................................                   216                   434                   584
Interest......................................................                22,569                14,145                 8,903
Amortization of deferred financing fees.......................                 1,393                 1,829                 2,792
(Income) losses from investment in unconsolidated real estate
  limited partnerships........................................                  (405)                 (233)                  320
Merger related costs..........................................                   524                   --                     --
                                                                         -------------          -------------         -------------
Total expenses................................................                89,041                65,133                48,145
                                                                         -------------          -------------         -------------
Income before minority interest, gain on sale of rental
  property, loss on sale of investment, loss  on sale of
  interest rate cap, and extraordinary item...................                 4,288                 5,061                 5,236
Income allocated to minority interest.........................                (1,237)               (1,883)                 (615)
                                                                         -------------          -------------         -------------
Income before gain on sale of rental property, loss on sale of
  investment, loss on sale of interest rate cap and
  extraordinary item..........................................                 3,051                 3,178                 4,621
Gain on sale of rental property, net of minority interest.....                    --                    --                   966
                                                                         -------------          -------------         -------------
Income before loss on sale of investment, loss on sale of
  interest rate cap and extraordinary item....................                 3,051                 3,178                 5,587
Loss on sale of investment, net of minority interest..........                  (509)                   --                    --
                                                                         -------------          -------------         -------------
Income before loss on sale of interest rate cap and
  extraordinary item..........................................                 2,542                 3,178                 5,587
Loss on sale of interest rate cap, net of minority interest...                    --                (2,084)                   --
                                                                         -------------          -------------         -------------
Income before extraordinary item..............................                 2,542                 1,094                 5,587
Extraordinary item, net of minority interest..................                (1,384)               (4,653)                4,360
                                                                         -------------          -------------         -------------
Net income (loss).............................................                 1,158                (3,559)                9,947
Income allocated to preferred stockholders....................                 2,296                   851                    --
                                                                         -------------          -------------         -------------
Net (loss) income applicable to common stockholders...........           $    (1,138)            $  (4,410)            $   9,947
                                                                         =============          =============         =============
BASIC EARNINGS PER SHARE OF
    COMMON STOCK:
(Loss) income per weighted average share
  of common stock outstanding: 
Before extraordinary item.....................................           $      0.02            $     0.03            $     0.62
Extraordinary item............................................                 (0.14)                (0.52)                 0.49
                                                                         -------------          -------------         -------------
Net (loss) income.............................................           $     (0.12)            $   (0.49)            $    1.11
                                                                         =============          =============         =============
DILUTED EARNINGS PER SHARE OF
    COMMON STOCK:
(Loss) income per weighted average share
of common stock outstanding:
Before extraordinary item.....................................           $      0.03            $     0.03            $     0.62
Extraordinary item............................................                 (0.14)                (0.52)                 0.49
                                                                         -------------          -------------         -------------
Net (loss) income.............................................           $     (0.11)            $   (0.49)            $    1.11
                                                                         =============          =============         =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                     F-4

<PAGE>   79
                                      
                         AMBASSADOR APARTMENTS, INC.
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                            (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>

    
                                                                        YEAR ENDED DECEMBER 31,              
                                                           --------------------------------------------      
                                                                1997             1996             1995       
                                                           ----------       ----------       ----------      
COMMON STOCK                                                                                                 
<S>                                                        <C>              <C>              <C>             
Balance, beginning of year.........................        $      90        $      90        $      90
  Net proceeds from common stock offering..........               13               --               --
  Proceeds from exercise of stock options..........                2               --               --
  Conversion of common units to common stock                                                          
    by minority interest...........................                1               --               --
                                                           ----------       ----------       ----------
Balance, end of year...............................        $     106        $      90        $      90
                                                           ==========       ==========       ==========
ADDITIONAL PAID-IN CAPITAL

Balance, beginning of year.........................        $ 112,975        $ 112,957        $ 112,943
  Net proceeds from common stock offering..........           28,833               --               --
  Proceeds from exercise of stock options..........            3,193               --               --
  Conversion of common units to common stock                                                          
    by minority interest...........................            1,090               --               --
  Principal payments on notes receivable for
    issuance of common units.......................            1,323               18               14
                                                           ----------       ----------       ----------
Balance, end of year...............................        $ 147,414        $ 112,975        $ 112,957
                                                           ==========       ==========       ==========
DIVIDENDS IN EXCESS OF
 ACCUMULATED EARNINGS

Balance, beginning of year.........................        $ (22,617)       $  (3,874)       $  (3,071)
  Net (loss) income applicable to common  
    stockholders...................................           (1,138)          (4,410)           9,947
  Dividends to common stockholders.................          (15,717)         (14,333)         (10,750)
                                                           ----------       ----------       ----------
Balance, end of year...............................        $ (39,472)       $ (22,617)       $  (3,874)
                                                           ==========       ==========       ==========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-5



<PAGE>   80
                                      
                                      
                         AMBASSADOR APARTMENTS, INC.
               CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOWS
                            (DOLLARS IN THOUSANDS
                                      

<TABLE>
<CAPTION>
                                                                  YEAR ENDED       YEAR ENDED       YEAR ENDED 
                                                                  DECEMBER 31,     DECEMBER 31,     DECEMBER 31, 
                                                                     1997             1996             1995 
                                                                  -----------      -----------      -----------
OPERATING ACTIVITIES                                                                             
 <S>                                                              <C>              <C>              <C>
 Net income (loss).....................................           $    1,158       $  (3,559)       $   9,947
 Adjustments to reconcile net income(loss)  to net cash                     
   provided  by operating activities:                                       
   Depreciation........................................               18,979          13,430            8,894
   Bad debt expense....................................                  216             434              584
   Amortization of deferred financing fees.............                1,393           1,829            2,792
   (Income) losses from investment in unconsolidated                        
     real estate limited partnerships..................                 (405)           (233)             320
   Income allocated to minority interest...............                1,237           1,883              615
   Gain on sale of rental property, net of minority                         
     interest..........................................                   --              --             (966)
   Loss on sale of investment, net of minority interest                  509              --               --
   Loss on sale of interest rate cap, net of minority                       
     interest..........................................                   --           2,084               --
   Extraordinary item, net of minority interest........                1,384           4,653           (4,360)
   Write-off of deferred letter of credit fees.........                   --              --            1,374
   Changes in operating assets and liabilities:                             
     Accounts receivable...............................                   68          (1,074)            (448)
     Other assets......................................               (2,897)           (706)            (182)
     Accrued interest..................................                 (359)            913              (92)
     Real estate taxes payable.........................               (1,489)         (1,161)           1,925
     Tenant security deposits..........................                  249             599              526
     Accounts payable and other liabilities............                  689              (5)             663
                                                                  ----------       ----------       ----------
 Net cash provided by operating activities.............               20,732          19,087           21,592
                                                                  ----------       ----------       ----------

INVESTING ACTIVITIES:                                                       
 Purchase of rental property ..........................              (24,179)        (59,951)         (55,565)
 Improvements to rental property.......................              (19,033)        (16,189)         (12,227)
 Advances to unconsolidated real estate limited                             
   partnerships........................................                   --         (39,883)              --
 Repayment from unconsolidated real estate limited                                                           
   partnerships........................................                3,183          36,048               --
 Repayment of note receivable - officer................                1,000              --               --
 Net proceeds from sale of rental property.............                   --              --            7,650
 Contribution to unconsolidated real estate limited                                         
   partnerships........................................                   --              --              (28)
 Distribution from unconsolidated real estate limited                                       
 partnerships..........................................                   --              --            1,640
                                                                  ----------       ----------       ----------
 Net cash used in investing activities.................              (39,029)        (79,975)         (58,530)
                                                                  ----------       ----------       ----------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-6



<PAGE>   81

                         AMBASSADOR APARTMENTS, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (DOLLARS IN THOUSANDS)
                                      
<TABLE>
<CAPTION>
                                                                  YEAR ENDED       YEAR ENDED       YEAR ENDED 
                                                                  DECEMBER 31,     DECEMBER 31,     DECEMBER 31, 
                                                                     1997             1996             1995 
                                                                  -----------      -----------      -----------
FINANCING ACTIVITIES:
<S>                                                               <C>              <C>              <C>
 Net proceeds from common stock offering..............            $   28,846       $       --       $       --
 Capital contributions from Investor I and II.........                    --           23,000               --
 Net proceeds from preferred stock offering...........                    --           24,132               --
 Decrease (increase) in escrow deposits...............                   309          (17,952)         (12,945)
 Decrease in escrowed bond funds-restricted...........                   299            2,230            1,035
 Financing fees.......................................                (8,147)          (9,762)          (5,587)
 Proceeds from sale of interest rate cap..............                    --            1,485               --
 Proceeds from bonds payable..........................                68,805           34,305           42,015
 Payment to sinking fund..............................                    --               --             (550)
 Purchase of bonds payable............................                    --          (12,217)         (15,053)
 Repayment of bonds payable...........................               (48,313)              --               --
 Proceeds from notes payable..........................                87,941          145,721          102,362
 Repayment of notes payable...........................               (93,363)        (113,744)         (55,631)
 Premium paid on redemption of bonds..................                  (556)      
 Proceeds from exercise of stock options..............                 3,195               --               --
 Principal payments on notes receivable for 
  issuance of common units............................                 1,323               18               14
 Proceeds from sale of common units...................                   100               --               --
 Dividends paid to common stockholders................               (15,717)         (14,333)         (14,333)
 Dividends paid to preferred stockholders.............                (2,279)            (284)              --
 Distributions paid to minority interest..............                (3,700)          (2,979)          (1,543)
                                                                  ----------       ----------       ----------
 Net cash provided by financing activities............                18,743           59,620           39,784
                                                                  ----------       ----------       ----------
 Net increase (decrease)  in cash.....................                   446           (1,268)           2,846
 Cash and cash equivalents at beginning of year.......                 4,002            5,270            2,424
                                                                  ----------       ----------       ----------
 Cash and cash equivalents at end of year.............            $    4,448       $    4,002       $    5,270
                                                                  ==========       ==========       ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                                      F-7



<PAGE>   82

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   ORGANIZATION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

     Ambassador Apartments, Inc. ("Ambassador") was organized in Maryland on
April 15, 1994, and completed an initial public offering (the "Offering") on
August 31, 1994.  Ambassador expects to continue to make an election to qualify
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986 ("the Code"), as amended, for Federal income tax purposes.

     Ambassador is the sole general partner of Ambassador Apartments, L.P., a
Delaware limited partnership (the "Operating Partnership") and owns 10,552,180
common units of partnership interest ("Common Units") and 1,351,351 preferred
units of partnership interest (the "Class A Preferred Units") as of December
31, 1997.  These units represent 92.2% and 100% of outstanding Common Units and
Class A Preferred Units, respectively, as of December 31, 1997.  Dividends
declared or paid to holders of Ambassador's common stock ("Common Stock") and
its Class A Senior Cumulative Preferred Stock ("Class A Preferred Stock") are
based upon such distributions received by Ambassador with respect to its Common
Units and Class A Preferred Units.

     Unless the context requires otherwise, all references to the Company
herein mean Ambassador Apartments, Inc. and those entities owned or controlled
by Ambassador Apartments, Inc., including the Operating Partnership.  The
Company accounts for three joint ventures using the equity method of
accounting.  The Company has a 50% ownership interest in Williamsburg Limited
Partnership ("Williamsburg"), a 50% ownership interest in Brook Run Associates,
and a 49.6% interest in G.P. Municipal Holdings, L.L.C. ("G.P. Holdings") (see
Note 4).  Total assets, liabilities and net income for G.P. Holdings as of and
for the year ended December 31, 1997 is $658,100, $643,620 and $-0-,
respectively.  The joint venture partners of Williamsburg and G.P. Holdings are
affiliated entities of the Company.

     The Company is a self-administered and self-managed REIT engaged in the
ownership and management of residential rental properties leased primarily to
middle-income tenants.  As of December 31, 1997, the Company owns interests in
52 apartment communities with a total of 15,728 units located in Arizona,
Colorado, Florida, Georgia, Illinois, Tennessee, and Texas.  The Company's
principal markets with more than 1,000 units each  include Phoenix and Tucson,
Arizona; Tampa, Florida; Atlanta, Georgia; and Austin, Houston, and San
Antonio, Texas.

     At December 31, 1997, the interests of the Company are represented by two
types of partnerships (collectively, the  "Company  Partnerships"): 1)
partnerships in which the Company owns certain properties (the "Property
Partnerships"), and, 2) real estate limited partnerships in which the Company
owns a joint venture interest (the "Joint Venture Partnerships").  The
following tables set forth the Company Partnerships and their corresponding
operating properties.


                                      F-8



<PAGE>   83

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>



     PROPERTY PARTNERSHIPS                       OPERATING PROPERTIES
--------------------------------  ------------------------------------------------
<S>                               <C>                <C>                <C>
Ambassador I, L.P...............  Privado Park       Quail Ridge        Windridge
                                  Shadow Creek       Tierra Bonita      Bent Oaks
                                  Vista Ventana      The Stratford      Mountain View
Ambassador II, L.P..............  LaJolla de Tucson  Heather Ridge      Pine Shadows
                                  Legend Oaks        Cedar Creek        Hidden Lake
Ambassador III, L. P............  Sun Lake
Ambassador IV, L.P..............  Falls of Bells Ferry
Ambassador VI, L.P..............  Cypress Ridge      Madera Point
                                  Broadmoor          Stonybrook
Ambassador VII, L.P.............  Coral Cove         Summit Creek
                                  Tatum Gardens      Westway Village
Ambassador VIII, L.P............  Eagle's Nest       Harbor Cove        The Mills
                                  Cape Cod           Prime Crest        Shallow Creek
                                  LaJolla            Royal Crest        Franklin Oaks
                                  Mesa Ridge         Aspen Hills        Crossings of Bellevue
                                  Braesview          Brookdale Lakes    Park Colony
                                  Sandalwood         Trails of Ashford  Crossroads
Ambassador X, L.P...............  Palencia
Ambassador XI, L.P..............  Courtney Park      Country Club West
Ambassador/CRM Florida Partners
 Limited Partnership............  Arbors             Village Crossing
                                  Ocean Oaks         Haverhill Commons
JOINT VENTURE PARTNERSHIPS
Williamsburg Limited Partnership  Williamsburg
Brook Run Associates............  Brook Run
G.P. Municipal Holdings, LLC....  N/A
</TABLE>



                                     F-9


<PAGE>   84

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(a) Basis of Presentation

     The accompanying consolidated financial statements include the accounts of
Ambassador, the Operating Partnership and all entities in which Ambassador has
majority interest or control.  The effects of all significant intercompany
balances and transactions have been eliminated in the consolidated
presentation.

     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,
except that any gains or losses of Williamsburg resulting from financing
transactions are allocated to the Company, the managing general partner of
Williamsburg.  To the extent the Company's investment basis differs from its
share of the capital of an unconsolidated Joint Venture Partnership, such
difference is amortized over the depreciable life (20 years) of the
unconsolidated Joint Venture Partnership's investment assets.

(b) Revenue Recognition

     Rental revenue is recognized as income in the period earned.

(c) Renovation Costs

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

(d) Cash Equivalents

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

(e) Rental Property

     Rental property is carried at cost.  The Company evaluates its rental
properties periodically for indicators of impairment, including recurring
operating losses and other significant adverse changes in the business climate
that affect the recovery of the recorded asset value.  If rental property is
considered impaired, a loss is provided to reduce the net carrying value of the
asset to its estimated fair value.  No impairment losses are included in the
accompanying financial statements.



                                      F-10



<PAGE>   85

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     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
their estimated useful life.   In addition, initial   "turnover"  costs such as
electrical, plumbing, and painting generally incurred during the renovation,
re-tenanting, and stabilization period subsequent to an acquisition, which are
necessary to restore apartments units to their intended use, are capitalized
and depreciated over their estimated useful lives.

     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.

(f) Income Taxes

     The Company expects to continue to make an election to qualify as a REIT.
Under the applicable provisions of the Internal Revenue Code of 1986, as
amended, a REIT will generally not be subject to Federal income tax so long as
it distributes at least 95% of its REIT taxable income to its shareholders and
complies with certain other requirements.  Even if the Company qualifies as a
non-taxable entity for Federal income tax purposes, the Company may be subject
to certain state or local taxes on its income and property depending on the tax
laws of particular states.

     As of December 31, 1997 the bases of the Company's net assets reported in
the Company's consolidated financial statements exceeded the tax bases by
approximately $13.2 million.

(g) Deferred Financing Costs

     Deferred financing costs include costs incurred to obtain long-term
financing and interest rate protection agreements.  The deferred financing
costs are being amortized over the terms of their respective agreements on a
straight-line basis.  During 1997, unamortized deferred financing costs of 
approximately $990,000 were written off due to refinancing the secured 
revolving line of credit (see Note 16).


                                      F-11



<PAGE>   86

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




     During 1996, unamortized deferred financing costs of approximately $9.8
million were fully amortized due to the sale of the interest rate cap, early
repayment of bridge financing, and reissuance of certain bonds in connection
with replacement of credit enhancement.

     During 1995, unamortized deferred financing costs were written off upon
the Company's acquisition of its fixed rate bonds, termination of standby
purchase agreements with a financial institution, and the Company's sale of the
Laurelwood property.  The total unamortized financing costs written off due to
the transactions mentioned above was approximately $2.0 million.


<TABLE>
<CAPTION>
                            1997      1996     1995
                          --------  --------  -------
<S>                       <C>       <C>       <C>
Deferred financing costs   $33,705   $25,558  $15,796
Accumulated amortization   (18,301)  (15,918)  (4,266)
                          --------  --------  -------
                           $15,404    $9,640  $11,530
                          ========  ========  =======
</TABLE>

h) Earnings Per Share of Common Stock

     In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share".  Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share.  Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share.  All earnings per share amounts for all periods
have been presented to conform to the Statement No. 128 requirements.

(i) Derivative Financial Instruments

     The Company has entered into interest rate swap transactions to modify the
interest characteristics with respect to certain of its variable rate bonds
(see Note 4).  The agreements involve the exchange of amounts based on a fixed
interest rate for amounts based on variable rates over the life of the
agreement without an exchange for the notional amount upon which the payments
are based.  The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest expense during the period
to which the payment or receipt relates.  The related amount payable to or
receivable from the counterparty is included in accrued interest or accounts
receivable. The fair value of any swap agreement that qualifies as a hedge is
not recognized in the financial statements.  The gain or loss on termination of
an interest rate swap agreement is deferred and amortized as an adjustment to
interest expense related to the debt over the remaining term of the original    
contractual life of the terminated swap agreement. In the event of the early
extinguishment of the related debt, any realized or unrealized gain or loss
from the swap is recognized in income coincident with the extinguishment.  Swap
agreements or specific notional components thereof that do not qualify as a
hedge of the Company's interest rate risk are recorded at fair value.


                                      F-12



<PAGE>   87

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company purchased interest rate protection (interest rate caps) to
hedge its exposure to increases in interest costs for certain other of its
variable rate bonds (see Note 4).  The premium paid for the Company's interest
rate protection is included in deferred financing costs and is amortized
ratably over the term of the related interest rate protection agreement.
Payments received as a result of the specified interest rate index exceeding
the strike price are accrued in accounts receivable and are recognized as a
reduction of interest expense (the accrual accounting method).  Upon any
termination of the interest rate protection agreement, any gain or loss is
recognized in income coincident with the termination.

     The Company is exposed to credit loss in the event of non-performance by
counterparties on the interest swap agreements, but the Company does not expect
non-performance by any of these counterparties.  The amount of such exposure is
generally limited to the amount of any payments due but not yet received from
the counterparty.

(j) Use of Estimates

     The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those estimates.

(k) Stock Based Compensation

     Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation."  This Statement defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans.  However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees."  Under the fair
value based method, compensation cost is measured at the grant date based on
the estimated fair value of the award and is recognized over the service
period, which is usually the vesting period.  Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock.  The Company has elected to continue to 
account for its employee stock compensation plans under APB Opinion No. 25 and
has recognized no compensation expense in the statements of operations relating
to grants awarded under its stock compensation plans.  Unaudited pro forma
disclosures of net earnings and earnings per share, as if the fair value based
method of accounting defined in SFAS No. 123 had been applied, are presented in
Note 8.


                                      F-13



<PAGE>   88

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2. MINORITY INTEREST

     Certain affiliated entities and senior executives of the Company (the
"Limited Partners") hold 895,318 Common Units as limited partners of the
Operating Partnership as of December 31, 1997.  The Operating Partnership made
loans to certain senior executives of the Company to acquire Common Units,
which are pledged as collateral for the loans.  The partners'  equity of the
Operating Partnership is reduced by the outstanding balance of these loans.
However, the minority interest percentage in the Operating Partnership includes
such Common Units because these executives will receive all of the benefits of
a Common Unit holder.

     Terms of the loans are as follows:


<TABLE>
<CAPTION>
                                  MATURITY                                         
              ORIGINAL   DATE OF  DATE OF      BALANCE AT          COMMON UNIT     
               AMOUNT     LOAN     LOAN     DECEMBER 31, 1997  ACQUIRED AND PLEDGED
             ----------  -------  --------  -----------------  --------------------
<S>          <C>         <C>       <C>            <C>                <C>
Loan A (i)   $1,350,000  8/31/94   8/31/04        $    --            84,375
Loan B (i)      250,000  8/31/94   8/19/98        240,000            15,625
Loan C (ii)     700,000   4/7/97   6/30/00        700,000            32,990
</TABLE>                                          

      (i)  Loan bears interest at the prime rate (8.50% at
           December 31, 1997) plus 0.50% per annum.  Requires
           quarterly principal and interest payments.

      (ii) Loan bears interest at 6.38% per annum.
           Requires quarterly interest-only payments.

     The Common Units held by Limited Partners have the same characteristics as
shares of Common Stock in as much as they share proportionately in any
distributions of the Operating Partnership.  The minority interest ownership
percentage is calculated by dividing the number of Common Units held by Limited
Partners divided by the total number of outstanding Common Units.

     On March 27, 1996, the Company, through its affiliates, formed two new
limited partnerships, Jupiter-I, L.P. and Jupiter-II, L.P., which hold 99%
limited partnership interests in Ambassador I, L.P. and Ambassador VII, L.P.,
respectively.  The Company, through its affiliates, holds a 1% general
partnership interest in both Ambassador I, L.P. and Ambassador VII, L.P. and a
49.6% general partnership interest in both Jupiter-I, L.P. and Jupiter-II, L.P.

     In return for a capital contribution of $17.8 million, a Japanese
corporation ("Investor I") received a 50.4% limited partnership interest in
Jupiter-I, L.P.  In return for a capital contribution of $5.2 million, a
Japanese individual ("Investor II") received a 50.4% limited partnership
interest in Jupiter-II, L.P.  The Company used the proceeds to pay approximately
$1.4 million of placement fees and formation costs for Jupiter-I, L.P. and
Jupiter-II, L.P. and approximately $21.6 million to repay principal outstanding
on the Company's secured revolving line of credit.  The Company treats 

                                      F-14



<PAGE>   89

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


as minority interest any profits and losses allocated to Investor I and 
Investor II in accordance with the respective partnership agreements of 
Jupiter-I, L.P. and Jupiter-II, L.P.

     The partnership agreements of Jupiter-I, L.P. and Jupiter-II, L.P. provide
that profits and losses will generally be distributed to the partners as
follows.  All depreciation of the applicable properties are to be allocated to
the partners in proportion to their respective ownership percentages.  All
other profit and loss (excluding depreciation) from the applicable properties
are to be allocated to the partners in proportion to the amount of cash
distributed to each partner during the year.

     To the extent available, the following cash distributions will be made
from Ambassador I, L.P. to the partners of Jupiter-I, L.P.  First, Investor I
receives an 8.5% per annum cumulative priority return on its original
investment, paid monthly in arrears.  Second, the Company receives an 8.5% per
annum cumulative priority return on its capital contribution (as defined) into
Jupiter-I, L.P., paid monthly in arrears.  Third, the Company receives excess
cash flow up to a specified amount (as defined), paid quarterly in arrears.
Fourth, any remaining excess cash flow from Ambassador I, L.P. is paid
quarterly in arrears, 30% to Investor I and 70% to the Company.

     To the extent available, the following cash distributions will be made
from Ambassador VII, L.P. to the partners of Jupiter-II, L.P.  First, Investor
II receives an 8.5% per annum cumulative priority return on its original
investment, paid monthly in arrears.  Second, the Company  receives an 8.5% per
annum cumulative priority return on its capital contribution (as defined) into
Jupiter-II, L.P., paid monthly in arrears.  Third, the Company receives excess
cash flow up to a specified amount (as defined), paid quarterly in arrears.
Fourth, any remaining excess cash flow from Ambassador VII, L.P. is paid
quarterly in arrears, 30% to Investor II and 70% to the Company.

     At any time following the fifth, but automatically upon the seventh,
anniversary of the formation of Jupiter-I, L.P. and Jupiter-II, L.P., Investor
I and Investor II are each entitled to a redemption of their partnership
interests in the form of cash and/or Common Stock in the Company.  The election
of the form of the redemptions (cash or stock) is at the sole and absolute
discretion of the Company.  The Company has reserved 1,195,233 shares of Common
Stock for issuance upon conversion of the limited partnership interests by
Investor I and Investor II.

3.   MERGER

     On December 23, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Apartment Investment and Management
Company ("AIMCO"), an owner and manager of multifamily apartment properties,
based in Denver, Colorado.  Pursuant to the Merger Agreement, the Company will
be merged with and into AIMCO (the "Merger"), with AIMCO as the surviving
corporation.  Upon consummation of the Merger, each outstanding share of the
Company's Common Stock other than Common Stock held by the Company or AIMCO,
will
                                      F-15



<PAGE>   90

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




be converted into the right to receive that number of shares of AIMCO's common
stock ("AIMCO Common Stock") equal to the quotient (rounded to the nearest
1/1000) (the "Conversion Ratio") determined by dividing $21.00 by the AIMCO
Index Price.  The term "AIMCO Index Price" means the aggregate of the average
of the high and low sales prices of AIMCO Common Stock, as reported on the New
York Stock Exchange ("NYSE"), on each of the twenty consecutive NYSE trading
days ending on the fifth NYSE trading day immediately preceding the effective
time of the merger ("Effective Time"), divided by 20. Notwithstanding the
foregoing, if the Conversion Ratio calculated pursuant to the foregoing is
greater than 0.583, then, at AIMCO's option, the Conversion Ratio to be used
shall be either the Conversion Ratio as calculated pursuant to the foregoing or
0.583 (so long as the Merger would continue to qualify as a reorganization
under Section 368(a) of the Code).  If AIMCO opts for the Conversion Ratio to
equal 0.583, then, in addition to 0.583 shares of AIMCO Common Stock, AIMCO
will pay to each holder of Common Stock for each share of Common Stock held by
such shareholder an amount in cash equal to (i) $21.00 minus (ii) the product
of the AIMCO Index Price and 0.583.  In lieu of any fractional shares of AIMCO
Common Stock, each holder of Common Stock who would otherwise be entitled to
receive such fractional shares will be paid cash equal to the product of such
fractional shares and the AIMCO Index Price.  The Merger is subject to a number
of conditions, including the approval by the stockholders of the Company. 
Costs related to the Merger are expensed as incurred and approximated $524,000
for the year ended December 31, 1997.

     In the Merger Agreement, AIMCO and the Company agreed that the parties
will use their reasonable best efforts to effect a business combination (the
"OP Reorganization") of the Operating Partnership with AIMCO Properties, L.P.,
a Delaware limited partnership ("AIMCO Operating Partnership") immediately
following the Effective Time, with the AIMCO Operating Partnership as the
surviving entity, which business combination will have, to the extent possible, 
for the holders of units representing interests in the Operating Partnership
("Common Units"), the same economic and tax consequences for the holders of
Common Units as the Merger has for holders of Common Stock.  If a business
combination is not effected due to the failure to obtain consents of all
persons entitled to give or withhold such consents which are necessary for such
business combination, then (i) the partnerships shall remain and be operated to
separate entities and (ii) AIMCO will execute and deliver to each limited
partner in the Operating Partnership the agreement contemplated by a certain
Exchange Rights Agreement of the Company and be bound thereby, relating to the
exchange rights of holders of Common Units.

     The Merger Agreement also provides that at or prior to the Effective Time,
the Company will call for redemption the limited partnership interests not
owned by the Company or its affiliates in Jupiter-I, L.P. and Jupiter-II, L.P.
(the "Jupiter Redemption") in accordance with their respective partnership
agreements and subject to and simultaneously with the Effective Time, AIMCO
will provide the funds for, and cause payment to be made in respect of, the
redemption thereof upon the Effective Time.

                                      F-16



<PAGE>   91

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     The Merger Agreement provides that prior to the Effective Time, the Board
of Directors of the Company (the "Board") will call for the redemption of all
outstanding shares of the Preferred Stock of the Company in accordance with,
and at a redemption price equal to the amount set forth in Section 8(a) of the
Articles Supplementary of the Company with respect thereto, to be effective
simultaneously with, and to be conditioned upon, the occurrence of, the 
Effective Time.  Notwithstanding the foregoing, the parties convert such stock
into Common Stock in the manner set forth in such Articles Supplementary.  To
the extent any Preferred Stock shall not have been converted as of the Effective
Time, AIMCO will provide the funds for, and cause payment to be made in respect
of, the redemption thereof on the date of the Effective Time.

     In addition to its regular quarterly dividends, the Company expects to
declare a special dividend with a record date prior to the Effective Time which
will result in its stockholders receiving an amount per share equal to the
product of (x) the difference between (a) the Company's most recent quarterly
dividend amount (appropriately adjusted by any stock splits and the like) and
(b) the product of the Conversion Ratio (as determined pursuant to the Merger
Agreement) and AIMCO's most recent quarterly dividend amount (appropriately
adjusted for any stock splits and the like) and (y) the number of days which
shall have elapsed through and including the day immediately prior to the day
of the Effective Time since the end of the most recent calendar quarter (as of
the Effective Time) for which the Company's dividend record date has occurred,
divided by 91.  Concurrent and equivalent per unit distributions for the
benefit of holder Common Units shall be made in connection with the special
dividend.

     Pursuant to the Merger Agreement, immediately prior to the Effective Time,
each outstanding stock option issued by the Company ("Stock Options") will
become fully vested and exercisable.  Pursuant to the Merger Agreement, holders
of Stock Options may elect prior to the Effective Time to have the Stock Options
with respect to which such election is made canceled, and, in   consideration
for such cancellation, each such electing holder shall receive on the day of the
Effective Time for each share subject to the Stock Options for which such 
election is made, an amount (subject to any applicable withholding tax) in cash
equal to the excess, if any, of $21.00 over the per share exercise price of such
Stock Option.  Pursuant to the Merger Agreement, as of the Effective Time, each
outstanding Stock Option for which such an election has not been made shall be
converted into an option (or a new substitute option shall be granted) to
purchase the number of shares of AIMCO Common Stock (rounded up to the nearest
whole share) equal to the number of shares of Common Stock subject to such
option multiplied by the Conversion Ratio (as calculated pursuant to the
definition thereof, without regard to the proviso regarding AIMCO's election) at
an exercise price per share of Common Stock (rounded down to the nearest penny)
equal to the former exercise price per share of Common Stock under such option
divided by the Conversion Ratio (as calculated pursuant to the definition
thereof, without regard to the proviso regarding AIMCO's election), subject to
adjustment based on the applicability of certain provisions of the Code.  Except
as provided above, the converted or substituted Stock Options shall be subject
to the same terms and 

                                      F-17



<PAGE>   92

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


conditions (including without limitation, expiration date, vesting and exercise
provisions) as were applicable to Stock Options immediately prior to the 
Effective Time, except that all converted or substituted Stock Options shall be
vested and fully exercisable and optionees may exercise their options through 
the expiration date unless their employment is terminated for cause or they are
removed as directors for cause.

     Under certain circumstances under the Merger Agreement, the Company may be
required to pay a "Break-Up Fee" and "Break-Up Expenses" (both as defined in
the Merger Agreement) to AIMCO if the Merger does not occur.  The maximum
amount payable by the Company is $9.7 million.


                                      F-18



<PAGE>   93

                         AMBASSADOR APARTMENTS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                      


4. DEBT (A)

<TABLE>
<CAPTION>
                                          (IN 000' S)
                                      -------------------           
                                          DECEMBER 31,    MATURITY  
                                        1997      1996      DATE    
                                      --------  --------  --------  
           BONDS PAYABLE:                                           
           <S>                        <C>       <C>          <C>    
           Brookdale Lakes (B) (D)    $ 14,800  $ 14,800     12/26  
           Eagle's  Nest (B) (D)         5,200     5,200     12/21  
           Cape Cod (B) (D)              8,100     8,100     12/21  
           LaJolla (B) (D)              10,000    10,000     12/21  
           Mesa Ridge (B) (D)            5,100     5,100     12/21  
           Braesview (B) (D)            20,500    20,500     12/21  
           Harbor Cove (B) (D)           5,900     5,900     12/21  
           Prime Crest (B) (D)           2,400     2,400     12/21  
           Royal Crest (B) (D)           3,400     3,400     12/21  
           Aspen Hills (B) (D)           9,800     9,800     12/21  
           Shallow Creek (B) (D)         2,300     2,300     12/26  
           Shallow Creek (C) (D)         2,300        --     12/26  
           Franklin Oaks (B) (D)        17,700    17,700     12/21  
           Crossings of Bellevue                                    
            (B) (D) (Q)                  8,540     8,572     12/27  
           The Mills (B) (D)            14,575    14,575     12/26  
           Sandalwood (C) (D)            4,000        --     12/36  
           Trails of Ashford (B) (D)     9,050        --     12/36  
           Crossroads (B) (D)            6,000        --     12/36  
           Privado Park (B) (D)          9,200     9,200     12/33  
           Shadow Creek (B) (D)          5,600     5,600     12/33  
           Vista Ventana (B) (D)         6,400     6,400     12/33  
           Quail Ridge (B) (D)           6,400     6,400     12/33  
           Tierra Bonita (B) (D)         6,000     6,000     12/33  
           The Stratford (B) (D)         5,945     5,945     12/21  
           Windridge (B) (D)             6,270     6,270     12/21  
           Bent Oaks (B) (D)             4,400     4,400     12/23  
           Sun Lake (E)                 15,287    15,478     10/25  
           Falls of Bells Ferry (F)     28,335    28,935     02/09  
           Cypress Ridge (G) (H)         4,250     4,250     06/26  
           The Broadmoor (G) (H)         6,000     6,000     06/26  
           Madera Point (G) (H)          7,180     7,180     06/26  
           Madera Point (I)                887        --     06/27  
           Stonybrook (I)                4,028        --     10/12  
           Palencia (J)                 13,250        --     03/24  
           The Arbors (K) (L)            7,605     7,280     10/27  
           Ocean Oaks (K) (L)           10,295    10,920     10/27  
           Village Crossing (K) (L)      7,000     9,800     10/27  
           Haverhill Commons (K) (L)     9,100    10,950     10/27  
                                      --------  --------            
           Total Bonds Payable        $313,097  $279,355            
                                      ========  ========            
           
</TABLE>

                                      F-19



<PAGE>   94

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                              (IN 000' S)                
                           -------------------           
                              DECEMBER 31,     MATURITY  
                             1997      1996      DATE    
                           --------  --------  --------  
NOTES PAYABLE:
<S>                        <C>       <C>          <C>
Bank One Loan (M)          $     --  $ 63,950        --
NACC Revolving Loan (M)      35,250        --     12/98
CLNY Unsecured Line (N)       2,010        --     05/98
Coral Cove (O)                3,999     4,031     04/26
Tatum Gardens (O)             3,456     3,483     04/26
Summit Creek (O)              3,555     3,583     04/26
Westway Village (O)           4,888     4,927     04/26
Country Club West (P)        11,344        --     03/27
Courtney Park (P)            10,050        --     03/27
                           --------  -------- 
Total Notes Payable        $ 74,552  $ 79,974
                           ========  ========
</TABLE>

(A)  Debt is collateralized by substantially all of the assets of the 
     respective Property Partnerships.

(B)  Permanent financing for these properties has been provided by variable
     rate tax-exempt revenue bonds (the "Bonds").  Under the terms of the bond
     loan agreements, the respective issuing Property Partnerships are to make
     interest-only payments calculated using a variable rate determined by the
     remarketing agents of the Bonds.  The rates ranged from 3.00% to 5.67% for
     the year ended December 31, 1997, from 2.5% to 7.0% for the year ended     
     December 31, 1996, and from 2.7% to 6.0% for the year ended December 31,
     1995.  Under certain conditions, the interest rate on the Bonds may be
     converted to a fixed rate at the request of the respective Property
     Partnership.  A bondholder may tender the Bonds during the variable
     interest rate period and receive principal, plus accrued interest through
     the tender date.  Upon tender, the remarketing agents will immediately
     remarket the Bonds.  In the event the remarketing agents fail to remarket
     any of the Bonds, the Property Partnerships are obligated to purchase
     those Bonds, for which they may draw on the appropriate credit enhancement
     facility.  The remarketing agents receive a fee of 0.08% per annum of the
     outstanding Bond balance, payable quarterly in arrears.  Such fees are
     included as financing fees in the accompanying consolidated statements of
     operations.

     Under the terms of the bond loan agreements, the Bond proceeds were        
     deposited in escrow accounts with trustee third-party banks.  The Bond
     funds were used for development costs including the acquisition and
     rehabilitation of the properties owned by the Property Partnerships.  As
     of December 31, 1997, approximately $250,000 remains in escrow for future
     renovation programs.


                                      F-20



<PAGE>   95

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(C)  Permanent financing for these properties has been provided by variable
     rate taxable bonds (the "Taxable Bonds").  Under the terms of the bond
     loan agreements, the respective issuing Property Partnerships are to make
     interest-only payments calculated using a variable rate determined by the
     remarketing agents of the Taxable Bonds.  The rates ranged from 5.55% to
     6.70% for the period ended December 31, 1997.  Under certain conditions,
     the interest rate on the Bonds may be converted to a fixed rate at the
     request of the respective Property Partnership.  A bondholder may tender
     the Taxable Bonds during the variable interest rate period and receive
     principal, plus accrued interest through the tender date.  Upon tender,
     the remarketing agents will immediately remarket the Taxable Bonds.  In
     the event the remarketing agents fail to remarket any of the Taxable
     Bonds, the Property Partnerships are obligated to purchase those Taxable
     Bonds, for which they may draw on the appropriate credit enhancement
     facility.  The remarketing agents receive a fee of 0.08% per annum of the
     outstanding Taxable Bond balance, payable quarterly in arrears.  Such fees
     are included as financing fees in the accompanying consolidated statements
     of operations.

(D)  Credit enhancement has been issued by Federal National Mortgage
     Association ("FNMA") in a single facility (the  "FNMA Facility") on
     approximately $216.4 million of variable rate tax-exempt and variable rate
     taxable bonds associated with 27 of the Company's properties (and
     Williamsburg).  FNMA has established three separate mortgage pools as
     collateral for providing credit enhancement on the bonds.  The first pool
     collateralizes $143.4 million of variable rate tax-exempt bonds and $6.3
     million of variable rate taxable bonds relating to eighteen properties
     owned by Ambassador VIII, L.P.  The carrying value of the eighteen
     properties in the first pool was approximately $191.9 million at December
     31, 1997.  The second pool collateralizes $50.2 million of variable rate   
     tax-exempt bonds relating to eight properties owned by Ambassador I, L.P.
     The carrying value of the nine properties in the second pool was
     approximately $68.2 million at December 31, 1997.  The third pool
     collateralizes $16.5 million of variable rate tax-exempt bonds relating to
     the Williamsburg property, whose carrying value approximated $14.8 million
     at December 31, 1997.  The credit enhancement agreements are
     collateralized by first mortgages on each of the properties.  FNMA is
     entitled to credit enhancement fees on the FNMA Facility at a weighted
     average rate of 1.04% per annum of the base value of the bonds, less any
     cash collateral.  FNMA also receives a reserve fee of 0.38% per annum on
     the amount of cash collateral with respect to the FNMA Facility.  The
     credit enhancement and reserve fees are payable monthly in advance.
     Pursuant to the terms of the FNMA Facility agreements, the Company is
     subject to certain financial covenants, including a 1.90 to 1.0
     consolidated interest coverage ratio, as defined, and a consolidated
     earnings before interest, taxes, depreciation and amortization ("EBITDA")
     to debt service ratio of 1.75 to 1.0, as defined.

     At December 31, 1997 and 1996, the Company has posted $26.0 million ($6.0  
     million in cash and a $20 million standby commitment) and $15.2 million,
     respectively, as additional  


                                     F-21



<PAGE>   96

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




     collateral with FNMA in an interest bearing escrow account.  The Company 
     is also making monthly principal reserve payments of approximately 
     $326,000 to FNMA which will be used to redeem bonds.  The FNMA credit
     enhancement matures on December 1, 2021.

(E)  Under the terms of the Sun Lake Bonds note agreement, the Company currently
     makes monthly principal and interest payment based on a 30-year 
     amortization.  The Sun Lake Bonds bear an all in interest rate of 6.49%
     and were issued by the Orange County Housing Finance Authority.  The Sun
     Lake Bonds are also guaranteed by FNMA and mature on October 1, 2025.  The
     guaranty is collateralized by a first mortgage on the property, whose
     carrying value approximated $24.9 million at December 31, 1997.

(F)  Under the terms of the Falls of Bells Ferry (the "Falls Bonds") loan
     agreement, the issuing Property Partnership is to make interest payments
     calculated using a one-year fixed rate determined by the remarketing
     agents of the Falls Bonds which is adjusted annually on January 15.  The
     rate was 3.65% at December 31, 1997 and 3.55% at December 31, 1996. Under
     certain conditions the interest rate on the Falls Bonds may be converted
     to a long-term fixed rate at the request of the Property Partnership.

     The Falls Bonds are collateralized by an irrevocable letter of credit
     issued by Guardian Savings and Loan Association ("Guardian").  Guardian    
     is entitled to a letter of credit fee of 1% per annum of the outstanding
     amount of the letter of credit for the period from September 1, 1995
     through August 15, 2004, and 2% per annum of the outstanding amount of the
     letter of credit from August 16, 2004 through August 15, 2006, and 2 1/2%
     per annum from August 16, 2006 through February 1, 2009.  The letter of
     credit is collateralized by a mortgage on the property, whose carrying
     value approximated $30.7 million at December 31, 1997, and cash placed in
     escrow with Guardian of $2.7 million.  The cash collateral will be used to
     fund annual sinking fund payments until the collateral is depleted. The
     letter of credit expires on February 1, 2009.  The total commitment
     outstanding under the letter of credit at December 31, 1997 is
     approximately $29.5 million.

     A bondholder may tender the Falls Bonds during the one year fixed rate     
     period and receive principal, plus accrued interest through the tender
     date.  Upon tender, the remarketing agents shall immediately remarket the
     Falls Bonds.  In the event the remarketing agents fail to remarket any of
     the Falls Bonds, the Property Partnership is obligated to purchase the
     Falls Bonds, for which it may draw on the letter of credit.  The 
     remarketing agents receive a fee of 0.325% per annum payable quarterly in
     arrears.  Such fees are included as financing fees in the accompanying
     consolidated statement of operations.

(G)  Permanent financing for these properties has been provided by fixed rate
     tax-exempt term bonds (the "Term Bonds").  Under the terms of the bond
     loan agreements, the respective 

                                      F-22



<PAGE>   97

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     issuing Partnerships are to make interest-only payments using a fixed rate 
     ranging from 5.3% to 6.35% depending upon the maturity date of each series
     of bonds.  The Term Bonds are subject to mandatory redemption dates
     beginning on June 1, 2006 with final maturity of the Term Bonds on June 1,
     2026.

(H)  On October 1, 1996, the Company entered into insurance and indemnity
     agreements ("Insurance and Indemnity Agreements") with Financial Security
     Assurance, Inc. ("FSA") to provide credit enhancement for these three bond
     issues.  The Company made a ten year prepayment of the insurance premium
     in the amount of $775,937, which is included in other assets and is being
     expensed over a ten year period.  In addition, an annual insurance premium
     will be due in the amount of 0.6% per annum payable monthly in advance on
     the face amount of the bonds, commencing June 12, 2006.  The Insurance and
     Indemnity Agreements have expiration dates consistent with the redemption
     dates of the bonds themselves with maturities that begin on June 1, 2006
     with final maturity of the bonds on June 1, 2026.  The Insurance and
     Indemnity Agreements are collateralized by first mortgages on the
     properties, whose carrying value approximated $21.9 million at December
     31, 1997.

(I)  On May 1, 1997, the Company sold at par approximately $4.0 million of
     tax-exempt bonds (the "Stonybrook Bonds") and approximately $900,000 of
     tax-exempt subordinate bonds (the  "Class B Madera Bonds") to TEB
     Municipal Trust II ("TEB II"), a New York trust.  The interest rate on the
     Stonybrook Bonds is fixed at 10.0% per annum.  The Stonybrook Bonds are
     collateralized by the Stonybrook property whose carrying value
     approximated $9.4 million at December 31, 1997.  The interest rate on the
     Class B Madera Bonds is fixed at 11.0% per annum.  The Class B Madera
     Bonds are collateralized by the Madera Point property whose carrying value
     approximated $11.0 million at December 31, 1997.

     Concurrent with its purchase of the bonds, TEB II sold a $4.9 million
     Class A Receipt of beneficial interest in TEB II at a fixed rate of 9.5%
     per annum, payable monthly.  G.P. Holdings holds an approximately $14,500  
     Class G Receipt, which is entitled to a distribution in an amount equal to
     the excess of interest earned by TEB II from its ownership of the Class B
     Madera Bonds and the Stonybrook Bonds over the distributions paid to the
     Class A Receipt holders.  Under the terms of certain agreements between
     members of G.P. Holdings, the Company receives 100% of any excess cash
     flows, as defined, from G.P. Holdings.  This amounted to approximately     
     $5,000 for TEB II for the period from May 1, 1997 through December 31,
     1997.

(J)  In March 1997, the Company assumed $13.3 million of fixed rate, tax-exempt
     bonds with respect to Palencia (the "Palencia Bonds"). Pursuant to the
     terms of the loan agreement, the Palencia Bonds bear interest at 7.65% per
     annum.  The Palencia bonds are collateralized by

                                      F-23



<PAGE>   98

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     the Palencia property whose carrying value approximated $15.9 million at 
     December 31, 1997.

     Upon the request of Banc One Capital Funding Corporation ("BOCFC"), the
     holder of the Palencia Bonds, the Company may be required to purchase
     the Palencia Bonds from BOCFC, on or after April 1, 1997, at a price equal
     to the outstanding balance of the Palencia Bonds, plus accrued interest,
     and any other amounts due BOCFC under the terms of a Put Agreement between
     the Company and BOCFC.  The obligation under the Put Agreement is
     considered to be recourse to the Company.

(K)  Permanent financing for these properties had been provided by variable
     rate, tax-exempt bonds (the "Prior Florida Bonds").  The $39.0 million of
     Prior Florida Bonds were purchased in 1996 by TEB Municipal Trust I ("TEB
     I"), a New York trust.  TEB I then sold $27.0 million in Class A
     certificates, $10.0 million in Class B certificates, and approximately
     $2.0 million in a Class G certificate.  The Class G certificate was owned
     by G.P. Holdings.  G.P. Holdings, as the holder of the Class G
     certificate, was entitled to a distribution in an amount equal to the
     excess of interest earned by TEB I from its ownership of the Prior Florida
     Bonds over the distributions paid to the Class A and Class B certificate
     holders.  During the third quarter ended September 30, 1997, Prior Florida
     Bonds and, correspondingly, the trust certificates were subject to a
     $300,000 partial redemption, thereby leaving an aggregate outstanding
     balance of $38.7 million in trust certificates.

     On October 27, 1997, the Housing Finance Authority of Volusia County,
     Florida issued $17.9 million of variable rate tax-exempt bonds for the
     benefit of The Arbors and Ocean Oaks properties, and the Housing Finance
     Authority of Palm Beach County, Florida issued $16.1 million of variable
     rate tax-exempt bonds for the benefit of Village Crossing and Haverhill
     Commons (collectively, the "Florida Bonds").  The Company deposited the    
     proceeds from the Florida Bonds plus an additional $4.7 million into an
     escrow account to redeem the Prior Florida Bonds.

     Under the terms of the bond loan agreements, the respective issuing        
     Property Partnerships are to make interest-only payments calculated using
     a variable rate determined by the remarketing agents of the Florida Bonds. 
     The rates ranged from 3.55% to 4.00% from October 27, 1997 through
     December 31, 1997.  The interest rate is currently reset on a weekly
     basis.  The remarketing agents receive a fee of 0.10% per annum.

     On December 1, 1997, the Company redeemed $38.7 million of the Prior
     Florida Bonds owned by TEB I.  TEB I then redeemed the Class B and Class G 
     certificates and reimbursed 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.  At that time, TEB I dissolved and triggered
     a Special 

                                      F-24



<PAGE>   99

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Put Event under the Put Agreement with the Class B Receipt holders.  The
     Company paid a premium payment of approximately $556,000 to the Class B 
     Receipt holders, which is included as a loss on sale of investment, net of
     minority interest, in the consolidated statements of operations.

     Under the terms of certain agreements between members of G.P. Holdings,    
     the Company receives 100% of any excess cash flows, as defined, from G.P.
     Holdings.  This amounted to approximately $497,000 for TEB I for the year
     ended December 31, 1997.

(L)  On October 27, 1997, the Company obtained credit enhancement for the
     Florida Bonds.  The Florida Bonds are credit enhanced by four separate
     letters of credit aggregating $34.5 million from Credit Lyonnais New York
     Branch (" 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 that October 27, 2002.  The letters of
     credit are collateralized by first mortgages on the properties, whose
     carrying value approximated $38.7 million at December 31, 1997.

     Commencing on January 1, 1998 and on each April 1, July 1, October 1 and
     January 1, thereafter, the Company is obligated to deposit, as additional
     collateral for the letters of credit, cash into a sinking fund equal to
     the principal portion of the quarterly amortization payment which would be
     due on each such date on a loan in the amount of the aggregate stated      
     amount of such letters of credit  being amortized over a term of
     twenty-five years with an interest rate of 8.00% per annum.

(M)  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 Loan") with Nomura Asset Capital Corporation ("NACC" )  (as
     amended, the "NACC Revolving Loan").  The Bank One Loan  had an interest
     rate of between LIBOR plus 1.70% and 1.95% and had a maximum commitment of
     $75 million based on the amount of collateral posted.

     The NACC Revolving Loan bears interest at LIBOR plus 1.50% and has a
     maximum commitment of $75 million subject to the amount of collateral
     pledged by the Company.  As of December 31, 1997, six properties were      
     pledged as collateral under the NACC Revolving Loan, and approximately
     $35.3 million was outstanding.  The value of the pledged collateral is
     adjusted periodically to reflect current valuations of the properties. As
     of December 31, 1997, the six properties pledged as collateral would have
     provided an additional $2.6 million 


                                      F-25



<PAGE>   100

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




     of availability under the NACC Revolving Loan.  On September 30, 1997, the
     Company amended the maturity date of the NACC Revolving Loan from  
     December 31, 1997 to December 31, 1998.

     On June 26, 1997, the Company entered into an amendment to the NACC        
     Revolving Loan to permit the Company, notwithstanding the maximum
     availability provisions, to borrow $20.7 million to acquire the Park
     Colony and Cedar Creek properties.  This advance was intended to serve as
     short-term financing and was required to be repaid by July 2, 1997.  On
     June 30, 1997, the Company repaid the $20.7 million short-term bridge loan
     with proceeds from the Company's Offering (see Note 11).  Pursuant to the
     terms of the NACC Revolving Loan agreements, the Company is subject to
     certain financial covenants including a 1.40 to 1.0 debt service coverage
     ratio, as defined.

(N)  On May 28, 1997, the Company entered into an unsecured revolving credit
     facility with CLNY for $25.0 million (as amended, 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 principal,
     together with any accrued or unpaid interest thereon, is due and payable
     120 days following the date of any advance under the CLNY Unsecured Line
     of Credit.  On September 30, 1997, the Company amended the maturity date   
     of the CLNY Unsecured Line of Credit from December 31, 1997 to May 23,
     1998.  As of December 31, 1997, the CLNY Unsecured Line of Credit provided
     $6.25 million of working capital availability (the "CLNY Working Capital
     Availability"), of which approximately $2.0 million was outstanding.  The
     remaining availability may be utilized for acquisitions.  Pursuant to the
     terms of the CLNY Unsecured Line of Credit agreements, the Company is
     subject to  certain financial covenants including a 2.00 to 1.0
     consolidated interest coverage ratio, as defined, and a consolidated
     EBITDA to debt service ratio of 1.75 to 1.0, as defined.  The consolidated
     interest coverage ratio covenant was changed by CLNY to 1.90 to 1.0 for
     the quarter ended December 31, 1997.

     Effective January 30, 1998, the Company amended the CLNY Unsecured Line    
     of Credit (the "CLNY Amendment").  The CLNY Amendment provides the Company
     with $10 million of borrowing capacity (the "CLNY Swap Availability") to
     be used by the Company solely to meet, or to reimburse itself for previous
     payments made to meet, collateral requirements for CLNY made on or after
     January 12, 1998 relating to the Company's outstanding swap agreements
     with CLNY.  This $10 million of CLNY Swap Availability is in addition to
     the $6.25 million of CLNY Working Capital Availability, but does not
     increase the aggregate $25 million availability.  The Company paid
     $200,000, plus expenses, for the CLNY Amendment.  The CLNY Amendment
     further provides for a method of required paydowns to the CLNY Unsecured
     Line of Credit under various circumstances.

                                      F-26



<PAGE>   101

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(O)  Permanent financing for these properties has been provided by a $16.1
     million conventional fixed rate loan from NACC.  Under the terms of the
     loan agreement, the Company makes monthly principal and interest payments
     based on an interest rate of 7.88% per annum and a 30-year amortization.
     The loan is collateralized by first mortgages on the four properties,
     whose carrying value approximated $23.3 million at December 31, 1997.

(P)  On March 5, 1997, permanent financing for these properties was provided
     by a $21.5 million conventional fixed rate loan from NACC.  Under the
     terms of the loan agreement, the Company makes monthly principal and
     interest payments based on an interest rate of 8.08% per annum and a
     30-year amortization.  The loan is collateralized by first mortgages on
     the two properties, whose carrying value approximated $24.0 million at
     December 31, 1997.

(Q)  On April 17, 1997, the Company refinanced $8.5 million of fixed-rate,
     tax-exempt 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 whose carrying
     value approximated $15.8 million at December 31, 1997.  The Bellevue Bonds
     now 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 the FNMA Facility and mature on
     December 15, 2027.  Prior to the refinancing the Bellevue Bonds, the
     Company made monthly principal and interest payments based on a 30 year
     amortization.  The Bellevue Bonds bore interest at 9.3%.

Interest Rate Protection Facilities

     On August 31, 1994, the Company acquired an interest rate cap for
approximately $5.6 million to protect itself from interest rate fluctuations.
On March 14, 1996, the Company sold its interest rate protection contract for
approximately $1.5 million.  As a result of this sale, the Company recognized a
$2.1 million loss, net of minority interest.

     On March 14, 1996, the Company entered into swap transactions (the "Basis
Risk Swap") with Nomura Capital Services, Inc. ("NCSI" ) (subsequently assigned
to Salomon Brothers) pursuant to which the Company pays to Salomon Brothers a
variable rate (72.5% of 90-day LIBOR) on a notional amount of $130.0 million
(composed of a $55 million and a $75 million agreement).  The Company receives
a floating rate based on the Kenny Index.  The Basis Risk Swap matures on       
February 26, 1999.  As a result of the cancellation of certain swaps in
December 1996 (described below), the notional of $103.5 million of the Basis
Risk Swap no longer provides the Company a hedge against interest rate risk and
has, therefore, been recorded at its fair value.  The fair value of the $103.5
million notional amount was approximately $588,000 and $798,000 at December 31,
1997 and  1996, respectively, and is included in other liabilities in the
consolidated balance sheets.  In 1997, a fair value adjustment of approximately
$140,000 was recorded in general and 



                                      F-27



<PAGE>   102

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



administrative expenses in the consolidated statements of operations.  At
December 31, 1997 and 1996, respectively, the Company had approximately $1.5 
million and $4.2 million posted as collateral with respect to the Basic Risk 
Swap.

     On October 3, 1996, the Company entered into an interest rate swap
transaction (the "Goldman Swap") with Goldman Sachs Capital Markets, L.P. 
("Goldman" ) pursuant to which the Company pays a fixed rate on a notional
amount of $26.5 million of its variable rate tax-exempt bonds.  Under this swap
agreement, the Company pays a fixed rate of 6.84% to Goldman and receives a
floating rate based on 90-day LIBOR.  At both December 31, 1997 and 1996, the
Company had approximately $565,000 posted as collateral with respect to the
Goldman Swap. The Swap agreement matures on October 3, 2003.

     On December 9, 1996, the Company canceled certain of its swap agreements.
The loss on cancellation of the swap agreements of approximately $1.4 million
is being amortized over the original life of the swaps and recognized as an
adjustment to interest expense on the underlying bonds.

     Also on December 9, 1996, the Company entered into a swap transaction with
CLNY.  Pursuant to this swap agreement, the Company pays a fixed rate on a
notional amount of $186.5 million (including $16.5 of Williamsburg debt) of its
variable rate tax-exempt bonds.  Under the terms of the agreement, the Company
pays to CLNY a fixed rate of 4.636% on a notional amount of $186.5 million and
receives a floating rate based on the PSA Municipal Swap Index.  The swap
agreement matures on December 9, 2003.

     Effective March 3, 1997, the Company entered into a swap transaction with
CLNY in order to hedge itself against interest rate fluctuations with respect
to the bonds secured by the  Crossroads property.  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 Swap Index.  The swap agreement terminates on March 3, 2004.

     Pursuant to the terms of the swaps and related credit support agreements,
the Company is required to post collateral to the swap providers for an amount
equal to their exposure, as defined, in each case to the extent that a
specified threshold is exceeded.  The collateral posted by the Company may be
in the form of cash or governmental securities as determined by the Company.
At December 31, 1997, the Company has posted approximately $5.2 million
(including Williamsburg) in cash collateral under its swap agreements.  The
Company estimates that for every .25% decrease in the LIBOR interest rate yield
curve, it will be required to post approximately $2 million of additional
collateral with the swap providers.  If interest rates rise, the Company
estimates that for every .25% increase in the LIBOR interest rate yield curve,
recovery of the posted collateral of a similar amount will be received up to
the outstanding collateral balances.


                                      F-28



<PAGE>   103

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     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 against
interest rate fluctuations with respect to bonds encumbering the Crossings of
Bellevue and Trails of Ashford properties.  Pursuant to the terms of the
interest rate cap agreement, the 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.

     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 against
interest rate fluctuations with respect to the bonds secured by the Sandalwood
property.  Pursuant to the terms of the interest rate cap agreement, the
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.

     Effective September 11, 1997, the Company entered into an interest rate
cap agreement with CLNY at a purchase price of $58,000 to protect itself
against interest rate fluctuations with respect to the taxable bonds secured by
the Shallow Creek property.  Pursuant to the terms of the 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.

Other

     Interest costs were as follows:

<TABLE>
<CAPTION>

                                                  (IN THOUSANDS)             
                                             YEAR ENDED DECEMBER 31,         
                                           ----------------------------      
                                             1997      1996      1995        
                                           --------  --------  --------      
<S>                                        <C>       <C>       <C>           
Interest incurred.........................  $22,569   $14,145    $8,903      
Interest paid.............................   22,928    13,232     8,995      
</TABLE>

     Scheduled principal payments of bonds and notes payable and sinking fund
deposits as of December 31, 1997 are as follows:


<TABLE>
<CAPTION>
                                      (IN 000'S)  
                                      ----------  
<S>                                     <C>       
1998.................................   $ 55,261  
1999.................................      5,430  
2000.................................      5,800  
2001.................................      6,194  
2002.................................      6,611  
Thereafter...........................    308,353  
                                        --------  
                                        $387,649  
                                        ========  
</TABLE>


                                      F-29



<PAGE>   104

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.   ESCROW DEPOSITS - RESTRICTED

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

6.   NOTE RECEIVABLE - OFFICER

     Concurrent with the Offering, the Operating Partnership made a limited
recourse loan to a senior executive of the Company in the amount of $1.0
million which he used to pay income taxes due in connection with the transfer
to him of 156,250 Common Units.  The loan was collateralized  by a subordinate
pledge of these Common Units.  The loan bore interest at 8% per annum and had a
maturity date of March 1, 1998.  On December 29, 1997, the senior executive
repaid the entire outstanding principal balance on this loan.

7.   UTILITY DEPOSITS

     Certain Property Partnerships are required to place escrow deposits with
local utility companies.  The deposits are typically for a two year period and
accrue interest at an average rate of approximately 4% per annum.  Total utility
deposits, including accrued interest, at December 31, 1997 and 1996 are
approximately $1.1 million and $1.0 million, respectively.  Such deposits are
included in accounts receivable.

8.   STOCK OPTION PLAN

     The Company has established a stock option plan for the purpose of
attracting and retaining directors, executive officers and other significant
employees via three stock incentive plans (collectively, the "Stock Incentive
Plan").  The 1994 Stock Incentive Plan, as amended, authorized the issuance of
options to purchase 469,000 shares of Common Stock.  The 1996 Stock Incentive
Plan, as amended in March 1997, authorized the issuance of options to purchase
250,000 shares of Common Stock.  The Board of Directors of the Company
established a new stock option plan in 1997 (the "1997 Stock Incentive Plan"),
which authorized the issuance of options to purchase up to 1.6 million shares
of Common Stock.

     Options outstanding as of December 31, 1997, have exercise prices ranging
from $15.53 to $24.25, vest in certain cases immediately upon the grant date or
up to four years, and have terms of five to ten years.

     At December 31, 1997, options for 1,654,490 shares of Common Stock are
available for grant under the Stock Incentive Plan.


                                      F-30



<PAGE>   105

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     Information on stock options is shown in the following table:
                                                                   
                                          

<TABLE>                                                               
<CAPTION>
                            OPTIONS OUTSTANDING                                               EXERCISABLE OPTIONS             
----------------------------------------------------------------------------            ---------------------------------- 
                                                            WEIGHTED-AVERAGE                              WEIGHTED-AVERAGE    
                                             SHARES           EXERCISE PRICE               SHARES           EXERCISE PRICE    
                                          ---------         ----------------            ---------         ----------------    
<S>                                       <C>               <C>                          <C>              <C>
January 1, 1995                             342,000         $         16.00                                                   
Options granted                              19,000                   15.64                                                   
                                          ---------                                                                           
December 31, 1995                           361,000                   15.98               160,999         $       15.95       
Options granted                             230,500                   20.26                                                   
                                          ---------                                                                           
December 31, 1996                           591,500                   17.63               391,750         $       16.90       
Options granted                              73,010                   23.68                                                   
Options exercised                          (192,000)                  16.65                                                   
Options expired                             (25,000)                  22.00                                                   
                                          ---------                                                                           
December 31, 1997                           447,510                   18.80               384,128         $       18.07       
                                          ==========
                                                                                                                 
<CAPTION>



                                                                                                   EXERCISABLE OPTIONS AT
                       OPTIONS OUTSTANDING AT DECEMBER 31, 1997                                      DECEMBER 31, 1997
---------------------------------------------------------------------------------       ----------------------------------
                                                                 WEIGHTED AVERAGE
RANGE OF EXERCISE                        WEIGHTED AVERAGE        REMAINING LIFE                         WEIGHTED AVERAGE
PRICES                     SHARES        EXERCISE PRICE              (YEARS)             SHARES         EXERCISE PRICE
-----------------          -------       ----------------        ----------------        -------        ----------------
<S>                        <C>           <C>                           <C>               <C>            <C>
$15.53 to $20              277,000       $   16.39                     6.8               277,000        $    16.39
$21 to $24.25              170,510           22.72                     9.2               107,128             22.40
                           -------       ----------------        ----------------        -------        ----------------
                           447,510       $   18.80                     7.7               384,128        $    18.07
                           =======       ================        ================        =======        ================
</TABLE>

     The effects on 1997, 1996, and 1995 pro forma net income and pro forma
earnings per common share of amortizing to expense the estimated fair value of
stock options are not necessarily representative of the effects on net income
to be reported in future years due to such things as the vesting period of the
stock options, and the potential for issuance of additional stock options in
future years.  For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period.  Had
compensation cost been determined using the fair market value-based accounting
method for options granted in 1997, 1996, and 1995, pro forma information would
be as follows (in thousands, except for earnings per share information):


                                      F-31



<PAGE>   106

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                 1997      1996     1995   
                                                               --------  --------  ------- 
<S>                                                            <C>       <C>       <C>     
Unaudited pro forma net (loss) income available to
common shareholders..........................................  $(2,003)  $(5,068)  $9,862
Unaudited pro forma (loss) earnings per common share -
basic and diluted............................................    (0.20)    (0.57)    1.10
</TABLE>

     The weighted average fair value of an option granted in 1997, 1996, and
1995 was $2.52, $6.16 and $5.16, respectively.  The Black-Scholes option
pricing model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable.  In      
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.  Because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the options granted.  For purposes
of fair market value disclosures, the fair market value of an option grant was
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions:


<TABLE>
<CAPTION>

                                         1997                  1996                  1995
                                      ---------             ---------             ---------
<S>                                   <C>                   <C>                   <C>
Risk-free interest rate........          5.8%                  5.7%                  6.8%
Dividend yields................         *0.0%                 *0.0%                 *0.0%
Volatility.....................         19.6%                 19.0%                 19.0%
Expected life of option (years)          1.0                   4.6                   5.0

* Management believes that the stock price reflects the expected dividend rate.
</TABLE>

9. SAVINGS PLAN

     Effective January 1, 1996, the Company established for the employees of
the Company a retirement plan with a salary deferral retirement feature, which
qualifies under section 401 of the Code (the "401(k) Plan").  The 401(k) Plan
permits the 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 by the Company to be made
annually 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 year.  The Company contributed a total of
approximately $33,000 in February 1997, on behalf of the participants.  Amounts
contributed by the Company on behalf of the participant will vest over a period
of five years (20% per year).  Amounts contributed by the Company and amounts
contributed by the participants will be held in trust until distributed to the
participant pursuant to the provisions of the 401(k) Plan.



                                      F-32



<PAGE>   107

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10. PREFERRED STOCK

     The Company is authorized to issue up to 20 million shares of preferred
stock.  On August 15, 1996, the Company issued 1,351,351 shares of Class A
Preferred Stock, par value $.01, for $18.50 per share or an aggregate amount of
$25 million.  Net of underwriting discounts and expenses, the Company received
approximately $24.1 million in net proceeds from the issuance.  The Company     
contributed the proceeds to the Operating Partnership in exchange for 1,351,351
Class A Preferred Units of the Operating Partnership.  The Operating
Partnership, in turn, used such proceeds primarily for property acquisitions.

     The dividend on the shares of Class A Preferred Stock issued and 
outstanding is paid quarterly at an annual rate of (i) $1.68 per share of Class
A Preferred Stock, on or prior to August 14, 1997, (ii) for the period August
15, 1997 through August 14, 1998, $1.73 per share of Class A Preferred Stock,
(iii) for the period August 15, 1998 through August 14, 1999, $1.78 per share   
of Class A Preferred Stock, (iv) for the period August 15, 1999 through August
14, 2001, $1.84 per share of Class A Preferred Stock, (v) for the period August
15, 2001 through August 14, 2002, $1.89 per share of Class A Preferred Stock,
and (vi) on or after August 15, 2002, the greater of (x) $1.68 per Class A
Preferred Stock, per annum or (y) the product of 1.05 of the dividend paid to
Common Stock.  Each share of Class A Preferred Stock is convertible into one
share of Common Stock at the sole and absolute discretion of the holder.

     The Company has the right to redeem the Class A Preferred Stock on or
after August 15, 2001.  Prior to August 14, 2002, the Company has the right to
redeem this Class A Preferred Stock  at a premium of 1.06% of the per share
purchase price of $18.50.  The premium to be paid upon redemption of the Class  
A Preferred Stock decreases over an eight year period to zero by August 15,
2010.  In the event of a change of ownership of the Company, the Company may be
required by the holder of Class A Preferred Stock to purchase all of the shares
of Class A Preferred Stock at a price equal to the lesser of (i) $19.98 or (ii)
the price at which the Company has the right to redeem shares of Class A
Preferred Stock from the holders as described above (see Note 3).

     Except as limited by law, the holders of the Class A Preferred Stock are
entitled to vote or consent on all matters submitted to the holders of Common
Stock together with the common stock as a single class.  Each share of Class A
Preferred Stock will entitle the holder to one vote for each share of common
stock into which such Class A Preferred Stock is convertible as of the record
date for such vote or consent.

11. SHELF REGISTRATION

     In June 1997, the Company registered 2.5 million shares of Common Stock
pursuant to an equity shelf registration statement, of which 1.3 million
registered Common Shares were sold on 

                                      F-33


<PAGE>   108

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 30, 1997 (the "Offering") at prices between $22.375 and $22.625.  The
closing price of a Common Share on June 17, 1997 (the date the Company  entered
into an agreement to sell 1.3 million shares of Common Stock) was $22.625.  The
Company received gross proceeds of approximately $29.3 million; net proceeds
approximated $28.8 million.  The Company used $20.7 million of the net proceeds
received from the Offering to repay the short-term bridge loan borrowed 
pursuant to the amendment to the NACC Revolving Loan used to acquire the Cedar
Creek and Park Colony properties and the balance to repay a portion of the
principal outstanding under the NACC Revolving Loan and the CLNY Unsecured Line
of Credit.

12. DIVIDENDS AND DISTRIBUTIONS TO STOCKHOLDERS AND MINORITY INTEREST

     The total dividends declared and paid to holders of Common Stock in 1997
and 1996 were approximately $15.7 million and $14.3 million, respectively, each 
representing $1.60 per share.  Of the dividends paid to stockholders in 1997,
approximately $1.10 per share of Common Stock is considered to be a return of
capital.

     The total dividends authorized for payment to holders of Class A Preferred
Stock in 1997 and 1996 were approximately $2.3 million and $851,000,
respectively, representing $1.70 and $0.63 per share, respectively.  Dividends  
paid to holders of Class A Preferred Stock in 1997 and 1996 were approximately
$2.3 million and $284,000, respectively.

     Total distributions to the Minority Interest include distributions to the
Common Units held by the Limited Partners as well as distributions made to
Investor I and Investor II.  Amounts declared in 1997 and 1996 for the Common   
Units held by the Limited Partners each represent $1.60 per Common Unit.  The
following table summarizes the distributions declared and paid to the Minority
Interest during 1997 and 1996:


<TABLE>
<CAPTION>
                              (DOLLARS IN THOUSANDS)              
                         FOR THE YEAR ENDED DECEMBER 31,          
                        --------------------------------------    
                             1997                1996             
                        -----------------   ------------------    
                        DECLARED   PAID       DECLARED   PAID     
<S>                     <C>       <C>         <C>       <C>       
Limited Partners....    $1,447    $1,447      $1,542    $1,542    
Investor I..........     1,826     1,756       1,274     1,129    
Investor II.........       527       497         346       308    
</TABLE>


                                      F-34



<PAGE>   109

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



13.  EARNINGS PER SHARE OF COMMON STOCK

        The following table sets forth the computations of basic and diluted 
earnings per share of Common Stock:


<TABLE>
<CAPTION>
                                                   DOLLARS IN THOUSANDS        
                                               EXCEPT FOR PER SHARE AMOUNTS    
                                               -------------------------------- 
                                                1997        1996        1995   
                                               --------  ---------  ---------- 
Numerator:                                                                     
<S>                                            <C>         <C>         <C>     
Net income before extraordinary item           $ 2,542     $ 1,094    $  5,587 
  Preferred stock dividends.............        (2,296)       (851)         -- 
                                               --------  ---------   ---------- 
  Net income available to                                                      
   common stockholders before                                                  
   extraordinary item...................           246         243       5,587 
  Extraordinary item....................        (1,384)     (4,653)      4,360 
                                               --------  ---------   ---------- 
  Numerator for basic and diluted                                               
   earnings per share-income available                                         
   to common stockholders...............       $(1,138)    $(4,410)   $  9,947 
                                               ========  =========   ==========
Denominator:                                                                   
  Denominator for basic earnings                                               
   per share - weighted-average shares       9,834,710   8,958,525   8,958,525 
  Effect of dilutive securities:                                               
   Employee stock options...............       101,163      53,585          -- 
                                               --------  ---------  ---------- 
  Denominator for diluted earnings                                             
   per share-adjusted weighted average                                         
   shares and assumed conversions.......     9,935,873   9,012,110   8,958,525
                                          ============   =========  ==========
Basic earnings per share................       $ (0.12)    $ (0.49)    $  1.11
                                          ============   =========  ==========
Diluted earnings per share..............       $ (0.11)    $ (0.49)    $  1.11
                                          ============   =========  ==========
</TABLE>

        Options to purchase 57,510 shares of Common Stock at prices ranging from
$23.63 per share to $24.25 per share and conversions into Common Stock of Common
Units, Class A Preferred Stock and Investors I and II limited partnership
interests in certain of the Company's consolidated subsidiaries were not
included in the computation of diluted earnings per share because of
antidilutive effects.

        For additional disclosures regarding Investors I and II, employee stock
options and Class A Preferred Stock, see Notes 2, 8, and 10, respectively.



                                      F-35



<PAGE>   110

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



14. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used by management in
estimating fair value disclosures for financial instruments:

        Cash and cash equivalents:  The carrying amount reported in
             the balance sheet for cash and cash equivalents approximates fair
             value.
        Escrow deposits-restricted: The carrying amount reported in the balance
             sheet for escrow deposits approximates fair value.
        Escrowed bond funds-restricted:  The carrying amount reported in the
             balance sheet for escrowed bond funds-restricted approximates fair
             value.
        Note receivable-officer:  The carrying amount reported in the
             balance sheet for the  note receivable-officer approximates fair
             value.
        Interest rate caps:  The fair value of the interest rate cap agreements
             is estimated based on the Company's current replacement costs for
             similar interest rate protection contracts.
        Interest rate swaps: The fair value of the interest rate swaps is
             estimated based on current settlement values.
        Bonds payable:  The carrying amounts of the Company's variable
             rate bonds approximate their fair value.  Fair value of fixed rate
             bonds are estimated   based on quoted market prices for similar
             borrowings.
        Notes payable:  The carrying amounts of the Company's notes
             payable approximate  their fair values based on the Company's
             current borrowing rates for similar types of borrowing
             arrangements.  The carrying amount of accrued interest
             approximates its fair value.





                                     F-36
<PAGE>   111

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The carrying amounts and fair value of the Company's financial instruments
at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                             (IN THOUSANDS)               (IN THOUSANDS)
                                                  1997                         1996
                                        ----------------------       ----------------------
                                            Carrying     Fair           Carrying      Fair
                                             Amount     Value           Amount       Value
                                        ------------  --------       ----------    ---------
ASSETS:
<S>                                     <C>          <C>              <C>         <C>
Cash and cash equivalents.......        $   4,448    $  4,448         $  4,002     $ 4,002
Escrow deposits.................           30,588      30,588           30,897      30,897
Escrowed bond funds - restricted              250         250              549         549
Note receivable - officer.......               --          --            1,000       1,000
Interest rate caps..............              937         350               --          --
LIABILITIES:
Bonds payable...................          313,097     313,097          279,355     279,355
Notes payable...................           74,552      74,552           79,974      79,974
Interest rate swaps.............              588       5,123              798       1,459
</TABLE>

15. GAIN ON SALE OF RENTAL PROPERTY

     On December 15, 1995, the Company sold the Laurelwood property for $7.7
million, net of closing costs.  Laurelwood had a net cost basis of $6.6
million, net of accumulated depreciation of approximately $464,000.  The        
Company also wrote-off approximately $20,000 of unamortized deferred financing
fees.  As a result of the transaction described above, the Company realized a
gain of approximately $966,000, net of minority interest of approximately
$104,000.

16. EXTRAORDINARY ITEMS

     During 1997, unamortized deferred financing costs were written off upon
refinancing the Bank One Loan.  As a result, the Company recognized an
extraordinary loss of approximately $900,000, which is net of minority interest
of $90,000.  In addition, the Company's share of income/loss from investments   
in and advances to unconsolidated real estate limited partnerships includes an
extraordinary loss of approximately $484,000, which is net of minority interest
of approximately $44,000.

     During 1996, unamortized deferred financing costs were written off upon
reissuance of certain bonds in connection with replacement of credit
enhancement.  As a result, the Company recognized an extraordinary loss of
approximately $4.3 million, which is net of minority interest of $1.5 million.
The Company also wrote off unamortized deferred financing costs upon the early


                                      F-37



<PAGE>   112

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

repayment of bridge financing; the Company recognized an extraordinary loss of
approximately $209,000, which is net of minority interest of $22,000.  In       
addition, the Company's share of income/loss from investments in unconsolidated
real estate limited partnerships includes an extraordinary loss of $159,000,
which is net of minority interest of $17,000.

        As a result of the Company's acquisition of its fixed rate bonds (see
Note 4) and subsequent discounts to the original purchase price paid to
purchase such bonds, the Company recognized an extraordinary gain of
approximately $2.3 million in 1995, net of minority interest of $253,000 and
the $562,000 write-off of deferred financing costs and other loan fees
associated with the bridge financing used to acquire the fixed rate bonds.  In
addition, the Company's share of income/loss from investments in unconsolidated
real estate limited partnerships includes extraordinary income of $2.0 million,
net of minority interest of $218,000.

17. ACQUISITIONS

        During the year ended December 31, 1997, the Company acquired the
properties listed below.  Each property was purchased from an unaffiliated
third party.  The acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the acquired assets are included in the
statement of operations from their respective dates of acquisition. Acquisition
cost includes the purchase price of the property and related closing costs.


<TABLE>
<CAPTION>
                                                        (IN THOUSANDS)
PURCHASE DATE     PROPERTY         LOCATION      UNITS  ACQUISITION COST
------------   ---------------  ---------------  ----   -----------------
<S>            <C>              <C>              <C>    <C>
3/11/97        Palencia (1)     Tampa, FL         420          $15,387
6/27/97        Park Colony (2)  Norcross, GA      352           14,709
6/27/97        Cedar Creek (2)  San Antonio, TX   392            7,333
</TABLE>                                                       

      (1)  The Company assumed $13.3 million of fixed rate tax-exempt
           bonds, which are collateralized by Palencia.

      (2)  The Company financed the acquisitions of Park Colony and
           Cedar Creek using borrowings under the NACC Revolving Loan (see
           Note 4).

18. 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 a material impact
on the Company's financial position.




                                      F-38



<PAGE>   113

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. SUBSEQUENT EVENTS

        On February 4, 1998, the Board of Directors of the Company (the
"Board") authorized distribution payments of approximately $4.6 million, or
$0.40 per Common Unit, to holders of Common Units of the Operating Partnership
for the quarter ended December 31, 1997.  The distributions were paid on
February 17, 1998.  The Board also authorized distribution payments of
$584,459, or $0.4325 per Preferred Unit, to holders of Preferred Units of the
Operating Partnership for the quarter ended December 31, 1997.  This
distribution was also paid on February 17, 1998.

        On February 4, 1998, the Board declared a quarterly dividend of $0.40
per share of Common Stock to the Common Stockholders of the Company for the
quarter ended December 31, 1997.  The dividends were paid on February 17, 1998,
to holders of record as of February 12, 1998.  The Board also authorized a
quarterly dividend of $0.4325 per Preferred Stock to the holder of Preferred
Stock of the Company for the quarter ended December 31, 1997.  This dividend
was also paid on February 17, 1998.

        In November 1997, the Company obtained a $20 million standby commitment
(the "Standby Commitment") from Bank of America National Trust and Savings
Association for the benefit of FNMA. On February 4, 1998, under the terms of
FNMA's Consent and the Standby Commitment, FNMA released the Standby
Commitment.  In connection with the release, the Company wrote off
approximately $349,000 of unamortized deferred financing costs.

        On March 5, 1998, the Industrial Development Authority of the City of
Phoenix, Arizona issued $6.0 million of variable rate, tax-exempt bonds (the
"Heather Ridge Bonds") for the benefit of the Heather Ridge property.  The
Heather Ridge Bonds, which are collateralized by the Heather Ridge property,
are credit enhanced under the FNMA Facility.  The Heather Ridge Bonds will
mature on December 15, 2037 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 Company used net proceeds of $5.5 million to repay a portion
of the  outstanding principal on the NACC Revolving Loan and the remainder to
fund working capital.  In addition, the Company entered into an interest rate
cap agreement with CLNY at a purchase price of $9,000 to protect itself against
interest rate fluctuations with respect to the Heather Ridge Bonds.  Pursuant
to the terms of the interest rate cap agreement, the interest rate is limited
to 4.8% per annum on a notional amount of $6.0 million.  The interest rate cap
agreement terminates on March 15, 1999.



                                      F-39



<PAGE>   114

                          AMBASSADOR APARTMENTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



20. PRO FORMA FINANCIAL INFORMATION - UNAUDITED

        The following unaudited table of pro forma information has been
prepared as if the acquisition of three properties in 1997, the acquisition of
13 properties in 1996, and the formation of G.P. Holdings  had occurred as of
the beginning of each year 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.


<TABLE>
<CAPTION>
                                                (IN THOUSANDS EXCEPT
                                                 PER SHARE AMOUNTS)
                                            PRO FORMA FOR THE YEAR ENDED
                                            -----------------------------
                                                    (UNAUDITED)      
                                                1997                1996 
                                            ---------           ---------
<S>                                         <C>                 <C>      
Total revenues...........................     $96,099             $92,473
Property operating expenses..............      44,498              41,156
Depreciation and amortization............      20,993              19,883
Interest.................................      26,326              26,123
Income from investment in                                                
 unconsolidated real estate limited                                       
 partnerships............................        (402)               (218)
                                            ---------           ---------
Total expenses...........................      91,415              86,944
                                            ---------           ---------
Income before minority interest, loss on                                 
sale of  investment, loss on sale of                                     
interest rate cap, and extraordinary item      $4,684              $5,529
                                            =========           =========
Income per share of Common Stock -                                       
 diluted.................................       $0.43               $0.55
                                            =========           =========
</TABLE>    

        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 depreciation to
reflect the acquisitions noted in (i) above; and (iv) an increase in income
from investment in unconsolidated real estate limited partnerships to reflect
the formation of G. P. Holdings.

        Income has not been reduced for Minority Interests, and 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, 1997 and 1996 would have been
10,840,707 and 9,976,093, respectively.


                                      F-40



<PAGE>   115

<TABLE>
<CAPTION>



                                                    AMBASSADOR APARTMENTS, INC.
                                      SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                         DECEMBER 31, 1997
                                                      (DOLLARS IN THOUSANDS)

                                                                         COST CAPITALIZED SUBSEQUENT      GROSS AMOUNT AT WHICH 
                                          INITIAL COST TO COMPANY              TO ACQUISITION          CARRIED AT CLOSE OF PERIOD
                                    ---------------------------------- ------------------------------- -------------------------- 
                                                           BUILDINGS,          BUILDINGS &                      BUILDINGS &     
                                                           FURNITURE           IMPROVEMENTS                    IMPROVEMENTS     
                                                               &                FURNITURE &                     FURNITURE &     
           DESCRIPTION              ENCUMBRANCES   LAND    EQUIPMENT    LAND     EQUIPMENT      TOTAL     LAND   EQUIPMENT      
---------------------------------   ------------- ------ ------------- ------  -------------  --------  ------- ------------    
<S>                                  <C>          <C>      <C>          <C>      <C>           <C>      <C>      <C>     
Management Business                   $2,010       $--          $--      $--       $1,597      $1,597      $--    $1,597        
Properties:                                                                                                                     
Prime Crest (Austin, TX)               2,400       670          857      314        2,544       2,858      984     3,401        
Royal Crest (Austin, TX)               3,400       805        1,183      392        3,321       3,713    1,197     4,504        
Aspen Hills (Austin, TX)               9,800     2,051        4,891       --        4,513       4,513    2,051     9,404        
Eagle's Nest (San Antonio, TX)         5,200       975        1,791      181        4,393       4,574    1,156     6,184        
LaJolla (San Antonio, TX)             10,000     1,944        1,434      484       10,592      11,076    2,428    12,026        
Cape Cod (San Antonio, TX)             8,100     1,360        5,617      259        2,831       3,090    1,619     8,448        
Braesview (San Antonio, TX)           20,500     2,599       14,916      380        5,429       5,809    2,979    20,345        
Mesa Ridge (San Antonio, TX)           5,100       630        3,654      189        2,649       2,838      819     6,303        
Harbor Cove (San Antonio, TX)          5,900     1,174        3,575       --        1,529       1,529    1,174     5,104        
Brookdale Lakes  (Naperville, IL)     14,800     1,295           --      234       18,077      18,311    1,529    18,077        
Bent Oaks (Austin, TX)                 4,400     1,078        3,823       16        1,001       1,017    1,094     4,824        
Coral Cove (Clearwater, FL)            3,999     1,289        4,570       22          598         620    1,311     5,168        
Mountain View                                                                                                                   
(Colorado Springs, CO)                    --       644        8,552       28          875         903      672     9,427        
Privado Park (Mesa, AZ)                9,200       600        6,898       39        2,056       2,095      639     8,954        
Quail Ridge (Tucson, AZ)               6,400     1,202        4,023       28        1,201       1,229    1,230     5,224        
Shadow Creek (Phoenix, AZ)             5,600     1,559        5,526       29        1,147       1,176    1,588     6,673        
Summit Creek (Austin, TX)              3,555     1,067        4,013       18          560         578    1,085     4,573        
Tatum Gardens (Phoenix, AZ)            3,456       916        4,171       14          373         387      930     4,544        
Vista Ventana (Phoenix, AZ)            6,400     1,146        4,581       32        1,103       1,135    1,178     5,684        
Cypress Ridge (Houston TX)             4,250     1,306        2,649       --        1,262       1,262    1,306     3,911        
The Mills (Houston, TX)               14,575     5,773       10,187       --        3,466       3,466    5,773    13,653        
Sandalwood (Houston, TX)               4,000     1,647        3,625       --        1,928       1,928    1,647     5,553        
Trails of Ashford  (Houston, TX)       9,050     2,056        6,949       --        1,998       1,998    2,056     8,947        
Westway Village (Houston, TX)          4,888     2,961        4,506       --        1,332       1,332    2,961     5,838        
Stratford (San Antonio, TX)            5,945     1,583        8,722       --        1,622       1,622    1,583    10,344        
The Broadmoor (Austin, TX)             6,000     1,158        4,626       --        1,124       1,124    1,158     5,750        
Windridge (San Antonio, TX)            6,270     1,122        7,278       --          903         903    1,122     8,181        
Shallow Creek (San Antonio, TX)        4,600     1,083        5,017       --          834         834    1,083     5,851        
Tierra Bonita (Tucson, AZ)             6,000     1,550        6,250       --        1,502       1,502    1,550     7,752        
Country Club West (Greely, CO)        11,344       646       12,254       --          829         829      646    13,083        
Courtney Park (Fort Collins, CO)      10,050     1,556       10,344       --          710         710    1,556    11,054        
Crossroads (Phoenix, AZ)               6,000       432        7,004       --        1,192       1,192      432     8,196        
Franklin Oaks (Franklin, TN)          17,700     2,932       21,570       --        1,094       1,094    2,932    22,664        
Falls of Bells Ferry (Atlanta, GA)    28,335     6,250       25,751       --        1,089       1,089    6,250    26,840        


<CAPTION>
                                                                                     DATE
                                                            ACCUMULATED           CONSTRUCTED (C)
           DESCRIPTION                         TOTAL        DEPRECIATION            ACQUIRED(A)
---------------------------------           ---------      --------------        -----------------
<S>                                          <C>             <C>                  <C>
Management Business                            $1,597            $771                                                
Properties:                                                                                                          
Prime Crest (Austin, TX)                        4,385             696                Mar. 1990 (A)                   
Royal Crest (Austin, TX)                        5,701             941                Mar. 1990 (A)                   
Aspen Hills (Austin, TX)                       11,455           1,890                June 1991 (A)                   
Eagle's Nest (San Antonio, TX)                  7,340           1,446                Jan. 1990 (A)                   
LaJolla (San Antonio, TX)                      14,454           2,138                June 1990 (A)                   
Cape Cod (San Antonio, TX)                     10,067           1,632                June 1990 (A)                   
Braesview (San Antonio, TX)                    23,324           3,685                Nov. 1990 (A)                   
Mesa Ridge (San Antonio, TX)                    7,122           1,249                Nov. 1990 (A)                   
Harbor Cove (San Antonio, TX)                   6,278           1,061                June 1991 (A)                   
Brookdale Lakes  (Naperville, IL)              19,606           3,957                Dec. 1990 (C)                   
Bent Oaks (Austin, TX)                          5,918             743                Oct. 1993 (A)                   
Coral Cove (Clearwater, FL)                     6,479             782                Oct. 1993 (A)                   
Mountain View                                                                                                        
(Colorado Springs, CO)                         10,099           1,487                Oct. 1993 (A)                   
Privado Park (Mesa, AZ)                         9,593           1,349                Oct. 1993 (A)                   
Quail Ridge (Tucson, AZ)                        6,454             866                Oct. 1993 (A)                   
Shadow Creek (Phoenix, AZ)                      8,261           1,020                Oct. 1993 (A)                   
Summit Creek (Austin, TX)                       5,658             727                Oct. 1993 (A)                   
Tatum Gardens (Phoenix, AZ)                     5,474             708                Oct. 1993 (A)                   
Vista Ventana (Phoenix, AZ)                     6,862             867                Oct. 1993 (A)                   
Cypress Ridge (Houston TX)                      5,217             509                Aug. 1994 (A)                   
The Mills (Houston, TX)                        19,426           1,767                Aug. 1994 (A)                   
Sandalwood (Houston, TX)                        7,200             675                Aug. 1994 (A)                   
Trails of Ashford  (Houston, TX)               11,003           1,086                Aug. 1994 (A)                   
Westway Village (Houston, TX)                   8,799             884                Aug. 1994 (A)                   
Stratford (San Antonio, TX)                    11,927           1,280               Sept. 1994 (A)                  
The Broadmoor (Austin, TX)                      6,908             691               Sept. 1994 (A)                   
Windridge (San Antonio, TX)                     9,303           1,009                Oct. 1994 (A)                   
Shallow Creek (San Antonio, TX)                 6,934             682                Jan. 1995 (A)                   
Tierra Bonita (Tucson, AZ)                      9,302             904                Feb. 1995 (A)                   
Country Club West (Greely, CO)                 13,729           1,266               April 1995 (A)                   
Courtney Park (Fort Collins, CO)               12,610           1,070               April 1995 (A)                   
Crossroads (Phoenix, AZ)                        8,628             758                May  1995 (A)                    
Franklin Oaks (Franklin, TN)                   25,596           1,980                Aug. 1995 (A)                   
Falls of Bells Ferry (Atlanta, GA)             33,090           2,411                Aug. 1995 (A)                   
</TABLE>


                                      S-1


<PAGE>   116

<TABLE>
<CAPTION>


                                                    AMBASSADOR APARTMENTS, INC.
                                      SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                         DECEMBER 31, 1997
                                                      (DOLLARS IN THOUSANDS)

                                                                         COST CAPITALIZED SUBSEQUENT      GROSS AMOUNT AT WHICH 
                                          INITIAL COST TO COMPANY              TO ACQUISITION          CARRIED AT CLOSE OF PERIOD
                                    ---------------------------------- ------------------------------- -------------------------- 
                                                           BUILDINGS,          BUILDINGS &                      BUILDINGS &     
                                                           FURNITURE           IMPROVEMENTS                    IMPROVEMENTS     
                                                               &                FURNITURE &                     FURNITURE &     
           DESCRIPTION              ENCUMBRANCES   LAND    EQUIPMENT    LAND     EQUIPMENT      TOTAL     LAND   EQUIPMENT      
---------------------------------   ------------- ------ ------------- ------  -------------  --------  ------- ------------    
<S>                                  <C>          <C>      <C>          <C>      <C>           <C>      <C>      <C>     
Madera Point (Mesa, AZ)              $8,067      $453        $10,568     $--         $785         $785     $453     $11,353    
LaJolla de Tucson (Tucson, AZ)        4,967       954          3,929      --        1,177        1,177      954       5,106    
Stonybrook (Tucson, AZ)               4,028     1,732          7,206      --          957          957    1,732       8,163    
The Arbors (Deland, FL)               7,605     1,528          6,193      --          414          414    1,528       6,607    
Ocean Oaks (Port Orange, FL)         10,295     2,272          9,199      --          533          533    2,272       9,732    
Village Crossing                                                                                                               
(West Palm Beach, FL)                 7,000     2,015          7,238      --          351          351    2,015       7,589    
Haverhill Commons                                                                                                              
(West Palm Beach, FL)                 9,100     2,251          7,863      --          510          510    2,251       8,373    
Heather Ridge (Phoenix, AZ)           5,755     1,460          5,842      --          713          713    1,460       6,555    
Pine Shadows (Tempe, AZ)              7,350     1,890          7,561      --          958          958    1,890       8,519    
Crossings of Bellevue                                                                                                          
(Nashville, TN)                       8,540     1,871         13,918      --          618          618    1,871      14,536    
Hidden Lake (Tampa, FL)               4,605     1,257          4,599      --          994          994    1,257       5,593    
Legend Oaks (Tampa, FL)               8,263     1,939          7,178      --        1,490        1,490    1,939       8,668    
Sun Lake (Lake Mary, FL)             15,287     4,784         19,534      --        1,397        1,397    4,784      20,931    
Palencia (Tampa, FL)                 13,250     3,015         12,372      --        1,166        1,166    3,015      13,538    
Park Colony (Norcross, GA)               --     2,469         12,240      --          796          796    2,469      13,036    
Cedar Creek (San Antonio, TX)         4,310     1,002          6,331      --          433          433    1,002       6,764    
                                   --------   -------       --------  ------     --------     --------  -------    --------
                                   $387,649   $85,951       $362,578  $2,659     $100,566     $103,225  $88,610    $463,144    
                                   ========   =======       ========  ======     ========     ========  =======    ========

<CAPTION>
                                                                                      DATE
                                                            ACCUMULATED           CONSTRUCTED (C)
           DESCRIPTION                         TOTAL        DEPRECIATION            ACQUIRED(A)
---------------------------------           ---------      --------------        -----------------
<S>                                          <C>             <C>                  <C>
Madera Point (Mesa, AZ)                       $11,806            $804                Feb. 1996 (A)                                
LaJolla de Tucson (Tucson, AZ)                  6,060             458               April 1996 (A)                                
Stonybrook (Tucson, AZ)                         9,895             525                May  1996 (A)                                 
The Arbors (Deland, FL)                         8,135             340                Aug. 1996 (A)                                
Ocean Oaks (Port Orange, FL)                   12,004             509                Aug. 1996 (A)                                
Village Crossing                                                                                                                  
(West Palm Beach, FL)                           9,604             395                Aug. 1996 (A)                                
Haverhill Commons                                                                                                                 
(West Palm Beach, FL)                          10,624             436                Aug. 1996 (A)                                
Heather Ridge (Phoenix, AZ)                     8,015             309               Sept. 1996 (A)                                
Pine Shadows (Tempe, AZ)                       10,409             400               Sept. 1996 (A)                                
Crossings of Bellevue                                                                                                             
(Nashville, TN)                                16,407             629                Oct. 1996 (A)                                
Hidden Lake (Tampa, FL)                         6,850             249                Oct. 1996 (A)                                
Legend Oaks (Tampa, FL)                        10,607             414                Oct. 1996 (A)                                
Sun Lake (Lake Mary, FL)                       25,715             793                Nov. 1996 (A)                                
Palencia (Tampa, FL)                           16,553             617                Mar. 1997 (A)                                
Park Colony (Norcross, GA)                     15,505             297                Jun. 1997 (A)                                
Cedar Creek (San Antonio, TX)                   7,766             157                Jun. 1997 (A)                                
                                           ----------         -------
                                           $ $551,754         $52,319                                                             
                                           ==========         =======
</TABLE>




                                      S-2


<PAGE>   117




                          AMBASSADOR APARTMENTS, INC.
            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                               DECEMBER 31, 1997
                             (Dollars in Thousands)
                                  (Continued)

Depreciation on building and improvements is calculated on the straight-line
basis over the estimated useful lives of the assets as follows:


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

The aggregate cost of real estate for federal income tax purposes was
approximately $486.2 million at December 31, 1997.

The change in total real estate assets and accumulated depreciation for the
years ended December 31, 1997, 1996 and 1995 are as follows:


<TABLE>
<CAPTION>

                                    REAL ESTATE ASSETS
                               ----------------------------
                                 1997      1996      1995
                               --------  --------  --------
<S>                            <C>       <C>       <C>
Balance, beginning of year     $495,292  $343,869  $235,916
Sale of rental property              --        --    (7,024)
Acquisitions and improvements    56,462   151,423   114,977
                               --------  --------  --------
Balance, end of year           $551,754  $495,292  $343,869
                               ========  ========  ========


                                 ACCUMULATED DEPRECIATION
                               ----------------------------
                                 1997      1996      1995
                               --------  --------  --------
Balance, beginning of year      $33,340   $19,910   $11,480
Depreciation expense             18,979    13,430     8,894
Sale of rental property              --        --      (464)
                               --------  --------  --------
Balance, end of year            $52,319   $33,340   $19,910
                               ========  ========  ========

</TABLE>



                                      S-3