AMBASE CORP – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes, which are contained in Part II - Item 8, herein.

BUSINESS OVERVIEW

AmBase Corporation (the "Company") is a holding company which, through a wholly-owned subsidiary, owns a commercial office building in Greenwich, Connecticut. The Company previously owned an insurance company and a savings bank.

In February 1991, the Company sold its ownership interest in The Home Insurance Company and its subsidiaries. On December 4, 1992, Carteret Savings Bank, FA was placed in receivership by the Office of Thrift Supervision ("OTS").

The Company's assets currently consist primarily of cash and cash equivalents, investment securities, an indemnification asset, and real estate owned. The Company earns non-operating revenue consisting principally of investment earnings on investment securities and cash equivalents. The Company continues to evaluate a number of possible acquisitions and is engaged in the management of its assets and liabilities, including the contingent assets associated with its legal claims, as described in Part I - Item 1. Discussions and negotiations are ongoing with respect to certain of these matters. From time to time, the Company and its subsidiaries may be named as a defendant in various lawsuits or proceedings. The Company intends to aggressively contest all litigation and contingencies, as well as pursue all sources for contributions to settlements.

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

FINANCIAL CONDITION AND LIQUIDITY

The Company's assets at December 31, 2012, aggregated $104,870,000, consisting principally of cash and cash equivalents of $3,907,000, investment securities of $79,787,000, an indemnification asset, for a federal tax gross-up of $18,930,000 and real estate owned, net of $1,872,000. At December 31, 2012, the Company's liabilities aggregated $36,604,000. Total stockholders' equity was $68,266,000.

For the year ended December 31, 2012, cash of $163,256,000 was provided by operations resulting from proceeds received in connection with the Supervisory Goodwill Settlement Agreement partially offset by the payment of operating expenses. In addition, cash flows used by financing activities include the payment of a $2.00 per common share cash dividend paid in December 2012, aggregating $87,511,000. The cash needs of the Company for 2012 were principally satisfied by the Supervisory Goodwill Settlement Agreement proceeds received, the Company's financial resources and to a lesser extent, the receipt of investment earnings on investment securities and cash equivalents.

In October 2012, the Company received $180,650,000 (one hundred eighty million, six hundred fifty thousand dollars) pursuant to the Supervisory Goodwill Settlement Agreement between the Company, the Federal Deposit Insurance Corporation-Receiver ("FDIC-R") and the Department of Justice ("DOJ") on behalf of the United States of America (the "United States"). As part of the Settlement Agreement, the Company is also entitled to a tax-gross-up in an amount to be determined if and when any federal taxes should be imposed on the settlement amount. See Part II - Item 8 - Note 9 and Note 10 to the Company's consolidated financial statements for a discussion of Income Taxes and the Supervisory Goodwill proceedings and related Settlement Agreement.

On December 10, 2012, the Company paid a cash dividend of $2.00 per share of common stock to common shareholders.

For the year ended December 31, 2011, cash of $1,735,000 was used by operations, including the payment of operating expenses and prior year accruals; partially offset by the receipt of interest income and investment earnings. The cash needs of the Company for 2011 were principally satisfied by the Company's financial resources and to a lesser extent the receipt of investment earnings on investment securities and cash equivalents.

Real estate owned consists of one commercial office building in Greenwich, Connecticut which the Company owns and manages. The building is approximately 14,500 square feet; approximately 3,500 square feet is utilized by the Company for its executive offices; the remaining space is currently unoccupied and available for lease. Although the portion of the building not being utilized by the Company is currently unoccupied and available for lease, based on the Company's analysis, including but not limited to current market rents in the area, leasing values, and comparable property sales, the Company believes the property's fair value exceeds the property's current carrying value. Therefore, the Company believes the carrying value of the property as of December 31, 2012, has not been impaired. For additional information see Part II - Item 8 - Note 4 to the Company's consolidated financial statements.

Pursuant to the accounting principles with regard to recognition of uncertain tax positions, (ASC 740-10, Accounting for Income Taxes), as of December 31, 2012, the Company was required to record an aggregate tax reserve of approximately $34.2 million; ($18.4 million for federal), to reflect the net tax effect for potential tax audit and uncertainty that the $152 million, Carteret worthless stock tax deduction included in the Company's 2012 tax returns as filed, (which did meet the uncertain tax position recognition test), could be disallowed in whole or in part by the tax authorities. The Company believes that if any additional federal tax is owed as a result of any adjustments, these potential amounts would be reimbursable to the Company pursuant to the tax gross-up provision of the Settlement Agreement. As a result the Company recorded an indemnification asset, of $18.4 million to reflect the net amount of the federal uncertain tax position reserve recognized, as noted above. The calculation of the net federal uncertain tax position reserve amount factors in the assumed use of the Company's remaining NOL carryforwards and use of the Company's AMT Tax Credits. A portion of the uncertain tax position reserve as of December 31, 2012, is attributable to state taxes on the Settlement Amount which are not reimbursable to the Company as part of the Settlement Agreement. For additional information see Part II - Item 8 - Note 9 and Note 10 to the Company's consolidated financial statements.

There are no material commitments for capital expenditures as of December 31, 2012. Inflation has had no material impact on the business and operations of the Company.

The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its assets and liabilities, including the contingent assets associated with its legal claims as described in Part I - Item 1. Discussions and negotiations are ongoing with respect to certain of these matters. From time to time, the Company and its subsidiaries may be named as a defendant in various lawsuits or proceedings. The Company intends to aggressively contest all litigation and contingencies, as well as pursue all sources for contributions to settlements. For a discussion of lawsuits and proceedings, including a discussion of the Supervisory Goodwill legal proceedings and related Settlement Agreement, see Part II - Item 8 - Note 9 and Note 10 to the Company's consolidated financial statements. --------------------------------------------------------------------------------

RESULTS OF OPERATIONS

The Company earns non-operating revenue consisting principally of investment earnings on investment securities and cash equivalents. The Company's management believes that operating cash needs for the next twelve months will be met principally by the Company's financial resources and to a lesser extent, the receipt of investment earnings on investment securities and cash equivalents.

The Company recorded net income of $145,929,000 or $3.37 per share for the year ended December 31, 2012. Included in net income for the year ended December 31, 2012, is other income of $180,650,000 (one hundred eighty million, six hundred fifty thousand dollars) (the "Settlement Amount") from the Supervisory Goodwill legal proceedings settlement agreement (the "Settlement Agreement") which was paid directly to AmBase on October 19, 2012, as a result of the October 11, 2012Court of Federal Claims order approving the Settlement Agreement in the Supervisory Goodwill legal proceedings between AmBase, the Federal Deposit Insurance Corporation-Receiver ("FDIC-R") and the Department of Justice ("DOJ") on behalf of the United States of America (the "United States"). As part of the Settlement Agreement, the Company is also entitled to a tax gross-up in an amount to be determined if and when any federal taxes should be imposed on the Settlement Amount. Additional other income for the year ended December 31, 2012, reflects the Company's recording of an indemnification asset,- federal tax gross-up of $18,930,000, to reflect the net amount of the federal uncertain tax position reserve recognized. See Part II - Item 8 - Note 9 and Note 10 to the Company's consolidated financial statements for a discussion of the Supervisory Goodwill legal proceedings and related Settlement Agreement. For the year ended December 31, 2011, the Company recorded a net loss of $1,893,000 or $0.04 per share.

Compensation and benefits increased to $17,980,000 in 2012 from $1,410,000 in 2011. The increase in 2012 is due to increased incentive compensation payments in 2012 as a result of the Settlement Agreement proceeds received. Pursuant to the 2007 Employment Agreement, as amended between the Company and Richard A. Bianco, the Company's Chairman, President and Chief Executive Officer ("Mr. Bianco") (the "2007 Employment Agreement"), Mr. Bianco was paid an incentive payment of $13,565,000 based on the receipt by the Company of the Settlement Amount. Additionally, other employees received incentive payments of approximately $1,100,000. An additional amount, to be determined, could be due to Mr. Bianco pursuant to the 2007 Employment Agreement, based on value realized by the Company with respect a gross-up for federal taxes imposed on the Settlement Amount. At December 31, 2012, the Company recorded an additional incentive compensation accrual to Mr. Bianco of approximately $1.9 million related to the tax gross-up receivable in connection with the Settlement Amount. See Part II - Item 8 - Note 10 to the Company's consolidated financial statements for a discussion of the Supervisory Goodwill legal proceedings and related Settlement Agreement.

No stock based compensation expense was recorded for the year ended December 31, 2012. The Company recorded stock based compensation of $120,000 for the year ended December 31, 2011. Professional and outside services increased to $472,000 in 2012 from $306,000 in 2011. The increase in 2012 as compared to 2011 is principally the result of a higher level of legal fees incurred in connection with the Supervisory Goodwill Settlement Agreement. The Company has no contingent fee agreements in place with its attorneys or any outside advisor in connection with the Supervisory Goodwill legal proceedings or award. See Part II - Item 8 - Note 10 to the Company's consolidated financial statements for a discussion of the Supervisory Goodwill litigation proceedings.

Property operating and maintenance expenses were $89,000 in 2012 and $91,000 in 2011. Property operating and maintenance expenses have been maintained at consistent levels over the last several years despite the general increases in utility costs as a result of overall cost containment measures.

Insurance expenses increased to $44,000 in 2012, compared with $33,000 in 2011.

The increase is due to increased insurance costs.

Other operating expenses increased to $269,000 in 2012 compared with $97,000 in 2011 due to an increased franchise tax cost resulting from increased asset base in 2012 versus 2011.

Interest income was $39,000 in 2012 and $9,000 in 2011. The increase in 2012 compared to 2011 is principally due to a higher level of cash equivalents and investment securities.

Realized gains on sales of investment securities were $38,000 in 2012 and $19,000 in 2011. The gains are the result of the realization of gains on sales due to market appreciation.

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

Other income of $16,000 and $124,000 for 2012 and 2011 respectively, is attributable to recovery of funds by the Company from items previously written off.

For the year ended December 31, 2012, the Company recorded an income tax provision of $34,841,000. The 2012 income tax provision is attributable to a current federal provision of $18,930,000 a current state provision of $15,911,000. These amounts reflect the net effects of a valuation allowance reversal of $38,167,000 as a result of the recognition of an uncertain tax position reserve. In March 2013, the Company paid a federal alternative minimum tax liability of $501,000 based on the Company's 2012 tax return as filed and had previously paid $180,000 for a tax imposed by the state jurisdictions. For the year ended December 31, 2011, the Company recorded an income tax provision of $48,000 attributable to a provision for a minimum tax on capital imposed by the state jurisdictions. A reconciliation between income taxes computed at the statutory federal rate and the provision for income taxes is included in Part II - Item 8 - Note 9 to the Company's consolidated financial statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty. The determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to the consolidated financial statements. We believe that the following accounting policies, which are important to our consolidated financial position and consolidated results of operations, require a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our consolidated financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. For a summary of all our accounting policies, including the accounting policies discussed below, see Part II - Item 8 - Note 2 to the Company's consolidated financial statements.

Investment securities: Securities that the Company has both the positive intent and ability to hold to maturity are classified as held to maturity investments and are carried at amortized cost (which includes accrued interest). Investment securities - held to maturity consist of U.S. Treasury Bills and are carried at amortized cost (which includes accrued interest) based upon the Company's intent and ability to hold these investments to maturity. Investment securities - trading consist of investments in equity securities held for trading purposes and are carried at fair value with net unrealized gains and losses recorded directly in the consolidated statement of operations.

Interest and dividends on investment securities are recognized when earned. Realized gains and losses on the sale of investment securities - held for trading are calculated using an average cost basis for determining the cost basis of the securities. The fair value of publicly traded investment securities is determined by reference to current market quotations.

The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the security is written down to fair market value and the amount of the write down is included in the consolidated statement of operations.

Legal Proceedings: From time to time the Company and its subsidiaries may be named as a defendant in various lawsuits or proceedings. The Company presently is not aware of any pending or threatened litigation which could have a material adverse effect on the consolidated financial statements presented herein. Management of the Company, in consultation with outside legal counsel, continually reviews the likelihood of liability and associated costs of pending and threatened litigation including the basis for the calculation of any litigation reserves which may be necessary. The assessment of such reserves includes an exercise of judgment and is a matter of opinion. The Company intends to aggressively contest all threatened litigation and contingencies, as well as pursue all sources for contributions to settlements. For a discussion of lawsuits and proceedings, see Part II - Item 8 - Note 10.

Income Tax Audits: The Company's federal, state and local tax returns, from time to time, may be audited by the tax authorities, which could result in proposed assessments or a change in the net operating loss ("NOL") carryforwards currently available. The Company's federal income tax returns for the years subsequent to 1992 have not been reviewed by the Internal Revenue Service ("IRS") or state authorities except for tax year 2007 which was reviewed by the IRS, and which has been concluded. The accrued amounts for income taxes reflect management's best judgment as to the amounts payable for all open tax years.

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

Deferred Tax Assets: After taking into account the tax expense for the uncertain tax position, as of December 31, 2012 the Company did not have any deferred tax assets remaining. The usage of these amounts to offset current period tax expense also resulted in the release of the full valuation allowance that had previously been recorded. The Company could record these deferred tax assets in the future in part or whole based upon the outcome of the uncertain tax reserve recognized by the Company as of December 31, 2012. However, the future recording of such deferred tax assets are subject to additional valuation allowances at that time. See Part II - Item 8 - Note 9.

New Accounting Pronouncements

There are no new accounting pronouncements that would materially affect the Company's financial statements or results of operations for the periods reported herein.

Cautionary Statement for Forward-Looking Information

This Annual Report together with other statements and information publicly disseminated by the Company may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,(the "Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or make oral statements that constitute forward looking statements. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. The forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, anticipated market performance, anticipated litigation results or the timing of pending litigation, and similar matters. When used in this Annual Report, the words "estimates," "expects," "anticipates," "believes," "plans," "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. The Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to those set forth in "Item 1A, Risk Factors" and elsewhere in this Annual Report and in the Company's other public filings with the Securities and Exchange Commission including, but not limited to: (i) transaction volume in the securities markets; (ii) the volatility of the securities markets; (iii) fluctuations in interest rates; (iv) risks inherent in the real estate business, including, but not limited to, tenant defaults, changes in occupancy rates or real estate values; (v) changes in regulatory requirements which could affect the cost of doing business; (vi) general economic conditions; (vii) changes in the rate of inflation and the related impact on the securities markets; (viii) changes in federal and state tax laws; (ix) certain assumptions regarding the outcome of pending legal and/or tax matters, based in whole or in part upon consultation with outside advisors, and (x) risks arising from unfavorable decisions in the Company's current material tax and litigation matters, or unfavorable decisions in other Supervisory Goodwill cases. These are not the only risks that we face. There may be additional risks that we do not presently know of or that we currently believe are immaterial which could also impair our business and financial position.

Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that the Company's expectations will be realized.

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