UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-K


(Mark One)
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934

   For the fiscal year ended December 31, 1998
                                      OR
|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934

   For the transition period from ________ To ________


                        Commission file number 1-7265

                              AMBASE CORPORATION
            (Exact name of registrant as specified in its charter)

              DELAWARE                        95-2962743
     (State of incorporation)    (I.R.S. Employer Identification No.)

        51 Weaver Street,  Building 2, Greenwich, CT 06831-5155
                (Address of principal executive offices)

      Registrant's telephone number, including area code (203) 532-2000

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

        Title of each class         Name of each exchange on which registered

    Common Stock ($0.01 par value)                       None

    Rights to Purchase Common Stock                      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,  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 registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.

At January 29, 1999, there were 44,533,519  shares of registrant's  Common Stock
outstanding.  At January 29, 1999 the  aggregate  market  value of  registrant's
voting securities  (consisting of its Common Stock) held by nonaffiliates of the
registrant, based on the average bid and asking price on such date of the Common
Stock of $2.64 per share,  was  approximately  $93  million.  The  Common  Stock
constitutes registrant's only outstanding security.

Portions of the  registrant's  definitive  Proxy  Statement  for its 1999 Annual
Meeting of Stockholders,  which Proxy Statement  registrant intends to file with
the Securities  and Exchange  Commission not later than 120 days after the close
of its  fiscal  year,  is  incorporated  by  reference  with  respect to certain
information contained therein, in Part III of this Annual Report.

The Exhibit Index is located in Part IV, Item 14, Page 34.


<PAGE>

AmBase Corporation

Annual Report on Form 10-K
December 31, 1998

CROSS REFERENCE SHEET FOR
PARTS I, II, III and IV                                                    Page
===============================================================================
PART I

Item 1.    Business..........................................................1

Item 2.    Properties........................................................2

Item 3.    Legal Proceedings.................................................2

Item 4.    Submission of Matters to a Vote of Security Holders...............3

           Executive Officers of the Registrant..............................3

PART II

Item 5.    Market for Registrant's Common Equity and
           Related Stockholder Matters.......................................4

Item 6.    Selected Financial Data...........................................4

Item 7.    Management's Discussion and Analysis of
           Financial Condition and Results of Operations.....................5

Item 8.    Financial Statements and Supplementary Data......................10

Item 9.    Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure..............................33

PART III

Item 10.   Directors and Executive Officers of the Registrant...............33

Item 11.   Executive Compensation...........................................33

Item 12.   Security Ownership of Certain Beneficial Owners and Management...33

Item 13.   Certain Relationships and Related Transactions...................33

PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K..34




<PAGE>

PART I

ITEM 1.  BUSINESS

Corporate Profile

AmBase Corporation (the "Company") was incorporated as a Delaware corporation in
1975 by the City Investing  Company ("City") as the holding company for The Home
Insurance Company,  a New Hampshire  insurance  corporation,  and its affiliated
property and casualty  insurance  companies ("The Home").  In 1985,  City, which
prior to that date owned all the  outstanding  shares of the Common Stock of the
Company, distributed the Company's shares  to  City's  common stockholders.  The
Home was sold on February 13, 1991 to Home Holdings, Inc. ("Home Holdings").

In  December  1997,  the  Company  formed  a new  wholly-owned  subsidiary,  SDG
Financial Corp. ("SDG Financial"),  to pursue merchant banking  activities.  SDG
Financial  purchased  an  approximate  6.3%  equity  interest in SDG,  Inc.  for
$1,250,000  and  was  granted  the  exclusive  right  to act  as the  investment
banker/financial   advisor  to  SDG,  Inc.  and  all  of  its  subsidiaries  and
affiliates.

SDG, Inc. is a  development  stage  company  which  specializes  in creating new
technology-specific  companies that are dedicated to the clinical and commercial
development   of   proprietary,   targeted   liposomal   delivery   systems  for
pharmaceutical  therapies and consumer  product  ingredients.  SDG, Inc.'s lipid
vesicles are protected by numerous U.S. and related foreign patents.

Also in December 1997, the Company purchased  $100,000 of convertible  preferred
stock in AMDG, Inc. ("AMDG"), a majority owned subsidiary of SDG, Inc. AMDG is a
development stage pharmaceutical  company focused on the clinical development of
new  therapies  for the  treatment  of both Type I and Type II diabetes  and has
received from SDG, Inc. a worldwide, exclusive,  royalty-free license to certain
patented  technology.  AMDG  raised  $3.7  million  of equity  through a private
placement in December 1997.

In November 1993, the Company acquired 51% of the issued and outstanding  common
stock of  Augustine  Asset  Management,  Inc.  ("Augustine"),  a  Florida  based
investment  advisory  firm.  On  October 4, 1996,  the  Company  sold its entire
interest  in  Augustine,  to  Augustine.  See  Item 8 - Note 6 to the  Company's
consolidated financial statements for further information.

In August 1988, the Company  acquired  Carteret  Bancorp Inc.  Carteret  Bancorp
Inc.,  through its principal wholly owned subsidiary,  Carteret Savings Bank, FA
("Carteret"),  was  principally  engaged in retail  and  consumer  banking,  and
mortgage banking including mortgage  servicing.  On December 4, 1992, the Office
of  Thrift  Supervision  ("OTS")  placed  Carteret  in  receivership  under  the
management of the Resolution  Trust  Corporation  ("RTC") and a new institution,
Carteret  Federal Savings Bank, was established to assume the assets and certain
liabilities  of Carteret.  Following  the seizure of  Carteret,  the Company was
deregistered as a savings and loan holding company by the OTS,  although the OTS
retains jurisdiction for any regulatory violations prior to deregistration.

The Company's  assets currently  consist  primarily of cash and cash equivalents
and investment securities.

The Company had 7 employees at December 31, 1998.

The Company's main source of non-operating  revenue is interest income earned on
investment  securities and cash equivalents.  In order to maintain the principal
value of its assets, the Company has invested  substantially all of its funds in
U.S.  Treasury Bills and short-term money market funds. The Company continues to
evaluate a number of possible acquisitions,  and is engaged in the management of
its remaining assets and  liabilities,  including the contingent and alleged tax
and  litigation  liabilities,  as  described  in Item 8 - Notes 11 and 13 to the
Company's consolidated financial statements. The Company intends to aggressively
contest all pending and  threatened  litigation  and  contingencies,  as well as
pursue all sources for  contributions to settlements.  In order to continue on a
long-term  basis,  the  Company  must both  resolve its  contingent  and alleged
liabilities  by  prevailing  upon or  settling  these  claims  for less than the
amounts claimed and generate profits by acquiring existing  operations and/or by
developing new operations.

See Item 8 - Note 13 to the Company's  consolidated  financial  statements for a
discussion of Supervisory Goodwill Litigation.


                                     -1-

<PAGE>

At  December  31,  1998,  the  Company's  liabilities,  including  reserves  for
contingent  and  alleged   liabilities,   exceeded  total  recorded   assets  by
$25,000,000.  The  Company has  significant  alleged  tax  liabilities  and is a
defendant in a number of lawsuits  and  governmental  proceedings,  the ultimate
outcome of which could have a material adverse effect on its financial condition
and results of  operations.  Because of the nature of the contingent and alleged
liabilities  and the  inherent  difficulty  in  predicting  the  outcome  of the
litigation and governmental proceedings, management is unable to predict whether
the Company's recorded reserves will be adequate or its resources  sufficient to
satisfy  its  ultimate  obligations.  The  accompanying  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.  For a discussion of the alleged tax liabilities,  lawsuits
and  proceedings,  see  Item 8 - Notes 11 and 13 to the  Company's  consolidated
financial  statements.  Although the basis for the calculation of the litigation
and contingency  reserves and income tax reserves are regularly  reviewed by the
Company's management and outside legal counsel, the assessment of these reserves
includes an exercise of judgment and is a matter of opinion.

Discontinued Operations

For a discussion of discontinued investment management operations, refer to Item
8 - Note 6 to the Company's consolidated financial statements.

ITEM 2.  PROPERTIES

The Company  leases  approximately  4,800  square feet for use as its  executive
office at 51 Weaver Street, Building 2, Greenwich, CT 06831-5155.

ITEM 3.  LEGAL PROCEEDINGS

The Company has  significant  alleged tax  liabilities  and is a defendant  in a
number of lawsuits and governmental  proceedings,  the ultimate outcome of which
could have a material  adverse effect on its financial  condition and results of
operations.  Because of the nature of the contingent and alleged liabilities and
the  inherent  difficulty  in  predicting  the  outcome  of the  litigation  and
governmental proceedings,  management is unable to predict whether the Company's
recorded  reserves will be adequate or its  resources  sufficient to satisfy its
ultimate obligations.  The accompanying consolidated financial statements do not
include  any   adjustments   that  might   result  from  the  outcome  of  these
uncertainties.  Although the basis for the  calculation  of the  litigation  and
contingency  reserves  and income tax  reserves  are  regularly  reviewed by the
Company's management and outside legal counsel, the assessment of these reserves
includes an exercise of  judgment  and is a matter of opinion.  At December  31,
1998, the litigation and contingency reserves were $2,076,000.  For a discussion
of alleged tax liabilities,  lawsuits and proceedings, see Item 8 - Notes 11 and
13 to the Company's consolidated financial statements.

In  addition  to the  litigation  and  contingency  reserves,  the Company had a
reserve for income taxes of  $66,388,000  at December  31,  1998.  For a further
discussion,  see Item 8 - Note 11, Income Taxes and Note 13, Legal  Proceedings,
Dispute with Internal Revenue Service,  Withholding Taxes (Netherlands Antilles)
to the Company's consolidated financial statements.

See Item 8 - Note 13 to the Company's  consolidated  financial  statements for a
discussion of Supervisory Goodwill Litigation.





                                     -2-

<PAGE>

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

None.

Executive Officers of the Registrant

Each executive officer is elected to serve in the executive officer capacity set
forth   opposite  his   respective   name  until  the  next  Annual  Meeting  of
Stockholders.  The Company is not aware of any family relationships  between any
of the executive officers or directors of the Company.

Set forth  below is a  list of executive officers of the Company at December 31,
1998:
================================================================================
Name                       Age                  Present Title                 
================================================================================
Richard A. Bianco           51                  Chairman, President and
                                                Chief Executive Officer of
                                                AmBase Corporation

John P. Ferrara             37                  Vice President, Chief Financial
                                                Officer and Controller of
                                                AmBase Corporation

Mr. Bianco was elected a director of the Company in January 1991, and has served
as  President  and Chief  Executive  Officer of the Company  since May 1991.  On
January 26, 1993,  Mr. Bianco was elected  Chairman of the Board of Directors of
the Company.  He served as Chairman,  President and Chief  Executive  Officer of
Carteret, then a subsidiary of the Company, from May 1991 to December 1992.

Mr.  Ferrara was  elected to the  position of Vice  President,  Chief  Financial
Officer and Controller of the Company in December 1995, having previously served
as Acting Chief  Financial  Officer,  Treasurer and Assistant Vice President and
Controller  since January 1995; as Assistant Vice President and Controller  from
January  1992 to  January  1995;  and as  Manager of  Financial  Reporting  from
December 1988 to January 1992.



                                     -3-

<PAGE>

PART II

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

The Common Stock of the Company trades through one or more  market-makers,  with
quotations  made  available  in the  "pink  sheets"  published  by the  National
Quotation Bureau, Inc. ("Pink Sheets"),  under the symbol ABCP. The sales prices
per share for the  Company's  Common Stock  represent  the range of the reported
high and low bid  quotations as indicated in the Pink Sheets or as  communicated
orally to the Company by market-makers.  Such prices reflect interdealer prices,
without  retail  mark-up,  mark-down  or  commission,  and may  not  necessarily
represent actual transactions.

================================================================================
                                      1998                          1997
                                High        Low               High        Low
================================================================================
First Quarter                  $4.06       $3.50             $2.92       $2.50
Second Quarter                  4.06        2.80              2.96        2.49
Third Quarter                   3.40        2.16              3.02        2.58
Fourth Quarter                  2.86        1.65              3.96        2.90
================================================================================

As of January 29, 1999, there were approximately 21,000 beneficial owners of the
Company's  Common  Stock.  No dividends  were  declared or paid on the Company's
Common  Stock in 1998 or 1997.  The  Company  does not  intend to declare or pay
dividends in the foreseeable future.

For information  concerning the Company's  stockholder rights plan, see Item 8 -
Note 7 to the Company's consolidated financial statements.

ITEM 6.  SELECTED FINANCIAL DATA

The selected  financial  data should be read in  conjunction  with the Company's
consolidated  financial  statements  included  in Item 8 of this Form 10-K.  The
consolidated  statements  of  operations,  for the  periods  ended  prior to the
October 4, 1996 sale of Augustine  were  retroactively  reclassified  to reflect
their operations as discontinued operations.

================================================================================
                                              Years ended December 31
(in thousands, except
 per share data)                     1998      1997     1996     1995      1994
================================================================================
Interest income, net             $  2,430  $  2,661  $ 2,641  $ 2,835   $ 2,092
Income (loss) from continuing
  operations, before income taxes     423    (1,275)   6,636    6,005     6,246
Income tax (expense) benefit         (242)      191    7,189   (1,997)     (148)
Income (loss) from continuing
  operations                          181    (1,084)  13,825    4,008     6,098
Income from discontinued
  investment management
  operations, net of income
  taxes                                 -         -      207       60        32
Net income (loss)                     181    (1,084)  14,032    4,068     6,130
Earnings per common share
  - basic
Income (loss) from continuing
  operations                     $      -  $  (0.02) $  0.31  $  0.09   $  0.14
Income (loss) from discontinued 
  operations                            -         -        -        -         -
--------------------------------------------------------------------------------
Net income (loss)                $      -  $  (0.02) $  0.31  $  0.09   $  0.14
--------------------------------------------------------------------------------
Earnings per common share
  - assuming dilution
Income (loss) from continuing
  operations                     $      -  $  (0.02) $  0.30  $  0.09   $  0.14
Income (loss) from discontinued
  operations                     $      -         -        -        -         -
--------------------------------------------------------------------------------
Net income (loss)                $      -  $  (0.02) $  0.30  $  0.09   $  0.14
================================================================================
Dividends                               -         -        -        -         -
================================================================================
Total assets                     $ 51,638  $ 64,270  $66,229  $65,677   $70,113
Total stockholders' equity        (25,000)  (25,181) (24,097) (38,273)  (42,204)
================================================================================


                                      -4-

<PAGE>

ITEM 7.  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 Item 8, herein.  On October
4, 1996,  the Company sold its entire  interest in Augustine.  Accordingly,  the
operations  of  Augustine  have been  reclassified  as  discontinued  investment
management operations in the accompanying consolidated financial statements.

CONTINUING OPERATIONS

Financial Condition

The Company's  assets at December 31, 1998  aggregated  $51,638,000,  consisting
principally of cash and cash equivalents of $2,886,000 and investment securities
of  $47,156,000.  At December 31, 1998,  the  Company's  liabilities,  including
reserves for contingent and alleged liabilities,  as further described in Item 8
- Notes 11 and 13 to the Company's consolidated  financial statements,  exceeded
total recorded assets by $25,000,000.

In June 1998,  the Company  paid  $12,700,000  to the IRS for tax and  estimated
interest in full  satisfaction of the Company's Fresh Start tax liability.  This
amount was previously  reserved for as part of the Company's income tax reserves
account. See Part II - Item 8 - Note 11 for a more complete discussion regarding
the  Company's  payment  to the IRS in  connection  with  the  Fresh  Start  tax
proceeding and utilization of net operating loss carryforwards.

Pursuant  to the Home  Holdings  Revised  Third  Amended  and  Restated  Plan of
Reorganization  (the  "Revised  Plan"),  on July 30, 1998 the  Company  received
$15,200,000 in full  satisfaction  of all the Company's  claims relating to Home
Holdings other than certain disputed  claims.  See Part II - Item 8 - Note 4 for
further  information  regarding the Company's  receivable from Home Holdings and
the Company's  continuing  rights to pursue certain disputed claims against Home
Holdings pursuant to the Home Holdings bankruptcy case proceedings.

The cash needs of the  Company in 1998 were  principally  satisfied  by interest
income  received on investment  securities and cash  equivalents,  the Company's
current  financial  resources and the $15,200,000  received pursuant to the Home
Holdings Revised Plan. Management believes that the Company's cash resources are
sufficient to continue operations for 1999.

The cash needs of the Company for 1997 were  principally  satisfied  by interest
income received on investment securities and cash equivalents, a $475,000 income
tax refund and the Company's cash resources.

The cash needs of the Company for 1996 were principally satisfied by the receipt
of a 1977 tax refund,  collections  of the  receivable  from Home  Holdings  and
interest income received on investment securities and cash equivalents.

Management believes that the Company's cash resources are sufficient to continue
operations  for 1999.  Because  of the  nature  of the  contingent  and  alleged
liabilities described in Item 8 - Notes 11 and 13 to the Company's  consolidated
financial statements,  the Company is unable to predict whether it will have the
ability to generate sufficient resources to satisfy its ultimate obligations.

For the year ended December 31, 1998,  cash of $14,892,000 was used by operating
activities of continuing operations, including the payment of $12,700,000 to the
Internal  Revenue  Service  ("IRS") for the Company's Fresh Start tax liability,
the payment of operating  expenses and payments  charged  against the litigation
and contingency  reserve partially offset by interest income, and the receipt of
amounts received pursuant to the Home Holdings Revised Plan.

For the year ended  December 31, 1997,  cash of $4,486,000 was used by operating
activities  of  continuing  operations,   including  the  payment  of  operating
expenses,  and payments  charged  against  litigation and  contingency  reserves
partially  offset by the receipt of interest  income,  and a $475,000 income tax
refund.

For the year ended  December 31, 1996,  cash of $1,622,000 was used by operating
activities of continuing operations, including the payment of other liabilities,
payments  charged  against income tax reserves and  litigation  and  contingency
reserves, and the payment of operating expenses, partially offset by the receipt
of a 1977 tax refund, and the receipt of interest income.



                                      -5-

<PAGE>

There were no material  commitments for capital  expenditures as of December 31,
1998. 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 remaining assets and liabilities, including the
contingent  and alleged tax and  litigation  liabilities  described  in Item 8 -
Notes 11 and 13 to the Company's  consolidated  financial statements.  Extensive
discussions  and  negotiations  are  ongoing  with  respect  to certain of these
matters.  The Company intends to aggressively contest all pending and threatened
litigation and contingencies, as well as pursue all sources for contributions to
settlements.  In order to continue on a long-term  basis,  the Company must both
resolve its  contingent and alleged  liabilities by prevailing  upon or settling
these  claims  for less  than the  amounts  claimed,  and  generate  profits  by
acquiring existing operations and/or by developing new operations.

See Item 8 - Note 13 to the Company's  consolidated  financial  statements for a
discussion of Supervisory Goodwill Litigation.

Management of the Company  continually  reviews the  likelihood of liability and
associated costs of pending and threatened litigation. At December 31, 1998, the
litigation and contingency reserves were $2,076,000. For a discussion of alleged
tax  liabilities  and  lawsuits,  see Item 8 - Notes 11 and 13 to the  Company's
consolidated financial statements.

In  addition  to the  litigation  and  contingency  reserves,  the Company had a
reserve for income taxes of  $66,388,000  at December  31,  1998.  For a further
discussion,  see Item 8 - Note 11, Income Taxes and Note 13, Legal  Proceedings,
Dispute with Internal Revenue Service,  Withholding Taxes (Netherlands Antilles)
to the Company's consolidated financial statements.

During 1996,  the Company  determined  that there was a reduced  probability  of
incurring  costs to defend and/or settle  potential  litigation  with respect to
Carteret,  see the  Company's  Annual  Report  on Form  10-K for the year  ended
December  31,  1995,  Item 8 - Note 11. As a result,  the  Company  reduced  its
litigation  and  contingency  reserves by $8,000,000 and recorded such amount as
other income during 1996.  In making such  determination,  management  took into
consideration  numerous factors,  including the failure of the RTC to notify the
Company of any potential  legal action prior to the  expiration of a significant
statute of limitations  deadline and the transfer of the investigative duties of
the RTC to the FDIC upon the  expiration  of the RTC's  charter on December  31,
1995 pursuant to federal  statute.  Management  also considered the July 1, 1996
decision by the U.S.  Supreme  Court in the  consolidated  supervisory  goodwill
cases of Winstar,  Glendale Federal and Statesman,  which held the United States
liable for damages.

As noted above,  the Company has  significant  alleged tax  liabilities and is a
defendant in a number of lawsuits  and  governmental  proceedings,  the ultimate
outcome of which could have a material adverse effect on its financial condition
and results of  operations.  Because of the nature of the contingent and alleged
liabilities and the inherent  difficulty in predicting the outcome of litigation
and  governmental  proceedings,  management  is unable to  predict  whether  the
Company's  recorded  reserves  will be adequate or its  resources  sufficient to
satisfy  its  ultimate  obligations.  The  accompanying  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.  For a discussion of the alleged tax liabilities,  lawsuits
and  proceedings,  see  Item 8 - Notes 11 and 13 to the  Company's  consolidated
financial  statements.  Although the basis for the calculation of the litigation
and contingency  reserves and income tax reserves are regularly  reviewed by the
Company's management and outside legal counsel, the assessment of these reserves
includes an exercise of judgment and is a matter of opinion.

The Company  contractually  assumed the tax liabilities of City, which, prior to
September 1985, owned all the outstanding shares of Common Stock of the Company.
For all periods  through 1992, the IRS and the Company do not agree with respect
to only one issue,  withholding taxes in connection with a Netherlands  Antilles
finance subsidiary of City.

During 1996, in connection  with the completion by the IRS of the Company's 1985
to 1991 federal  income tax audits  (excluding  Fresh  Start),  the Company made
payments to the IRS totaling $1,995,000.  These amounts were previously reserved
for and  charged  against  the income  tax  reserves  account.  During the first
quarter  of 1997,  $475,000  of income  taxes  were  refunded  as a result of an
overpayment to the IRS for 1988 through 1991 tax years. This amount was recorded
as an income tax benefit in the first quarter of 1997.



                                  -6-

<PAGE>

With respect to the withholding taxes in connection with a Netherlands  Antilles
finance  subsidiary  of  City,  on May 11,  1995  the IRS  issued  a  Notice  of
Deficiency for withholding taxes on interest payments for the years 1979 through
1985.  In the Notice of  Deficiency,  the IRS contends  that City's wholly owned
Netherlands  Antilles finance subsidiary should be disregarded for tax purposes.
The Company vigorously contested the IRS's position in accordance with the IRS's
internal  appeals  procedures.  In January 1992, the National  Office of the IRS
issued technical advice  supporting the auditing  agent's  position.  In October
1992, the Company  appealed this technical  advice to the National  Office.  The
National Office advised the Company that it expected to issue  technical  advice
supporting the auditing agent's position, whereupon, the Company advised the IRS
that it was withdrawing its technical advice request.

On June 30, 1995,  the Company  filed a petition in the United  States Tax Court
("Tax Court")  contesting the Notice of Deficiency.  The IRS filed its answer on
August 23, 1995. The Company filed a motion for summary judgment in its favor on
February 13, 1996. On April 17, 1996, the IRS filed a Notice of Objection to the
Company's motion for summary judgment. The Tax Court requested,  and the Company
filed,  on July 3, 1996, a reply to the IRS's Notice of Objection.  On September
19, 1996, the Tax Court denied the Company's motion for summary judgment without
prejudice.  Based on the Tax Court's examination of the record and the status of
the discovery  process,  the Court  concluded that summary  adjudication at this
time was inappropriate. The Tax Court directed the parties to engage in full and
complete  discovery as expeditiously as possible.  A trial was held in this case
on March 24, 1997, after which the Judge asked the IRS and the Company to submit
post-trial  briefs,  which have subsequently been submitted to the Tax Court. If
the IRS were to prevail on this issue, the Company would be liable for taxes and
interest in excess of the Company's financial resources.

In a case dealing with a similar  withholding tax issue,  the Tax Court ruled in
favor of the taxpayer,  Northern Indiana Public Service Co. ("Northern Indiana")
in November 1995. The Tax Court rejected the IRS's contention that interest paid
to  Northern  Indiana's  foreign  subsidiary  was  subject to United  States tax
withholding. The IRS appealed this decision (Northern Indiana Public Service Co.
v. Commissioner,  105 T.C. No. 22) to the United States Court of Appeals for the
7th Circuit ("Appeals Court"). The Appeals Court affirmed the Tax Court's ruling
in favor of  Northern  Indiana.  Although  the  Appeals  Court  decision  in the
Northern  Indiana case could be  beneficial  to the  Company's  case,  it is not
necessarily  indicative  of the ultimate  result of the final  settlement of the
Netherlands Antilles issue between the Company and the IRS.

Based on an evaluation of the IRS's contention,  counsel has advised the Company
that, although the outcome in litigation can by no means be assured, the Company
has a very strong case and should prevail. Notwithstanding counsel's opinion and
the Tax Court's ruling in the Northern  Indiana case, it is not possible at this
time to determine the final  disposition of this issue,  when the issues will be
resolved,  or their final financial effect. A final disposition of this issue in
the  Company's  favor would have a material,  positive  effect on the  Company's
Statement of Operations and Financial Condition.

See Item 8 - Note 11, Income Taxes, and Note 13, Legal Proceedings, Dispute with
Internal  Revenue  Service,  Withholding  Taxes  (Netherlands  Antilles)  to the
Company's consolidated financial statements, for additional details.



                                      -7-

<PAGE>

Results of Operations - Continuing Operations

Summarized  financial  information for the continuing  operations of the Company
for the years ended December 31 is as follows:
================================================================================
(in thousands)                                     1998         1997        1996
================================================================================
Operating expenses:
Compensation and benefits                       $ 3,117      $ 3,116    $ 2,969
Professional and outside services                 1,128          512        457
Insurance                                            82          120        177
Occupancy                                            86           87         89
Other operating                                     142          160        161
--------------------------------------------------------------------------------
                                                  4,555        3,995      3,853
--------------------------------------------------------------------------------
Operating loss                                   (4,555)      (3,995)    (3,853)
--------------------------------------------------------------------------------
Interest income                                   2,430        2,661      2,641
Other income                                      2,548           59         30
Other income - litigation and
  contingency reserves reversal                       -            -      8,000
Realized loss on sale of investment
  securities - available for sale                     -            -       (182)
--------------------------------------------------------------------------------
Income (loss) from continuing
  operations before income taxes                    423       (1,275)     6,636
--------------------------------------------------------------------------------
Income tax (expense) benefit                       (242)         191      7,189
--------------------------------------------------------------------------------
Income (loss) from continuing operations        $   181      $(1,084)   $13,825
================================================================================

The Company's main source of non-operating  revenue is interest income earned on
investment  securities and cash equivalents.  The Company's  management  expects
that  operating  cash  needs in 1999 will be met  principally  by the  Company's
current financial resources and the receipt of non-operating  revenue consisting
of interest income earned on investment securities and cash equivalents.

The Company  recorded income from continuing  operations of $181,000 in the year
ended  December 31, 1998. As further  described in Financial  Condition,  above,
1998 includes $2,548,000 of non-recurring other income, principally attributable
to the receipt of $2,500,000 in connection  with the Home Holdings  Revised Plan
as further  described in Part II - Item 8 Note 4.  Excluding  the  non-recurring
other income, the Company would have recorded a loss from continuing  operations
of $2,367,000 for the year ended December 31, 1998.

The Company recorded a loss from continuing operations of $1,084,000 in the year
ended December 31, 1997. As further  described below, the 1997 period includes a
$475,000 income tax benefit. In addition,  the 1997 period includes other income
of  $59,000  attributable  to the  collection  by an  inactive  subsidiary  of a
receivable  previously considered  uncollectible.  Excluding these non-recurring
income items, the loss from continuing operations would have been $1,618,000, or
$0.04 per share, for the year ended December 31, 1997.

The Company  recorded  income from  continuing  operations of $13,825,000 in the
year ended  December  31,  1996.  As further  described  below,  the 1996 period
includes  other  income  of  $8,000,000,  resulting  from  a  reduction  in  the
litigation and  contingency  reserves,  and an additional  income tax benefit of
$7,613,000. Excluding these non-recurring items, the Company would have reported
a loss from  continuing  operations of $1,788,000,  or $0.04 per share,  for the
year ended December 31, 1996.

Compensation  and  benefits  was  $3,117,000  in  1998,  $3,116,000  in 1997 and
$2,969,000  in 1996.  The increase in 1997,  compared  with 1996, of $147,000 is
principally due to increased benefit related costs.

Professional and outside services  increased to $1,128,000 in 1998,  compared to
1997, and increased to $512,000 in 1997,  from $457,000 in 1996. The increase in
1998,  compared to 1997,  of $616,000 was  principally  the result of legal fees
incurred  attributable  to the Home Holdings  bankruptcy  case.  The increase in
1997, compared to 1996, was due to an increase in litigation expenses.  Expenses
for  professional  and outside  services in 1998,  1997, and 1996 do not include
costs  associated with defending  pending and threatened  litigation  which were
previously  reserved  for and charged  against the  litigation  and  contingency
reserves when paid.



                                     -8-

<PAGE>

Insurance  expenses  decreased  in 1998,  1997  and  1996,  due to  management's
renegotiation of insurance programs.

Occupancy  expenses  decreased  to  $86,000  in 1998,  from  $87,000 in 1997 and
$89,000 in 1996.  The  decreases  in 1998 and 1997 as compared to prior years is
the result of the continued  reduction of occupancy  related  expenses,  and the
relocation   of  the   Company's   executive   office  and  the  closing  of  an
administrative office during 1996.

Interest  income was  $2,430,000 in 1998,  $2,661,000 in 1997 and  $2,641,000 in
1996. The decrease in 1998,  compared to the 1997 period,  was attributable to a
decreased yield on cash equivalents and investment  securities.  The increase in
1997,  compared  to  1996,  was  attributable  to an  increased  yield  on  cash
equivalents and investment securities.

Other income in 1998 of $2,548,000 is principally attributable to the receipt of
$2,500,000 received in connection with the Home Holdings Revised Plan.

Other income of $59,000 in 1997 is attributable to the collection by an inactive
subsidiary of a receivable previously considered uncollectible.

The  Company  realized  a loss of  $182,000  in 1996 on the  sale of  investment
securities - available for sale.

During 1996, the Company recorded as other income an $8,000,000 reduction in the
litigation  and  contingency  reserves,  as more fully  described  in  Financial
Condition, above.

The 1998 income tax provision of $242,000 is principally  attributable  to state
and local taxes.

During 1997, the Company received a $475,000 income tax refund.  This amount was
recognized as an income tax benefit in 1997. In addition, included in income tax
benefit is a state and local tax provision of $284,000 in 1997.

During 1996, the Company  received a 1977 income tax refund of $7,613,000.  This
amount was  recognized as an income tax benefit in 1996,  based on  management's
continuing  review of the overall tax  liability  position  of the  Company.  In
addition, included in income tax benefit is a federal and state tax provision of
$424,000 in 1996.

A reconciliation between income taxes computed at the statutory federal rate and
the  provision for income taxes is included in Item 8 - Note 11 to the Company's
consolidated financial statements.

Discontinued Investment Management Operations

See  Item 8 - Note 6 to the  Company's  consolidated  financial  statements  for
information.

Year 2000 Issue

The Company has completed  its review of year 2000 issues and has  determined it
will not have a material effect on the Company's business, results of operations
or financial condition.

STOCKHOLDER INQUIRIES

Stockholder  inquiries,  including  requests  for the  following:  (i) change of
address;  (ii) replacement of lost stock  certificates;  (iii) Common Stock name
registration changes; (iv) Quarterly Reports on Form 10-Q; (v) Annual Reports on
Form 10-K; (vi) proxy material;  and (vii) information regarding  stockholdings,
should be directed to:

        American Stock Transfer and Trust Company
        40 Wall Street, 46th Floor
        New York, NY  10005
        Attention:  Shareholder Services
        (800) 937-5449 or (718) 921-8200

In addition,  the Company's public reports,  including Quarterly Reports on Form
10-Q, Annual Reports on Form 10-K and Proxy Statements,  can be obtained through
the Securities and Exchange Commission EDGAR Database over the World Wide Web at
www.sec.gov.

                                     -9-

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                      REPORT OF INDEPENDENT ACCOUNTANTS




To the Board of Directors
and Stockholders of
AmBase Corporation

In our opinion,  the  accompanying  consolidated  Balance Sheets and the related
consolidated  Statements of Operations,  of Changes in Stockholders' Equity, and
of Cash Flows present fairly, in all material  respects,  the financial position
of AmBase  Corporation and its subsidiaries (the "Company") at December 31, 1998
and 1997,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1998,  in  conformity  with
generally accepted  accounting  principles.  These financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which 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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

As discussed in Notes 11 and 13, the accompanying  financial  statements include
income tax reserves  relating to a significant  issue.  Final resolution of this
issue is dependent upon future events,  which may result in amounts more or less
than those  presented.  The ultimate  outcome of this issue cannot  presently be
determined.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial   statements,   substantial   operations  of  the  Company  have  been
discontinued, and substantial contingencies exist against the Company in various
lawsuits  and  proceedings,  which  are  discussed  in  Notes  11  and 13 to the
financial  statements and the second paragraph of this report. The Company has a
net capital deficiency of approximately  $25,000,000 at December 31, 1998. These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going  concern.  It will be necessary for the Company to resolve the  contingent
liabilities by prevailing upon or settling these claims at amounts less than the
claims and the amounts  recorded and to generate,  through  acquisition or start
up,  profitable  operations  to continue on a  long-term  basis.  See Note 1 for
further  discussion  of  management's  plans.  The  financial  statements do not
include  any   adjustments   that  might   result  from  the  outcome  of  these
uncertainties.





PricewaterhouseCoopers LLP
New York, New York
March 10, 1999



                                     -10-

<PAGE>
                      AMBASE CORPORATION AND SUBSIDIARIES
                     Consolidated Statements of Operations
                            Years Ended December 31




================================================================================
(in thousands, except per share data)             1998         1997        1996
================================================================================

Operating expenses:
Compensation and benefits                       $ 3,117     $ 3,116     $ 2,969
Professional and outside services                 1,128         512         457
Insurance                                            82         120         177
Occupancy                                            86          87          89
Other operating                                     142         160         161
--------------------------------------------------------------------------------
                                                  4,555       3,995       3,853
--------------------------------------------------------------------------------
Operating loss                                   (4,555)     (3,995)     (3,853)
--------------------------------------------------------------------------------
Interest income                                   2,430       2,661       2,641
Other income                                      2,548          59          30
Other income - litigation and
  contingency reserves reversal                       -           -       8,000
Realized loss on sale of investment
  securities - available for sale                     -           -        (182)
--------------------------------------------------------------------------------
Income (loss) from continuing operations
  before income taxes                               423      (1,275)      6,636
Income tax (expense) benefit                       (242)        191       7,189
--------------------------------------------------------------------------------
Income (loss) from continuing operations            181      (1,084)     13,825
Income from discontinued investment
   management operations, net of income taxes         -           -         207
--------------------------------------------------------------------------------

Net income (loss)                               $   181     $(1,084)    $14,032
================================================================================
Earnings per common share - basic
Income (loss) from continuing operations        $     -     $ (0.02)    $  0.31
Income (loss) from discontinued operations            -           -           -
--------------------------------------------------------------------------------
Net income (loss)                               $     -     $ (0.02)    $  0.31
================================================================================
Earnings per common share - assuming dilution
Income (loss) from continuing operations        $     -     $ (0.02)    $  0.30
Income (loss) from discontinued operations            -           -           -
--------------------------------------------------------------------------------
Net income (loss)                               $     -     $ (0.02)    $  0.30
================================================================================

Dividends                                       $     -     $     -     $     -
================================================================================
Average shares outstanding                       44,534      44,534      44,534
================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                      -11-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
                       Consolidated Balance Sheets
                               December 31




================================================================================
(in thousands)                                                 1998        1997
================================================================================
Assets:
Cash and cash equivalents                                 $   2,886   $   5,548
Investment securities - held to maturity
   (market value $47,160 and $44,276, respectively)          47,156      44,310
Receivable from Home Holdings, Inc.                               -      12,736
Investment in SDG, Inc. at cost                               1,250       1,250
Other assets                                                    346         426
--------------------------------------------------------------------------------
Total assets                                              $  51,638   $  64,270
================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued liabilities                  $   1,642   $   1,550
Supplemental retirement plan                                  5,079       4,865
Postretirement welfare benefits                               1,301       1,412
Other liabilities                                               152         196
Litigation and contingency reserves                           2,076       2,340
Income tax reserves                                          66,388      79,088
--------------------------------------------------------------------------------
Total liabilities                                            76,638      89,451
--------------------------------------------------------------------------------
Commitments and contingencies                                     -           -
--------------------------------------------------------------------------------
Stockholders' equity:
Common stock                                                    447         447
Paid-in capital                                             547,712     547,712
Accumulated deficit                                        (572,512)   (572,693)
Treasury stock                                                 (647)       (647)
--------------------------------------------------------------------------------
Total stockholders' equity                                  (25,000)    (25,181)
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity                $  51,638   $  64,270
================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       -12-

<PAGE>

                         AMBASE CORPORATION AND SUBSIDIARIES
             Consolidated Statements of Changes in Stockholders' Equity
                               Years Ended December 31


================================================================================
                                     Accumulated
                           Paid-           Other
                 Common       In   Comprehensive  Accumulated Treasury
(in thousands)    Stock  Capital   Income (Loss)      Deficit    Stock    Total
================================================================================
December 31, 1995  $447 $547,712          $(144)   $(585,641)   $(647) $(38,273)
Comprehensive
  income:
   Net income         -        -              -       14,032        -    14,032
   Reclassification
     adjustment for
     losses realized
     in net income    -        -            144            -        -       144
--------------------------------------------------------------------------------
Comprehensive income  -        -              -            -        -    14,176
--------------------------------------------------------------------------------
December 31, 1996   447  547,712              -     (571,609)    (647)  (24,097)
Net loss              -        -              -       (1,084)       -    (1,084)
--------------------------------------------------------------------------------
December 31, 1997   447  547,712              -     (572,693)    (647)  (25,181)
Net income            -        -              -          181        -       181
--------------------------------------------------------------------------------
December 31, 1998  $447 $547,712          $   -    $(572,512)   $(647) $(25,000)
================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                         -13-

<PAGE>
                          AMBASE CORPORATION AND SUBSIDIARIES
                         Consolidated Statements of Cash Flows
                                Years Ended December 31





================================================================================
(in thousands)                                        1998       1997      1996
================================================================================
Cash flows from operating activities:
Income (loss) from continuing operations            $  181    $(1,084)  $13,825
Adjustments to reconcile income (loss)
  from continuing operations to net cash
  used by continuing operations:
Other assets                                            86       (128)      286
Accounts payable and accrued liabilities                92        122       692
Litigation and contingency reserves uses              (264)      (614)   (1,195)
Litigation and contingency reserves
  - (reserve reversal)                                   -          -    (8,000)
Income tax reserves                                (12,700)         -     5,619
Income tax refund - 1977                                 -          -    (7,613)
Accretion of discount
  - investment securities                           (2,350)    (2,419)   (2,428)
Realized loss on sale of investment
  securities - available for sale                        -          -       182
Other, net                                              63       (363)   (2,990)
--------------------------------------------------------------------------------
Net cash used by operating activities
  of continuing operations                         (14,892)    (4,486)   (1,622)
--------------------------------------------------------------------------------
Cash used by discontinued investment
  management operations                                  -          -      (291)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities of investment securities
  - held to maturity                                78,451     77,880    71,235
Purchases of investment securities
  - held to maturity                               (78,947)   (72,512)  (76,011)
Purchases of investment securities
  - available for sale                                   -       (100)        -
Investment in SDG, Inc.                                  -     (1,250)        -
Proceeds from sales of investment
  securities - available for sale                        -          -        31
Proceeds from Home Holdings, Inc.
  receivable                                        12,708        450     3,997
Proceeds from sale of Augustine
  Asset Management, Inc.                                 -          -       500
Other, net                                              18        (25)        -
--------------------------------------------------------------------------------
Net cash provided (used) by
  investing activities                              12,230      4,443      (248)
--------------------------------------------------------------------------------
Net decrease in cash and cash equivalents           (2,662)       (43)   (2,161)
Cash and cash equivalents at beginning of year       5,548      5,591     7,752
--------------------------------------------------------------------------------
Cash and cash equivalents at end of year            $2,886     $5,548   $ 5,591
================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                        -14-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

Note 1 - Organization

AmBase Corporation (the "Company") is a holding company which,  through a wholly
owned  subsidiary,  owns a 6.3%  ownership  interest  in SDG,  Inc.  The Company
previously held a majority  ownership  interest in Augustine  Asset  Management,
Inc.  ("Augustine"),  an investment advisor, and also previously owned a savings
bank and an insurance company, all of which have been designated as discontinued
operations, as further discussed below.

On October 4, 1996, the Company sold its entire interest in Augustine, to 
Augustine.  See Note 6 for a further discussion.

On  December 4, 1992,  Carteret  Savings  Bank,  FA  ("Carteret")  was placed in
receivership by the Office of Thrift Supervision ("OTS").

On February  13,  1991,  the  Company  sold its  ownership  interest in The Home
Insurance  Company  ("The Home") and its  subsidiaries  to Home  Holdings,  Inc.
("Home Holdings"). See Note 4 for a further discussion.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going  concern.  Substantial  contingent and
alleged  liabilities  exist  against the Company  through  various  lawsuits and
proceedings,  as described in Notes 11 and 13. These factors  raise  substantial
doubt about the Company's  ability to continue as a going  concern.  In order to
continue on a long-term  basis, the Company must both resolve its contingent and
alleged  liabilities  by prevailing  upon or settling these claims for less than
the amounts  claimed,  and  generate  profits by acquiring  existing  operations
and/or by developing  new  operations.  The financial  statements do not include
adjustments  to the  carrying  value of assets and  liabilities  which  might be
necessary should the Company not continue in operation. The Company continues to
evaluate a number of possible acquisitions,  and is engaged in the management of
its remaining assets and  liabilities,  including the contingent and alleged tax
and litigation liabilities, as described in Notes 11 and 13. The Company intends
to aggressively  contest all pending and threatened  litigation and governmental
proceedings, as well as pursue all sources for contributions to settlements. The
Company's main source of non-operating  revenue is interest earned on investment
securities and cash equivalents. The Company's management expects that operating
cash needs in 1999 will be met  principally by the Company's  current  financial
resources and the receipt of non-operating revenue consisting of interest income
earned on investment  securities and cash equivalents.  Because of the nature of
the contingent and alleged liabilities and the inherent difficulty in predicting
the outcome of litigation and governmental proceedings,  management is unable to
predict  whether  the  Company's  recorded  reserves  will  be  adequate  or its
resources  sufficient  to satisfy its  ultimate  obligations.  The  accompanying
consolidated  financial  statements  do not include any  adjustments  that might
result from the outcome of these uncertainties.  For a discussion of the alleged
tax  liabilities,  lawsuits and governmental  proceedings,  see Notes 11 and 13.
Although  the  basis  for the  calculation  of the  litigation  and  contingency
reserves  and  income tax  reserves  are  regularly  reviewed  by the  Company's
management and outside legal counsel,  the assessment of these reserves includes
an exercise of judgment and is a matter of opinion.

See Note 13 for a discussion of Supervisory Goodwill Litigation.

Note 2 - Summary of Significant Accounting Policies

The  consolidated  financial  statements  have been prepared in accordance  with
generally accepted accounting  principles  ("GAAP").  Certain  reclassifications
have been made to the 1997 and 1996 consolidated financial statements to conform
with the 1998 presentation.

Use of estimates in the preparation of financial statements:

The  preparation  of  financial  statements  in  conformity  with GAAP  requires
management to make estimates and  assumptions,  that it deems  reasonable,  that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from such estimates and assumptions.



                                      -15-

<PAGE>

                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Principles of consolidation:

The  consolidated  financial  statements  are  comprised  of the accounts of the
Company  and  its  majority  owned  subsidiaries.   All  material   intercompany
transactions  and balances  have been  eliminated.  Investments  in companies in
which  ownership  interest  is less  than 20% are  accounted  for using the cost
method.

Cash and cash equivalents:

Highly liquid  investments,  consisting  principally of funds held in short-term
money market accounts, are classified as cash equivalents.

Investment securities:

Securities  that the Company has both the positive intent and ability to hold to
maturity  are  classified  as  investment  securities  held to maturity  and are
carried at amortized cost. Investment securities - available for sale, which are
those securities that may be sold prior to maturity,  are carried at fair value,
with any net  unrealized  gains or losses  reported in a separate  component  of
stockholders' equity, net of deferred taxes.

Interest and dividends on investment  securities are recognized in the Statement
of Operations  when earned.  Realized gains and losses on the sale of investment
securities  - available  for sale are  calculated  using the  first-in/first-out
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.

Comprehensive Income:

During 1998, the Company adopted  Statement of Financial  Account  Standards No.
130,  "Reporting   Comprehensive   Income"  ("Statement  130").   Statement  130
establishes  the concept of  comprehensive  income and  provides  standards  for
reporting  comprehensive income.  Comprehensive income has two major components;
net income as reported in the Consolidated  Statements of Operations,  and other
comprehensive  income.  The Company  has changed the format of its  Consolidated
Statements of Changes in Stockholders' Equity to present  comprehensive  income.
The adoption of Statement 130 had no impact on total stockholders' equity or net
income.

Income taxes:

The Company and its domestic subsidiaries file a consolidated federal income tax
return. The Company recognizes both the current and deferred tax consequences of
all  transactions  that  have  been  recognized  in  the  financial  statements,
calculated based on the provisions of enacted tax laws,  including the tax rates
in effect for current and future years.  Net deferred tax assets are  recognized
immediately  when a more likely than not  criterion  is met;  that is,  unless a
greater  than 50%  probability  exists that the tax  benefits  will  actually be
realized sometime in the future. At the present time, management has no basis to
conclude that realization is more likely than not.

Earnings per share:

The Company  presents  earnings per share ("EPS") in accordance  with  Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
No. 128,  "Earnings Per Share"  ("Statement  128").  Statement 128 requires dual
presentation  of basic and diluted EPS.  Furthermore,  a  reconciliation  of the
numerator  and  denominator  of the basic EPS  computation  to the numerator and
denominator of the diluted EPS computation is required.

Stock-based compensation:

The  Company  adopted  the  disclosure   requirements  of  Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 123,
"Accounting for  Stock-Based  Compensation"  ("Statement  123") and continues to
account  for stock  compensation  using APB Opinion  25,  "Accounting  for Stock
Issued to Employees" ("APB 25"),  making proforma  disclosures of net income and
earnings  per share as if the fair value based  method had been  applied.  For a
further discussion, see Note 10.

                                      -16-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 3 - Investment Securities

Investment  securities - held to maturity  consist of U.S.  Treasury  Bills with
original  maturities of one year or less and which are carried at amortized cost
based upon the  Company's  intent  and  ability  to hold  these  investments  to
maturity.

Investment securities at December 31 consist of the following:
================================================================================
                               1998                            1997
                 ------------------------------   ------------------------------
                                        Cost or                          Cost or
                 Carrying   Amortized      Fair   Carrying   Amortized      Fair
(in thousands)      Value        Cost     Value      Value        Cost     Value
================================================================================
Held to Maturity:
  U.S.
  Treasury
  Bills           $47,156     $47,156   $47,160    $44,310     $44,310   $44,276
================================================================================

The gross unrealized  gains and losses on investment  securities at December 31,
consist of the following:
================================================================================
(in thousands)                                                1998         1997
================================================================================
Held to Maturity - Gross unrealized gains (losses)           $   4       $  (34)
================================================================================

Other investment securities at December 31, 1998 and 1997 consist of $100,000 of
convertible  preferred stock in AMDG, Inc., that was purchased through a private
placement in December 1997, is classified as other assets and is carried at cost
which approximates market value. During 1996,  investment securities - available
for sale were sold,  resulting  in proceeds  of $31,000  and a realized  loss of
$182,000.



                                       -17-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 4 - Receivable From Home Holdings

In 1991,  the Company  sold its entire  interest in The Home  Insurance  Company
("Home Insurance") and its subsidiaries to Home Holdings, Inc. ("Home Holdings")
pursuant to an agreement  between the Company,  Home Insurance and Home Holdings
(then known as TVH Acquisition  Corporation)  dated as of September 28, 1990 (as
amended the "Stock  Purchase  Agreement").  As part of the sale  proceeds,  Home
Holdings agreed to pay $48 million to the Company over a period of years to meet
certain  specified  obligations  of the Company,  as  incurred,  relating to tax
issues,  litigation and administrative  expenses.  The Company had collected the
portion  of this  receivable  with  respect  to  litigation  and  administrative
expenses.  As of January 15,  1998,  the  Company  believed  that the  remaining
receivable, related principally to tax issues, was at least $12,728,000.

On January 15, 1998,  Home Holdings filed a voluntary  petition for relief under
Chapter 11 of the United States  Bankruptcy  Code ("Chapter  11"). Home Holdings
scheduled  the  Company's  outstanding   receivable  from  Home  Holdings  as  a
contingent  general  unsecured claim in the amount of  $11,703,136.  The Company
disagreed with Home Holdings'  characterization of its receivable as contingent,
and also with the amount of the  outstanding  receivable.  The Company filed, in
connection with the Home Holdings  bankruptcy  case, a proof of claim ("Proof of
Claim") for all damages, which was significantly in excess of $12,728,000.

On  January  15,  1998,  Home  Holdings  filed,  along  with  its  petition,   a
pre-arranged plan of reorganization under Chapter 11 (the "Plan").  According to
Home Holdings' Plan and accompanying  disclosure  statement,  general  unsecured
creditors of Home Holdings,  including the Company,  were to receive a projected
future recovery of approximately 38.3% of the amounts owed to them.

The Company filed with the United States Bankruptcy Court  ("Bankruptcy  Court")
an objection to the Plan. Thereafter,  Home Holdings filed a Second Amended Plan
(the "Amended Plan").  According to the Amended Plan, Home Holdings purported to
leave the Company's claim unimpaired,  which means that the Company would retain
its  rights to seek the full  amount  of its  outstanding  receivable  from Home
Holdings  after the Amended  Plan was  confirmed,  and would not be limited to a
recovery of approximately 38.3%. The Company disagreed with the characterization
of its claim as unimpaired, and filed an objection to the Amended Plan.

Home Holdings then filed a number of amended  plans,  culminating in the Revised
Third Amended and Restated Plan of Reorganization (the "Revised Plan"), to which
the Company  agreed.  The Revised Plan was confirmed by order of the  Bankruptcy
Court dated June 9, 1998, and was declared effective on July 29, 1998.

Pursuant to the Revised Plan, on July 30, 1998, the Company received $15,200,000
in full  satisfaction  of all of the Company's  claims relating to Home Holdings
other than certain disputed claims relating to Section  7.4(c)(iii) of the Stock
Purchase  Agreement (the "Disputed  Claims").  The Company's rights against Home
Holdings  in respect  of the  Disputed  Claims are  preserved  and  survive  the
effective  date of the Revised Plan,  and the Company may pursue any such claims
in federal or state court.  The Revised Plan further provides credit support for
any amounts due the Company on account of the  Disputed  Claims in the form of a
Keepwell  Agreement  provided  by Zurich  Reinsurance  Centre  Holdings.  On the
effective date of the Revised Plan, the Company  withdrew its Proof of Claim and
exchanged releases with Home Holdings and various other parties.







                                       -18-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 5 - Earnings Per Share

The  calculation  of basic  earnings per share and dilutive  earnings per share,
including the effect of dilutive securities, for the years ended December 31, is
as follows:
================================================================================
                                                           1998
                                        ----------------------------------------
                                             Income         Shares     Per Share
(in thousands)                          (Numerator)  (Denominator)        Amount
================================================================================
Basic earnings per share:
Income from continuing operations           $   181         44,534      $     - 
                                             ======                      ======
Effect of Dilutive Securities:
Assumed stock option exercise                     -          1,697            -
                                                             -----
Diluted earnings per share:
Income from continuing operations
  and assumed conversions                   $   181         46,231      $     -
================================================================================

================================================================================
                                                           1997
                                        ----------------------------------------
                                               Loss         Shares     Per Share
(in thousands)                          (Numerator)  (Denominator)        Amount
================================================================================
Basic earnings per share:
Loss from continuing operations             $(1,084)        44,534      $ (0.02)
                                             ======                      ======
Effect of Dilutive Securities:
Assumed stock option exercise                     -              -            -
                                                            ------
Diluted earnings per share:
Loss from continuing operations
  and assumed conversions                   $(1,084)        44,534      $ (0.02)
================================================================================

================================================================================
                                                           1996
                                        ----------------------------------------
                                             Income         Shares     Per Share
(in thousands)                          (Numerator)  (Denominator)        Amount
================================================================================
Basic earnings per share:
Income from continuing operations           $13,825         44,534      $  0.31
                                             ======                      ======
Effect of Dilutive Securities:
Assumed stock option exercise                     -          1,603            -
                                                            ------
Diluted earnings per share:
Income from continuing operations
  and assumed conversions                   $13,825         46,137      $  0.30
================================================================================


                                     -19-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 6 - Discontinued Investment Management Operations

On October 4, 1996, the Company sold its entire ownership  interest in Augustine
to Augustine,  for $500,000 in cash. Accordingly,  as of September 30, 1996, the
operations of Augustine  were  designated as  discontinued  operations,  and the
consolidated  statements of  operations  for the periods  presented  herein were
retroactively  reclassified  to report the income from  discontinued  operations
separately from the results of continuing  operations by excluding the operating
revenues and expenses of discontinued  operations from the respective  statement
captions.  The  amount of income  taxes  allocated  to  discontinued  operations
reflects  the  incremental  effect  on  income  taxes  that  resulted  from such
operations.

Income from  discontinued  operations  was $207,000 for 1996.  This reflects the
unaudited results of Augustine's operations of $59,000 for the nine month period
ended September 30, 1996, and a gain of $148,000 from the sale.

Note 7 - Stockholders' Equity

Authorized  capital stock consists of 50,000,000 shares of cumulative  preferred
stock, $0.01 par value, and 200,000,000 shares of Common Stock, $0.01 par value.
At  December  31,  1998,  1997 and 1996,  there  were  44,533,519  shares of the
Company's Common Stock outstanding, excluding 126,488 treasury shares carried at
average cost of $5.12 per share, aggregating approximately $647,000.

At December 31, 1998,  there were 6,860,000  shares  reserved for issuance under
the Company's stock option and other employee benefit plans.

Accumulated  other  comprehensive   income  (loss)  shown  in  the  Consolidated
Statements of Changes in Stockholders'  Equity at December 31, 1995 is comprised
of the  accumulated  losses on investment  securities  available  for sale.  The
change  in  other   comprehensive   income   (loss)   during  1996   reflects  a
reclassification  adjustment  of  $144,000  for losses  realized  on the sale of
investment securities - available for sale.

Stockholder Rights Plan:

On January  29,  1986,  the  Company's  Board of  Directors  declared a dividend
distribution  of one right  for each  outstanding  share of Common  Stock of the
Company.  The rights, as amended,  which entitle the holder to purchase from the
Company a common share at a price of $75.00,  are not exercisable until either a
person or group of  affiliated  persons  acquires  25% or more of the  Company's
outstanding common shares or upon the commencement or disclosure of an intention
to  commence  a tender  offer or  exchange  offer for 20% or more of the  common
shares.  The rights are redeemable by the Company at $0.05 per right at any time
until the earlier of the tenth day following an  accumulation  of 20% or more of
the Company's shares by a single acquirer or group, or the occurrence of certain
Triggering Events (as defined in the Stockholder  Rights Plan). In the event the
rights become exercisable and,  thereafter,  the Company is acquired in a merger
or other business  combination,  or in certain other  circumstances,  each right
will  entitle the holder to purchase  from the  surviving  corporation,  for the
exercise  price,  Common Stock having a market value of twice the exercise price
of the right.  The rights are subject to  adjustment  to prevent  dilution,  and
expire on February 10, 2001.



                                      -20-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 8 - Pension and Savings Plans

The Company sponsors a non-qualified supplemental retirement plan ("Supplemental
Plan")  under  which only one  current  executive  officer  and  certain  former
officers of the Company are  participants.  The cost of the Supplemental Plan is
actuarially determined and is accrued but not funded.

Pension expense for the Supplemental Plan for the years ended December 31 was as
follows:
================================================================================
(in thousands)                                   1998           1997        1996
================================================================================
Service cost of current period                $   337        $   306     $   225
Interest cost on projected benefit obligation     337            335         336
--------------------------------------------------------------------------------
                                              $   674        $   641     $   561
================================================================================

A reconciliation of the changes in the  projected  benefit  obligation  from the
beginning of the year to the end of the year is as follows:
================================================================================
(in thousands)                                                  1998        1997
================================================================================
Projected benefit obligation at beginning of year           $  5,045    $ 4,732
Service cost                                                     337        306
Interest cost                                                    337        335
Actuarial loss, including effect of change in assumptions        894        172
Benefits paid                                                   (460)      (500)
--------------------------------------------------------------------------------
Projected benefit obligation at end of year                 $  6,153    $ 5,045
================================================================================

Accrued  pension costs for the  Supplemental  Plan at December 31, and the major
assumptions used to determine these amounts, are summarized below:
================================================================================
(dollars in thousands)                                         1998         1997
================================================================================
Actuarial present value of benefit obligations:
Accumulated benefit obligations, fully vested               $ 5,019      $4,513
================================================================================
Projected benefit obligation for service rendered to date   $ 6,153      $5,045
Unrecognized net loss                                        (1,074)       (180)
--------------------------------------------------------------------------------
Accrued pension costs                                       $ 5,079      $4,865
================================================================================
Major assumptions:
Pre-retirement and postretirement discount rate               6.75%        7.0%
Rate of increase in future compensation                        6.0%        6.0%
================================================================================

The Company sponsors the AmBase 401(k) Savings Plan (the "Savings Plan"),  which
is a "Section  401(k) Plan"  within the meaning of the Internal  Revenue Code of
1986, as amended (the "Code").  The Savings Plan permits  eligible  employees to
make contributions of up to 15% of salary, which are matched by the Company at a
percentage  determined  annually.  The employer  match is currently  100% of the
first 3% of the employee's salary eligible for deferral.  Employee contributions
to the  Savings  Plan are  invested  at the  employee's  discretion,  in various
investment funds. The Company's matching  contributions are invested in the same
manner  as  the  salary   reduction   contributions.   The  Company's   matching
contributions to the Savings Plan, charged to expense, were $26,000, $18,000 and
$16,000 in 1998, 1997 and 1996,  respectively.  All contributions are subject to
maximum limitations contained in the Code.


                                      -21-

<PAGE>



                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 9 - Postretirement Benefits Other Than Pensions

Pursuant to a 1985 agreement,  the Company has assumed the obligation to provide
a portion of retiree  medical and life  insurance  coverage to  individuals  who
retired from City Investing  Company ("City"),  which,  prior to September 1985,
owned all the outstanding shares of Common Stock of the Company. The Company and
its subsidiaries do not provide  postretirement  benefits to employees currently
retiring.

Retiree insurance coverage is provided to participants through group medical and
life  insurance  contracts.   Retiree  medical  coverage  provides  supplemental
Medicare  coverage for retirees and their  eligible  spouses.  Life insurance is
provided to retirees at 25% of the participant's  pre-retirement  amount, not to
exceed $50,000. All participants are required to contribute a portion, which may
be adjusted, of the cost of their postretirement  benefit coverage.  The Company
does not pre-fund these plans and retains the right to modify or terminate these
plans in the future.

The  Company  accounts  for  postretirement  benefits  other  than  pensions  in
accordance with Statement of Financial Accounting Standards No. 106, "Employers'
Accounting  for  Postretirement  Benefits Other Than  Pensions".  This statement
requires the costs of certain  postretirement  benefits to be recognized  during
the period  employees  render service,  with all such costs being  recognized in
full by the eligibility date.

Net  periodic  postretirement  benefit  (income)  expense  for the  years  ended
December 31 was as follows:
================================================================================
(in thousands)                                    1998         1997         1996
================================================================================
Interest cost on accumulated
  postretirement benefit obligation               $ 22        $  23       $  32
Amortization of prior service liability            (66)         (66)        (62)
Amortization of unrecognized gain                  (41)         (45)        (37)
--------------------------------------------------------------------------------
Net periodic postretirement benefit
  (income) expense                                $(85)       $ (88)      $ (67)
================================================================================

A  reconciliation  of the  changes  in the  accumulated  postretirement  benefit
obligation from the beginning of the year to the end of the year is as follows:
================================================================================
(in thousands)                                                  1998        1997
================================================================================
Accumulated postretirement benefit
  obligation at beginning of year                               $323       $323
Interest cost                                                     22         23
Amendments                                                       (87)         -
Actuarial (gain) loss, including effect of assumption changes    (13)         3
Plan participant contributions                                    52         50
Benefit premiums paid                                            (78)       (76)
--------------------------------------------------------------------------------
Accumulated postretirement benefit obligation at end of year    $219       $323
================================================================================

The accrued postretirement benefit liability at December 31 is summarized below:
================================================================================
(in thousands)                                                 1998         1997
================================================================================
Accumulated postretirement benefit obligation:
Retirees                                                       $  219     $  323
--------------------------------------------------------------------------------
Unrecognized net gains                                            450        478
Unrecognized prior service liability                              632        611
--------------------------------------------------------------------------------
Accrued postretirement benefit liability                       $1,301     $1,412
================================================================================
                                       -22-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


The accumulated  benefit obligation for 1998, 1997 and 1996 was determined using
the projected  unit credit  method and a discount rate of 6.75%,  7.0% and 7.5%,
respectively. The health care cost trend rates were assumed to be 8% in 1998, 9%
in 1997, and 10% in 1996,  gradually  declining to 5.5% in 2001 and remaining at
that level, thereafter.

Assumed  health care cost trend rates have a  significant  effect on the amounts
reported. A 1% change in the assumed health care cost trend rates, while holding
all other assumptions constant, would have the following effects:
================================================================================
                                                                 1%           1%
(in thousands)                                             Increase     Decrease
================================================================================
Effect on net periodic postretirement benefit income           $ (1)       $  1
Effect on accumulated postretirement benefit obligation          13         (11)
================================================================================

Note 10 - Incentive Plans

Under the Company's  1994 Senior  Management  Incentive  Compensation  Plan (the
"1994 Plan"), an executive officer of the Company whose compensation is required
to be reported to  stockholders  under the Securities  Exchange Act of 1934 (the
"Participants") and who is serving as such at any time during the fiscal year as
to which an award is granted, may receive an award of a cash bonus ("Bonus"), in
an amount  determined  by the  Personnel  Committee  of the  Company's  Board of
Directors (the  "Committee")  and payable from an annual bonus fund (the "Annual
Bonus  Pool").   The  Committee  may  award  Bonuses  under  the  1994  Plan  to
Participants  not later  than 120 days  after the end of each  fiscal  year (the
"Reference Year"), beginning with the fiscal year ending on December 31, 1994.

If the  Committee  grants a Bonus under the 1994 Plan,  the amount of the Annual
Bonus Pool will be an amount equal to the sum of (i) plus (ii), where:

      (i) is ten  percent  (10%) of the  amount  by which  the  Company's  Total
Stockholders'  Equity, as defined, on the last day of a Reference Year increased
over the Company's Total  Stockholders'  Equity, as defined,  on the last day of
the immediately preceding Reference Year; and

      (ii) is five  percent  (5%) of the  amount by which the  Company's  market
value,  as defined,  on the last day of the Reference  Year  increased  over the
Company's  market value on the last day of the immediately  preceding  Reference
Year.

Notwithstanding  the  foregoing,  the 1994 Plan  provides that in the event of a
decrease in either or both of items (i) and/or (ii) above, the Annual Bonus Pool
is  determined  by  reference to the last  Reference  Year in which there was an
increase in such item.

If the Committee determines within the 120-day time period to award a Bonus, the
share of the Annual Bonus Pool to be allocated to each  Participant  shall be as
follows:  45% of the Annual Bonus Pool shall be allocated to the Company's Chief
Executive Officer,  and 55% of the Annual Bonus Pool shall be allocated pro rata
to each of the  Company's  Participants  as  determined  by the  Committee.  The
Committee in its  discretion  may reduce the percentage of the Annual Bonus Pool
to any Participant for any Reference Year, and such reduction shall not increase
the share of any other  Participant.  The 1994  Plan is not the  exclusive  plan
under  which  the  Executive  Officers  may  receive  cash  or  other  incentive
compensation or bonuses.



                                        -23-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the Company may
grant to officers  and  employees  of the Company  and its  subsidiaries,  stock
options ("Options"), stock appreciation rights ("SARs"), restricted stock awards
("Restricted Stock"), merit awards ("Merit Awards") and performance share awards
("Performance  Shares"),  through May 28, 2008. An aggregate of 5,000,000 shares
of the  Company's  Common Stock are  reserved  for issuance  under the 1993 Plan
(upon the  exercise of Options  and Stock  Appreciation  Rights,  upon awards of
Restricted  Stock  and  Performance  Shares);  however,  of  such  shares,  only
2,500,000 shares in the aggregate shall be available for issuance for Restricted
Stock  Awards and Merit  Awards.  Such shares shall be  authorized  but unissued
shares of Common  Stock.  Options  may be granted  as  incentive  stock  options
("ISOs")  intended to qualify for favorable tax treatment  under Federal tax law
or as nonqualified stock options ("NQSOs").  SARs may be granted with respect to
any  Options  granted  under  the 1993 Plan and may be  exercised  only when the
underlying Option is exercisable. The 1993 Plan requires that the exercise price
of all Options and SARs be equal to or greater than the fair market value of the
Company's Common Stock on the date of grant of that Option.  The term of any ISO
or related SAR cannot  exceed ten years from the date of grant,  and the term of
any NQSO cannot  exceed ten years and one month from the date of grant.  Subject
to the terms of the 1993 Plan and any  additional  restrictions  imposed  at the
time of grant,  Options and any related SARs ordinarily will become  exercisable
commencing  one year  after  the date of  grant.  In the  case of a  "Change  of
Control" of the Company (as defined in the 1993 Plan),  Options granted pursuant
to the 1993 Plan may become fully exercisable as to all optioned shares from and
after the date of such Change in Control in the  discretion  of the Committee or
as  may  otherwise  be  provided  in  the  grantee's  Option  agreement.  Death,
retirement,  resignation  or  absence  for  disability  will not  result  in the
cancellation of any Options.

As a condition  to any award of  Restricted  Stock or Merit Award under the 1993
Plan,  the Committee may require a participant  to pay an amount equal to, or in
excess  of,  the par value of the  shares of  Restricted  Stock or Common  Stock
awarded to him or her. Restricted Stock may not be sold, assigned,  transferred,
pledged or otherwise encumbered during a "Restricted Period",  which in the case
of grants to  employees  shall not be less than one year from the date of grant.
The Restricted Period with respect to any outstanding shares of Restricted Stock
awarded to  employees  may be reduced by the  Committee  at any time,  but in no
event  shall  the  Restricted  Period be less  than one  year.  Except  for such
restrictions,  the  employee  as the owner of such  stock  shall have all of the
rights of a  stockholder  including,  but not limited to, the right to vote such
stock and to receive  dividends  thereon as and when paid.  In the event that an
employee's  employment is terminated  for any reason,  an employee's  Restricted
Stock will be forfeited;  provided,  however,  that the Committee may limit such
forfeiture in its sole  discretion.  At the end of the  Restricted  Period,  all
shares  of  Restricted  Stock  shall  be  transferred  free  and  clear  of  all
restrictions to the employee.  In the case of a Change in Control of the Company
(as defined in the 1993 Plan),  an  employee  may receive his or her  Restricted
Stock free and clear of all restrictions in the discretion of the Committee,  or
as may otherwise be provided pursuant to the employee's Restricted Stock award.

Performance  Share awards of Common Stock under the 1993 Plan shall be earned on
the basis of the Company's  performance in relation to  established  performance
measures for a specific performance period. Such measures may include, but shall
not be  limited  to,  return  on  investment,  earnings  per  share,  return  on
stockholder's  equity, or return to stockholders.  Performance Shares may not be
sold, assigned, transferred, pledged or otherwise encumbered during the relevant
performance  period.  Performance  Shares may be paid in cash,  shares of Common
Stock or  shares of  Restricted  Stock in such  portions  as the  Committee  may
determine.  An employee must be employed at the end of the performance period to
receive payments of Performance Shares; provided,  however, in the event that an
employee's employment is terminated by reason of death,  disability,  retirement
or other  reason  approved  by the  Committee,  the  Committee  may  limit  such
forfeiture  in its sole  discretion.  In the case of a Change in  Control of the
Company  (as  defined in the 1993  Plan),  an  employee  may  receive his or her
Performance  Shares in the discretion of the  Committee,  or as may otherwise be
provided in the employee's Performance Share award.

During January 1998, the Board of Directors of the Company approved the award of
incentive stock options to certain  employees to acquire 85,000 shares of AmBase
Common Stock at exercise  prices between $3.65 and $4.02 per share,  pursuant to
the 1993 Plan.

Under the  Company's  1985  Stock  Option  Plan (the  "1985  Plan"),  options to
purchase shares of Common Stock could be granted to salaried employees. The 1985
Plan  provided  for the granting of up to  2,000,000  shares as incentive  stock
options and/or  nonqualified  stock options  through May 22, 1995. No additional
stock  options  can be awarded  under the 1985 Plan.  As of December  31,  1998,
1,750,000  shares are reserved for  issuance  under the 1985 Plan.  The exercise
price of incentive  stock options could not be less than 100% of the fair market
value of the Company's Common Stock on the date of grant, with a maximum life of
ten years, and may not be exercised to purchase stock until vesting requirements
have been met.
                                        -24-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Incentive plan activity is summarized as follows:
================================================================================
                                         1993 Stock               1985 Stock
(shares in thousands)                  Incentive Plan            Option Plan    
================================================================================
                                              Weighted                  Weighted
                                    Shares     Average      Shares       Average
                                     Under    Exercise       Under      Exercise
                                    Option       Price      Option         Price
================================================================================
Outstanding at December 31, 1995         -        $  -       1,763         $0.15
Granted                                100        2.09           -             -
--------------------------------------------------------------------------------
Outstanding at December 31, 1996       100        2.09       1,763          0.15
Granted                                  5        2.84           -             -
Cancelled                                -           -         (13)         0.21
--------------------------------------------------------------------------------
Outstanding at December 31, 1997       105        2.13       1,750          0.15
Granted                                 85        3.85           -             -
--------------------------------------------------------------------------------
Outstanding at December 31, 1998       190       $2.90       1,750         $0.15
================================================================================
Options exercisable at:
   December 31, 1996                     -        $  -       1,456       $  0.13
   December 31, 1997                    50        2.09       1,750          0.15
   December 31, 1998                   103        2.11       1,750          0.15
================================================================================

================================================================================
                                               1993 Stock             1985 Stock
                                             Incentive Plan          Option Plan
================================================================================
Weighted average fair value of
  options granted during:
   1996                                            $ 1.35                 $    -
   1997                                              1.81                      -
   1998                                              1.89                      -
================================================================================

The following  table  summarizes  information  about the Company's stock options
outstanding  and  exercisable  under the 1985 Plan and 1993 Plan at December 31,
1998, as follows:
================================================================================
(shares in thousands)    Options Outstanding               Options Exercisable
================================================================================
                              Weighted
                               Average     Weighted                     Weighted
  Range of                   Remaining      Average                      Average
  Exercise                 Contractual     Exercise                     Exercise
    Prices       Shares           Life        Price        Shares          Price
================================================================================
     $0.11        1,150        4 years       $ 0.11         1,150        $  0.11
$0.20 to 0.23       600        2 years         0.23           600           0.23
     $2.09          100        8 years         2.09           100           2.09
$2.84 to 4.02        90        9 years         3.79             3           2.84
--------------------------------------------------------------------------------
     Total        1,940                                     1,853              
================================================================================
                                        -25-

<PAGE>



                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


The details of the Company's  incentive plans are summarized  above. The Company
has adopted the  disclosure  only  provisions of Statement 123, but continues to
apply APB 25 in accounting for employee stock options. No compensation  expense,
attributable to stock incentive plans, was charged to earnings during 1998, 1997
and 1996. The fair value of stock options  granted by the Company in 1998,  1997
and 1996 used to compute proforma net income and earnings per share  disclosures
is the estimated  fair value at date of grant,  using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
1998,  1997 and 1996,  respectively:  dividend yield 0% for all years,  expected
historical volatility of 0.53, 0.84 and 0.84, risk-free interest rates of 4.65%,
5.84% and 6.15%,  and weighted  average  expected  life of the options of 4 to 6
years.  If the  Company  had elected to  recognize  compensation  cost for stock
options  based on the fair  value at date of grant for stock  options  under the
1993 Plan and the 1985 Plan,  consistent with the method prescribed by Statement
123, net income  (loss) and net income  (loss) per share would have been changed
to the proforma amounts indicated below.

The Black-Scholes option valuation 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
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially  affect the fair value estimate,  and given the
substantial  changes in the price per share of the Company's Common Stock during
1998,  1997 and  1996,  in  management's  opinion,  the  existing  models do not
necessarily  provide a reliable single measure of the fair value of its employee
stock options.

For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the options'  vesting period.  The Company's  proforma
information for the years ended December 31 follows:
================================================================================
(in thousands, except per share data)            1998          1997         1996
================================================================================
Net income (loss)
As reported                                     $ 181       $(1,084)     $14,032
Proforma                                           61        (1,171)      13,959
================================================================================
Per share data
As reported                                     $   -       $ (0.02)     $  0.31
Proforma                                            -         (0.02)        0.31
================================================================================

                                       -26-

<PAGE>

                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 11 - Income Taxes

The  components of income tax (expense)  benefit for the years ended December 31
are as follows:
================================================================================
(in thousands)                                   1998           1997        1996
================================================================================
Income tax (expense) benefit:
Continuing operations                          $ (242)        $  191     $7,189
Discontinued investment management operations       -              -        (53)
================================================================================

The components of pretax income (loss) and the  difference  between income taxes
from  continuing  operations  computed at the  statutory  federal rate of 35% in
1998,  1997 and  1996,  and the  provision  for  income  taxes  from  continuing
operations for the years ended December 31 follows:
================================================================================
(in thousands)                                   1998           1997        1996
================================================================================
Income (loss) from continuing operations
  before income taxes                           $ 423        $(1,275)   $ 6,636
================================================================================
Tax (expense) benefit:
Tax at statutory federal rate                   $(148)       $   446    $(2,323)
Prior year tax refund                               -            475      7,613
Benefit of operating loss carryforwards             -              -      2,323
Accounting loss benefit not recognized              -           (446)         -
Accounting loss benefit recognized                148              -          -
Federal income taxes                                -              -        (76)
State income taxes                               (242)          (284)      (348)
--------------------------------------------------------------------------------
                                                $(242)       $   191    $ 7,189
================================================================================

The composition of income tax (expense)  benefit from continuing  operations for
the year ended December 31 is as follows:
================================================================================
(in thousands)                                   1998           1997        1996
================================================================================
Current:
Federal                                         $   -        $     -    $   (76)
State                                            (242)          (284)      (348)
--------------------------------------------------------------------------------
                                                 (242)          (284)      (424)
--------------------------------------------------------------------------------
Deferred (primarily federal):
Prior year tax refund                               -            475      7,613
--------------------------------------------------------------------------------
                                                    -            475      7,613
--------------------------------------------------------------------------------
                                                $(242)       $   191    $ 7,189
================================================================================

The Company  contractually  assumed the tax liabilities of City, which, prior to
September 1985, owned all the outstanding shares of Common Stock of the Company.
For all periods  through  1992,  the Internal  Revenue  Service  ("IRS") and the
Company  disagree only with respect to  withholding  taxes in connection  with a
Netherlands Antilles finance subsidiary of City. See Note 13, Legal Proceedings,
Disputes  with  Internal  Revenue  Service,   Withholding   Taxes   (Netherlands
Antilles),  for additional  details.  During 1996,  the Company  received a 1977
income tax refund of  $7,613,000;  as a result,  City no longer remains open for
refunds.  This amount was recognized as an income tax benefit in 1996,  based on
management's  continuing  review of the  overall tax  liability  position of the
Company.



                                      -27-

<PAGE>

                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


In June 1998,  the Company  paid  $12,700,000  to the IRS for tax and  estimated
interest in full satisfaction of the Company's Fresh Start tax liability,  which
related to a 1987 tax dispute  with the IRS. In  connection  with the  Company's
payment to the IRS,  the  Company  also  utilized  approximately  $40 million of
NOL's. As a result, the Company has remaining NOL carryforwards of approximately
$14 million  expiring  beginning  in 2008,  and $145 million of  additional  NOL
carryforwards  generated from the Company's tax basis in  Carteret/Carteret  FSB
expiring no earlier than 2007.

During 1996, in connection  with the completion by the IRS of the Company's 1985
to 1991 federal  income tax audits  (excluding  Fresh  Start),  the Company made
payments to the IRS totaling $1,995,000.  These amounts were previously reserved
for and  charged  against  the income  tax  reserves  account.  During the first
quarter of 1997,  $475,000  of income  taxes were  refunded  as the result of an
overpayment to the IRS for 1988 through 1991 tax years. This amount was recorded
as an income tax benefit in the first  quarter of 1997.  The  Company's  federal
income tax returns for years  subsequent  to 1992 have not been  reviewed by the
IRS.

As a result of the OTS's December 4, 1992 placement of Carteret in receivership,
under the management of the Resolution Trust Corporation ("RTC")/Federal Deposit
Insurance Corporation ("FDIC"),  and proposed Treasury Reg.  ss.1.597-4(g),  the
Company had previously filed its 1992 and subsequent  federal income tax returns
with Carteret  disaffiliated from the Company's  consolidated federal income tax
return. Based upon the impact of Treasury Reg.  ss.1.597-4(g),  which was issued
in final form on December 20, 1995, a  continuing  review of the  Company's  tax
basis in Carteret,  and the impact of prior year tax return  adjustments  on the
Company's  1992 federal income tax return as filed,  the Company  decided not to
make an election  pursuant to final Treasury Reg.  ss.1.597-4(g) to disaffiliate
Carteret from the Company's  consolidated federal income tax return effective as
of December 4, 1992 (the "election decision").

The  Company has made  numerous  requests to the  RTC/FDIC  for tax  information
pertaining to Carteret and the resulting successor institution, Carteret Federal
Savings Bank ("Carteret  FSB"),  but this information has not yet been received.
Based on the Company not making the election  decision,  as described above, and
upon receipt of the requested  information  from the RTC/FDIC,  the Company will
amend its consolidated  federal income tax returns to include the federal income
tax effects of Carteret and Carteret  FSB.  Based on the  information  currently
available, the Company does not believe a material increase in the Company's tax
liabilities will result.

The  Company  anticipates  that,  as a result of filing a  consolidated  federal
income tax return  with  Carteret  FSB,  approximately  $170  million of tax NOL
carryforwards   will  be   generated   from   the   Company's   tax   basis   in
Carteret/Carteret  FSB as tax losses are incurred by Carteret FSB, of which $145
million are still available.  The NOL carryforwards generated from the Company's
tax basis in Carteret/Carteret  FSB would expire no earlier than 2007, and would
be  available  to  offset  future  taxable  income,   in  addition  to  the  NOL
carryforwards as further detailed below.

Based upon the Company's  federal  income tax returns as filed from 1993 to 1997
(subject to IRS audit  adjustments)  (excluding the NOL  carryforwards  from the
Company's tax basis in  Carteret/Carteret  FSB, as noted above), at December 31,
1998 the  Company  has NOL  carryforwards  available  to reduce  future  federal
taxable income, which expire if unused, as follows:

           2008    $ 1,000,000
           2009      7,000,000
           2010      5,000,000
           2012      1,000,000
                   -----------
                   $14,000,000
                   ===========

The utilization of certain  carryforwards  is subject to limitations  under U.S.
federal income tax laws. In addition,  the Company has approximately $21 million
of  alternative  minimum  tax  credit  carryforwards,  which are not  subject to
expiration.

Under  Statement 109, the Company has calculated a net deferred tax asset of $25
million and $33 million as of December 31, 1998 and 1997, respectively,  arising
primarily  from  NOL's,  alternative  minimum tax credits and the excess of book
over tax  reserves  (not  including  the  anticipated  tax  effects of the NOL's
expected to be generated  from the  Company's  tax basis in Carteret,  resulting
from  the  election  decision,  as more  fully  described  above).  A  valuation
allowance  has been  established  for the entire  net  deferred  tax  asset,  as
management,  at the current time,  has no basis to conclude that  realization is
more likely than not.


                                      -28-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Note 12 - Commitments and Contingencies

Future   minimum  rental   payments,   principally   for  office  space,   under
noncancellable  operating leases at December 31, 1998, are: 1999, $79,000; 2000,
$80,000;  2001, $20,000.  Rent expense charged to earnings was $66,000,  $67,000
and $46,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

Note 13 - Legal Proceedings

(a)  The  Company  is or  has  been a  defendant  in a  number  of  lawsuits  or
proceedings, including the following:

Rolo and Tenerelli v. City Investing Company  Liquidating Trust, et al. This was
a purported  class  action  filed in the United  States  District  Court for the
District of New Jersey (the "District Court").  Plaintiffs asserted a variety of
Federal  and state  causes of action in  connection  with an alleged  fraudulent
scheme  involving  the  marketing  and sale of  homesites  and houses by General
Development  Corporation ("GDC"), a former subsidiary of City.  Plaintiffs named
as  defendants  the Company and  Carteret,  as well as a number of directors and
other financial  institutions  that had business  dealings with GDC. On December
27, 1993, the District Court entered an Order and Opinion  dismissing the action
against all parties  (amended on January 17, 1994,  to include the  dismissal of
Carteret  Bancorp,  Inc.  and  Carteret).  Plaintiffs  appealed the order to the
United States Court of Appeals for the Third Circuit (the "Appeals Court") which
affirmed the order and  subsequently  remanded the case for  reconsideration  in
light  of an  intervening  decision.  Upon  remand,  the  District  Court  again
dismissed  plaintiffs'  complaint  on August  24,  1995 and  denied  plaintiffs'
petition for reconsideration.  Plaintiffs appealed the District Court's order to
the Appeals Court.  On August 31, 1998, the Appeals Court affirmed  dismissal of
this action by the District Court. On November 30, 1998, the time for Plaintiffs
to seek review of the decision of the Appeals Court expired.  As a result,  this
litigation has terminated  without  liability to the Company or any of the other
defendants and, therefore, this action is concluded.

In United States v. Brown,  an action  commenced in the United  States  District
Court for the Southern  District of Florida,  certain  officers of GDC,  none of
whom were officers of the Company,  were convicted of violating the Federal Mail
Fraud Statute and certain other related  statutes.  This  development led two of
GDC's insurers,  National Union Fire Insurance Co. and Pacific Insurance Co., to
seek to  terminate  their  directors  and  officers'  insurance  coverage in two
actions pending in the United States District Court for the Southern District of
Florida, Pacific Insurance Co. v. Brown, et al. and National Union Fire Ins. Co.
v. Brown,  et al. During the fourth  quarter of 1996,  the U.S. Court of Appeals
for the 11th Circuit  reversed the  conviction of the officers of GDC.  Although
the  Company  was not a party to these  actions,  certain  individuals  who were
directors of GDC and the Company were  defendants.  It was possible  that if the
insurers were successful in terminating coverage of these former directors,  the
Company may have been exposed to claims for indemnification. The parties to this
litigation had been engaged in settlement negotiations for a considerable period
of time.  During the last quarter of 1998,  this  litigation  was settled by the
parties thereto and no further claims are expected to be made.  Therefore,  this
action is concluded.

Marshall  Manley v. AmBase  Corporation.  On November 14, 1996,  Marshall Manley
("Manley"),  a former  President,  Chief  Executive  Officer and Director of the
Company,  commenced an action against the Company,  seeking indemnification from
the Company pursuant to a May 27, 1993 employment  settlement  agreement between
Manley and the Company.  Manley seeks  reimbursement of certain alleged payments
he made to the Trustee in the bankruptcy  proceedings of the law firm of Finley,
Kumble, Wagner, Heine, Underberg,  Manley & Casey (the "Manley action"), arguing
that he served at such firm at the request of the Company.  The Manley action is
pending in the United  States  District  Court for the Southern  District of New
York.  The Company  filed its answer on January 21,  1997,  raising  substantial
affirmative  defenses which the Company intends to vigorously pursue. On October
30,  1997,  AmBase  amended its Answer and  Counterclaims  to include a claim of
fraud against Manley. In December 1997, Manley moved for summary judgment in his
favor.  The Company  raised  substantial  opposition  to the motion and moved to
strike  certain  of  Manley's   affirmative  defenses  which  Manley  raised  in
connection  with the  Company's  fraud claim  against  Manley.  Oral argument on
Manley's Motion for Summary Judgment and the Company's motion to strike Manley's
affirmative  defenses was held on May 15, 1998.  The court denied both  motions.
The trial of this case has been adjourned by the Court until June 1999.



                                      -29-

<PAGE>



                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


Dispute with Internal Revenue Service. The Company contractually assumed the tax
liabilities of City,  which,  prior to September 1985, owned all the outstanding
shares of Common Stock of the Company. For all periods through 1992, the IRS and
the Company disagree only with respect to withholding taxes in connection with a
Netherlands Antilles finance subsidiary of City.

    Withholding Taxes (Netherlands  Antilles). On May 11, 1995, the IRS issued a
    Notice of  Deficiency  for  withholding  taxes on interest  payments for the
    years 1979 through 1985. In the Notice of Deficiency,  the IRS contends that
    City's  wholly  owned  Netherlands  Antilles  finance  subsidiary  should be
    disregarded  for tax purposes.  The Company  vigorously  contested the IRS's
    position  in  accordance  with the IRS's  internal  appeals  procedures.  In
    January  1992,  the  National  Office  of the IRS  issued  technical  advice
    supporting  the auditing  agent's  position.  In October  1992,  the Company
    appealed this technical advice to the National  Office.  The National Office
    advised the Company that it expected to issue  technical  advice  supporting
    the auditing agent's position,  whereupon,  the Company advised the IRS that
    it was withdrawing its technical advice request.

    On June 30,  1995,  the Company  filed a petition  in the United  States Tax
    Court  contesting  the  Notice of  Deficiency.  The IRS filed its  answer on
    August 23,  1995.  The Company  filed a motion for  summary  judgment in its
    favor on February  13, 1996.  On April 17,  1996,  the IRS filed a Notice of
    Objection  to the  Company's  motion  for  summary  judgment.  The Tax Court
    requested,  and the  Company  filed on July 3,  1996,  a reply to the  IRS's
    Notice of  Objection.  On  September  19,  1996,  the Tax Court  denied  the
    Company's motion for summary judgment  without  prejudice.  Based on the Tax
    Court's  examination of the record and the status of the discovery  process,
    the  Tax  Court  concluded  that  summary  adjudication  at  this  time  was
    inappropriate.  The Tax Court  directed  the  parties  to engage in full and
    complete  discovery as expeditiously  as possible.  A trial was held in this
    case on March 24, 1997,  after which the Judge asked the IRS and the Company
    to submit post-trial  briefs,  which have subsequently been submitted to the
    Tax Court.  If the IRS were to prevail on this issue,  the Company  would be
    liable  for  taxes  and  interest  in  excess  of  the  Company's  financial
    resources.

    In a case dealing with a similar  withholding tax issue, the Tax Court ruled
    in favor of the taxpayer,  Northern  Indiana Public  Service Co.  ("Northern
    Indiana") in November 1995. The Tax Court rejected the IRS's contention that
    interest paid to Northern Indiana's foreign subsidiary was subject to United
    States tax withholding. The IRS has appealed this decision (Northern Indiana
    Public  Service Co. v.  Commissioner,  105 T.C. No. 22) to the United States
    Court of Appeals for the 7th Circuit  ("Appeals  Court").  The Appeals Court
    affirmed the Tax Court's ruling in favor of Northern  Indiana.  Although the
    Appeals Court  decision in the Northern  Indiana case could be beneficial to
    the Company's case, it is not necessarily  indicative of the ultimate result
    of the final  settlement  of the  Netherlands  Antilles  issue  between  the
    Company and the IRS.

    Based on an  evaluation  of the IRS's  contention,  counsel  has advised the
    Company that, although the outcome in litigation can by no means be assured,
    the  Company  has a very  strong  case and should  prevail.  Notwithstanding
    counsel's  opinion and the Tax Court's ruling in the Northern  Indiana case,
    it is not possible at this time to determine the final  disposition  of this
    issue, when the issues will be resolved,  or their final financial effect. A
    final  disposition  of  this  issue  in the  Company's  favor  would  have a
    material,  positive  effect on the  Company's  Statement of  Operations  and
    Financial Condition.

The actions against the Company, including those identified in (a) above, are in
various  stages.  Nevertheless,  the allegations and claims are material and, if
successful,  could result in substantial  judgments against the Company.  To the
extent  the  aggregate  of any  such  judgments  were to  exceed  the  resources
available,  these matters would have a material  adverse effect on the Company's
financial  condition  and  results  of  operations.  Due to the  nature of these
proceedings, the Company and its counsel are unable to express any opinion as to
their probable outcome.



                                      -30-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)


(b) Supervisory Goodwill Litigation:

During the third  quarter of 1993,  the Company filed a claim against the United
States,  in the United  States  Court of Federal  Claims  (the "Court of Federal
Claims"),  based upon the impact of the Financial Institutions Reform,  Recovery
and Enforcement Act of 1989 ("FIRREA") on the Company's  investment in Carteret.
Approximately  120  other  similar  so-called   "supervisory   goodwill"  cases,
commenced  in  recent  years  by  other  financial   institutions  and/or  their
shareholders,  are pending in the Court of Federal Claims. Three of these cases,
Winstar Corp. v. United States, Glendale Federal Bank, FSB v. United States, and
Statesman  Savings  Holding Corp. v. United States (the  "consolidated  cases"),
which  involve  many of the same  issues  raised  in the  Company's  suit,  were
appealed to the United States  Supreme Court (the "Supreme  Court").  On July 1,
1996, the Supreme Court issued a decision in the consolidated cases. The Supreme
Court's  decision  affirmed the lower Court's grant of summary judgment in favor
of the  plaintiffs  on the  issue of  liability  and  remanded  the  cases for a
determination  of damages.  Although the decision in the  consolidated  cases is
beneficial  to the  Company's  case,  it is not  necessarily  indicative  of the
ultimate  outcome of the Company's  action.  On September 18, 1996, the Court of
Federal Claims entered an Omnibus Case Management Order that will govern further
proceedings   in  the  Company's   action  and  most  of  the  other   so-called
"Winstar-related"  cases.  On  March  14,  1997,  the  Court  entered  an  order
permitting  the FDIC to intervene  as an  additional  plaintiff  in  forty-three
cases, including the Company's case, but not allowing the FDIC to be substituted
as the sole  plaintiff in those cases.  On December 22, 1997, the Court issued a
decision which addressed  eleven "common  issues"  applicable to a number of the
Winstar-related  cases, and rejected the government's  arguments with respect to
each such issue.  Although  this  decision is also  beneficial  to the Company's
case, it is not necessarily  indicative of the ultimate outcome of the Company's
action.  On March 20, 1998, the FDIC filed a motion for partial summary judgment
against the United States on certain liability issues, and the Company has filed
a memorandum  in support of that motion.  The FDIC's  motion is currently  under
submission  to the  court.  Case-specific  discovery  in thirty  Winstar-related
cases,  including the Company's case, commenced in April 1998. Fact discovery is
currently  scheduled  to be completed by June 30, 1999. A trial date has not yet
been set in the Company's case. No assurance can be given regarding the ultimate
outcome of the litigation.

Note 14 - Fair Value of Financial Instruments

The  carrying   amounts  reported  in  the  balance  sheet  for  cash  and  cash
equivalents, and accounts payable and accrued liabilities approximate fair value
due to the short-term nature of these instruments.  The fair value of investment
securities  - held to maturity  are based on current  market  quotations.  Other
investment  securities  are based upon the December 1998 and 1997 cost for these
privately  placed  shares.  The carrying value of applicable  other  liabilities
approximates their fair value.

Note 15 - Supplemental Disclosure of Cash Flow Information

Additional information regarding cash flow for the years ended December 31 is as
follows:
================================================================================

(in thousands)                               1998          1997             1996
================================================================================
Cash received (paid) during the period:
Income tax refunded (paid), net          $(12,940)       $  244           $5,190
================================================================================

Income  taxes  refunded  (paid),  net in 1998  include  $12,700,000  for tax and
estimated  interest paid to the IRS in full  satisfaction of the Company's Fresh
Start tax liability.

In 1997, income taxes refunded include $475,000 of taxes refunded as a result of
an overpayment to the IRS for 1988 through 1991 tax years. In 1996, income taxes
refunded  (paid)  include a 1977 tax  refund of  $7,613,000  and  $1,995,000  of
payments to the IRS, principally for the 1985 through 1991 tax years.



                                      -31-

<PAGE>
                       AMBASE CORPORATION AND SUBSIDIARIES

Note 16 - Quarterly Financial Information (unaudited)

Summarized quarterly financial information follows:
================================================================================
(in thousands, except        First      Second       Third      Fourth     Full
per share data)            Quarter     Quarter     Quarter     Quarter     Year
================================================================================
1998:
Operating expenses           $ 871      $  880       $ 676      $2,128   $4,555
--------------------------------------------------------------------------------
Operating loss                (871)       (880)       (676)     (2,128)  (4,555)
Interest income                632         593         595         610    2,430
Other income                     -           -       2,500          48    2,548
--------------------------------------------------------------------------------
Income (loss) from continuing
  operations before income
  taxes                       (239)       (287)      2,419      (1,470)     423
Income tax (expense) benefit   (64)        (64)        (59)        (55)    (242)
--------------------------------------------------------------------------------
Income (loss) from
  continuing operations       (303)       (351)      2,360      (1,525)     181
Income from discontinued
  investment management
  operations, net of
  income taxes                   -           -           -           -        -
--------------------------------------------------------------------------------
Net income (loss)            $(303)     $ (351)     $2,360     $(1,525)   $ 181
================================================================================
Earnings per common
  share - basic:
Income (loss) from
  continuing operations     $(0.01)      (0.01)      $0.05      $(0.03)   $   -
Income from discontinued
  operations                     -           -           -           -        -
--------------------------------------------------------------------------------
Net income (loss)           $(0.01)     $(0.01)      $0.05      $(0.03)   $   -
================================================================================
Earnings per common share
  - assuming dilution:
Income (loss) from
  continuing operations     $(0.01)      (0.01)      $0.05      $(0.03)   $   -
Income from discontinued
  operations                     -           -           -           -        -
--------------------------------------------------------------------------------
Net income (loss)           $(0.01)     $(0.01)      $0.05      $(0.03)   $   -
================================================================================
1997:
Operating expenses           $ 672      $  707       $ 618      $1,998   $3,995
--------------------------------------------------------------------------------
Operating loss                (672)       (707)       (618)     (1,998)  (3,995)
Interest income                689         663         656         653    2,661
Other income                     -           -          55           4       59
--------------------------------------------------------------------------------
Income (loss) from
  continuing operations
  before income taxes           17         (44)         93      (1,341)  (1,275)
Income tax (expense) benefit   405         (70)        (73)        (71)     191
--------------------------------------------------------------------------------
Income (loss) from
  continuing operations        422        (114)         20      (1,412)  (1,084)
Income from discontinued
  investment management
  operations, net of
  income taxes                   -           -           -           -        -
--------------------------------------------------------------------------------
Net income (loss)            $ 422      $ (114)      $  20     $(1,412) $(1,084)
================================================================================
Earnings per common
  share - basic:
Income (loss) from
  continuing operations      $0.01      $    -       $   -     $ (0.03) $ (0.02)
Income from discontinued
  operations                     -           -           -           -        -
--------------------------------------------------------------------------------
Net income (loss)            $0.01      $    -       $   -     $ (0.03) $ (0.02)
================================================================================
Earnings per common share
  - assuming dilution:
Income (loss) from
  continuing operations      $0.01      $    -       $   -     $ (0.03) $ (0.02)
Income from discontinued
  operations                     -           -           -           -        -
--------------------------------------------------------------------------------
Net income (loss)            $0.01      $    -       $   -     $ (0.03) $ (0.02)
================================================================================
                                         -32-
<PAGE>



                       AMBASE CORPORATION AND SUBSIDIARIES


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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  concerning  executive  officers  required by this item is set forth
following Item 4 of Part I of this report under the caption "Executive  Officers
of the  Registrant",  pursuant to General  Instruction  G to Form 10-K.  For the
information  required  to be set forth by the  Company in  response to this item
concerning  directors  of  the  Company,  see  the  Company's  definitive  Proxy
Statement  for its Annual  Meeting of  Shareholders  to be held on May 14, 1999,
under the caption "Information  Concerning the Board and its Committees",  which
is incorporated herein by reference,  which the Company intends to file with the
Securities  and Exchange  Commission  not later than 120 days after the close of
its fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

For the information  required to be set forth by the Company in response to this
item,  see the Company's  definitive  Proxy  Statement for its Annual Meeting of
Shareholders  to  be  held  on  May  14,  1999,  under  the  caption  "Executive
Compensation",  which is  incorporated  herein by  reference,  which the Company
intends to file with the Securities  and Exchange  Commission not later than 120
days after the close of its fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

For the information  required to be set forth by the Company in response to this
item,  see the Company's  definitive  Proxy  Statement for its Annual Meeting of
Shareholders  to be held on May 14, 1999,  under the caption "Stock  Ownership",
which is  incorporated  herein by reference,  which the Company  intends to file
with the  Securities  and Exchange  Commission not later than 120 days after the
close of its fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For the information  required to be set forth by the Company in response to this
item,  see the Company's  definitive  Proxy  Statement for its Annual Meeting of
Shareholders  to  be  held  on  May  14,  1999,   under  the  caption   "Certain
Relationships  and  Related  Transactions",  which  is  incorporated  herein  by
reference,  which the Company  intends to file with the  Securities and Exchange
Commission not later than 120 days after the close of its fiscal year.



                                      -33-

<PAGE>

                       AMBASE CORPORATION AND SUBSIDIARIES

PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   Documents filed as a part of this report:

1. Index to Financial Statements:                                         Page

      AmBase Corporation and Subsidiaries:
         Report of Independent Accountants..................................10
         Consolidated Statements of Operations..............................11
         Consolidated Balance Sheets........................................12
         Consolidated Statements of Changes in Stockholders' Equity.........13
         Consolidated Statements of Cash Flows..............................14
         Notes to Consolidated Financial Statements.........................15

2. Index to Financial Statements Schedules:

      All schedules have been omitted because they are not applicable.

3. Exhibits:

      3A.   Restated  Certificate of  Incorporation  of AmBase  Corporation  (as
            amended  through  February 12, 1991)  (incorporated  by reference to
            Exhibit 3A to the Company's  Annual Report on Form 10-K for the year
            ended December 31, 1990).

      3B.   By-Laws of AmBase  Corporation  (as amended through March 15, 1996),
            (incorporated  by  reference to Exhibit 3B to the  Company's  Annual
            Report on Form 10-K for the year ended December 31, 1995).

      4.    Rights  Agreement  dated as of February 10, 1986 between the Company
            and  American  Stock  Transfer  and Trust Co. (as amended  March 24,
            1989,  November  20, 1990,  February 12, 1991,  October 15, 1993 and
            February 1, 1996)  (incorporated  by  reference  to Exhibit 4 to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1990, the Company's  Quarterly Report on Form 10-Q for the quarterly
            period ended  September 30, 1993 and the Company's  Annual Report on
            Form 10-K for the year ended December 31, 1995).

      10A.  1985  Stock  Option  Plan  for  Key  Employees  of  AmBase  and  its
            Subsidiaries  (incorporated  by  reference  to  Exhibit  10B  to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1989).

      10B.  1993 Stock Incentive Plan as amended  (incorporated  by reference to
            Exhibit A to the Company's Proxy Statement for the Annual Meeting of
            Stockholders held on May 28, 1998).

      10C.  1994 Senior Management Incentive  Compensation Plan (incorporated by
            reference  to Exhibit A to the  Company's  Proxy  Statement  for the
            Annual Meeting of Stockholders held on May 27, 1994).

      10D.  AmBase  Officers  and Key  Employees  Stock  Purchase  and Loan Plan
            (incorporated  by reference to Exhibit 10E to the  Company's  Annual
            Report on Form 10-K for the year ended December 31, 1989).

      10E.  AmBase  Supplemental  Retirement Plan  (incorporated by reference to
            Exhibit 10C to the Company's Annual Report on Form 10-K for the year
            ended December 31, 1989).

      10F.  Assignment  and  Assumption  Agreement  dated as of August 30, 1985,
            between the Company and City  (incorporated  by reference to Exhibit
            28 to the Company's  Current Report on Form 8-K dated  September 12,
            1985).


                                       -34-

<PAGE>

                       AMBASE CORPORATION AND SUBSIDIARIES


      10G.  Employment  Agreement  dated as of June 1, 1991  between  Richard A.
            Bianco and the  Company,  as amended  dated as of December  30, 1992
            (incorporated  by reference to Exhibit 10G to the  Company's  Annual
            Report on Form 10-K for the year ended  December 31,  1992),  and as
            amended February 24, 1997  (incorporated by reference to Exhibit 10G
            to the  Company's  Annual  Report  on Form  10-K for the year  ended
            December 31, 1996).

      10H.  Stock  Purchase  Agreement  among  AmBase   Corporation,   The  Home
            Insurance  Company  and TVH  Acquisition  Corporation,  dated  as of
            September  28,  1990 and  amended as of  December  12,  1990,  as of
            December  21,  1990 and as of  February  4,  1991  (incorporated  by
            reference to Exhibit  10HH to the  Company's  Annual  Report on Form
            10-K for the year ended December 31, 1990).

      10I.  Indemnity Agreement dated as of February 13, 1991 among the Company,
            The   Home  Insurance  Company   and   TVH  Acquisition  Corporation
            (incorporated  by  reference to Exhibit 10JJ to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1990).

      10J.  Consulting  Agreement  dated as of  February  13,  1991  between the
            Company and TVH Acquisition  Corporation  (incorporated by reference
            to Exhibit 10KK to the Company's  Annual Report on Form 10-K for the
            year ended December 31, 1990).

      22.   Subsidiaries of the Registrant.

      23.   Consent of Independent Accountants.

      27.   Financial Data Schedule (only submitted to SEC in electronic format)

Exhibits, except as otherwise indicated above, are filed herewith.

(b) Form 8-K

    The Company was not required to file a Current Report on Form 8-K during the
quarter ended December 31, 1998.

                                       -35-

<PAGE>



                       AMBASE CORPORATION AND SUBSIDIARIES


Signatures

Pursuant to the  requirements of Section 13 or 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,  on the 22nd day of March
1999.

AMBASE CORPORATION



RICHARD A. BIANCO
Chairman, President and Chief Executive
Officer (Principal Executive Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated, on the 22nd day of March 1999.





RICHARD A. BIANCO                        JOHN P. FERRARA
Chairman, President and                  Vice President, Chief Financial Officer
Chief Executive Officer                  and Controller
                                         (Principal Financial and Accounting
                                         Officer)




ROBERT E. LONG                           JOHN B. COSTELLO
Director                                 Director


                                       -36-

<PAGE>


                       AMBASE CORPORATION AND SUBSIDIARIES

DIRECTORS AND OFFICERS

BOARD OF DIRECTORS:

Richard A. Bianco           John B. Costello         Robert E. Long
Chairman, President and     Private Investor         President and
Chief Executive Officer                              Chief Executive Officer
AmBase Corporation                                   Business News Network, Inc.

AMBASE OFFICERS:

Richard A. Bianco           John P. Ferrara
Chairman, President and     Vice President, Chief Financial Officer
Chief Executive Officer     and Controller


INVESTOR INFORMATION

ANNUAL MEETING OF STOCKHOLDERS           CORPORATE HEADQUARTERS

The 1999 Annual Meeting is               AmBase Corporation
currently scheduled to be held at        51 Weaver Street, Bldg. 2
9:00 a.m. Eastern Daylight Time,         Greenwich, CT  06831-5155
on Friday, May 14, 1999, at:             (203) 532-2000

   Hyatt Regency Hotel
   1800 East Putnam Avenue
   Greenwich, CT  06870
                                         STOCKHOLDER INQUIRIES
COMMON STOCK TRADING
                                         Stockholder inquiries, including
AmBase stock is traded through one       requests for the following:(i) change
or more market-makers with quotations    of address; (ii) replacement of lost  
made available in the "pink sheets"      stock certificates; (iii) Common Stock
published by the National Quotation      name registration changes; (iv)
Bureau, Inc.                             Quarterly Reports on Form 10-Q; (v)
                                         Annual Reports on Form 10-K; (vi)
ISSUE    ABBREVIATION  TICKER SYMBOL     proxy material; and (vii) information
                                         regarding stockholdings, should be
Common   AmBase        ABCP              directed to:
Stock
                                         AMERICAN STOCK TRANSFER AND TRUST
TRANSFER AGENT AND REGISTRAR             COMPANY
                                         40 Wall Street - 46th Floor
AMERICAN STOCK TRANSFER AND TRUST        New York, NY  10005
COMPANY                                  Attention: Shareholder Services
40 Wall Street - 46th Floor              (800) 937-5449 or (718) 921-8200
New York, NY  10005
Attention: Shareholder Services          In   addition,  the   Company's  public
(800) 937-5449 or (718) 921-8200         reports, including Quarterly Reports on
                                         Form 10-Q,  Annual Reports on Form 10-K
INDEPENDENT ACCOUNTANTS                  and  Proxy  Statements, can be obtained
                                         through  the  Securities  and  Exchange
PRICEWATERHOUSECOOPERS LLP               Commission  EDGAR   Database  over  the
1177 Avenue of the Americas              World Wide Web at www.sec.gov.
New York, NY  10036

                                         NUMBER OF STOCKHOLDERS
                                         As  of  January  29, 1999,  there  were
                                         approximately 21,000 stockholders.

                                       -37-
<PAGE>

               EXHIBITS ATTACHED WITH THIS FORM 10-K


Exhibit
  No.                   Description
-------                 -----------

  22              Subsidiaries of the Registrant

  23              Consent of Independent Accountants

  27              Financial Data Schedule


                                       -38-