<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                   Quarterly Report Under Section 13 or 15 (d)
                     of the Securities Exchange Act of 1934
                                      10-Q


For Quarter Ended:                                               March 31, 1998


Commission File Number 0-14983

                                    AMBI INC.

-------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


New York                                                            11-2653613

-------------------------------------------------------------------------------
(State or other jurisdiction of            (IRS Employer Identification Number)
incorporation of organization)


771 Old Saw Mill River Road, Tarrytown, New York                         10591

-------------------------------------------------------------------------------
(Address of principal executive offices)                            (Zip Code)


                                 (914) 347-5767

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



-------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                  YES     X                          NO 

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.


Common Stock, Par Value $.005           20,903,905 shares as of May 13, 1998
-----------------------------           -----------------------------------

                                      1

<PAGE>



                             AMBI INC. & SUBSIDIARY

                                      INDEX



PART I       FINANCIAL INFORMATION                                        PAGE
------       ---------------------                                        ----

Item 1       Financial Statements


             Condensed Consolidated Balance
                      Sheets at March 31, 1998
                      and June 30, 1997                                      3


             Condensed Consolidated Statements of Operations for
                      the three months and nine months ended March
                      31, 1998 and March 31, 1997                            5


             Condensed Consolidated Statement of
                      Changes in Stockholders' Equity
                      for the nine months ended
                      March 31, 1998                                         6


             Condensed Consolidated Statements of
                      Cash Flows for the nine months
                      ended March 31, 1998 and
                      March 31, 1997                                         7

             Notes to Condensed Consolidated
                      Financial Statements                                   8


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


PART II      OTHER INFORMATION
-------      -----------------

Item 1       Legal Proceedings                                              19

Item 4       Submission of Matters to a Vote of Security Holders            19

Item 6       Exhibits and Reports on Form 8-K                               19



                                       2


<PAGE>

                             AMBI INC. & SUBSIDIARY

                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>


                                                                                March 31           June 30
                                                                                  1998               1997
                                                                               (Unaudited)        (See Note
                                                                                                    Below)
                                                                                  $'000             $'000
                                                                                  ------            -----

<S>                                                                              <C>                 <C>
ASSETS

Current assets:

Cash and cash equivalents                                                             864              8,615
Trade accounts receivable less allowance for
  doubtful accounts of $267,000 at March 31, 1998
  and $104,000 at June 30, 1997                                                     3,351                390
Inventories                                                                         1,476                606
Prepayments and other current assets                                                  778                404
                                                                                 --------           --------

Total current assets                                                                6,469             10,015

Property, plant and equipment at cost less
  accumulated depreciation of $643,000 at March 31,
  1998 and $382,000 at June 30, 1997                                                1,041              1,082
Patent costs, licensed technology and other
  intangible assets at cost less accumulated
  amortization of $1,700,000 at March 31, 1998 and                                 10,027              1,584
  $862,000 at June 30, 1997
Goodwill at cost less accumulated amortization of
  $42,000 at March 31, 1998                                                         2,238                 --
Other assets                                                                          472                 73
                                                                                 --------           --------

TOTAL ASSETS                                                                       20,247             12,754
                                                                                 ========           ========
</TABLE>



Note:  The Condensed Consolidated Balance Sheet as of June 30, 1997 has been
       derived from the audited consolidated financial statements at that date.




See notes to condensed consolidated financial statements

                                       3

<PAGE>


                             AMBI INC. & SUBSIDIARY

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                          March 31              June 30
                                                                            1998                 1997
                                                                         (Unaudited)          (See Note
                                                                                                Below)
                                                                            $'000                $'000
                                                                            -----                -----
<S>                                                                      <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long term debt and lease obligation                       1,082                156
Revolving line of credit facility                                            1,608                 --
Accounts payable                                                               514              1,283
Accrued expenses                                                             1,800              1,181
Preferred dividends payable                                                    559                340
Contingent payments payable - Nutrition 21 acquisition                       1,515                 --
                                                                          --------           --------

Total current liabilities                                                    7,078              2,960

Long term debt and lease obligation, less current portion                    3,763              2,184
                                                                          --------           --------

TOTAL LIABILITIES                                                           10,841              5,144
                                                                          --------           --------

STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 
  5,000,000: Series C convertible
  preferred, 222 shares outstanding at 
  March 31 and June 30 respectively
  (aggregate liquidation value Series C $2,654,755)                             --                 --
Series D convertible preferred, 45,000 shares issued and
 22,600 shares outstanding at March 31 and 45,000 
  shares issued and outstanding at June 30
  (aggregate liquidation value Series D $2,381,947)                             --                 --
Common stock, $0.005 par value, authorized
  65,000,000 shares. Issued and outstanding 20,898,297
  at March 31 and 18,783,342 at June 30                                        104                 94
Additional paid-in capital                                                  54,481             51,416
Accumulated deficit                                                        (45,179)           (43,900)
                                                                          --------           --------

TOTAL STOCKHOLDERS' EQUITY                                                   9,406              7,610

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

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  20,247             12,754
                                                                          ========           ========
</TABLE>



Note:  The Condensed Consolidated Balance Sheet as of June 30, 1997 has been
       derived from the audited consolidated financial statements at that date.

See notes to condensed consolidated financial statements

                                       4

<PAGE>


                             AMBI INC. & SUBSIDIARY


                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>


                                                         Three Months Ended                 Nine Months Ended
                                                              March 31                         March 31
                                                          1998          1997              1998          1997
                                                         $'000         $'000              $'000         $'000
                                                         -----         -----              -----         -----

<S>                                                     <C>           <C>                <C>          <C>     
Revenues                                                 5,333         1,858             14,365        10,423
Cost of goods sold                                        (720)         (767)            (2,070)       (4,420)
                                                        -------       -------            -------       -------
GROSS PROFIT                                             4,613         1,091             12,295         6,003

Marketing and sales expenses                            (1,602)       (4,206)            (4,649)      (11,373)
General and administrative expenses                     (1,449)       (1,103)            (4,008)       (2,943)
Research and development expenses                         (475)         (832)            (2,037)       (3,344)
Depreciation and amortization                             (450)         (147)            (1,075)         (630)
                                                        -------       -------            -------       -------

OPERATING INCOME/(LOSS)                                    637        (5,197)               526       (12,287)
Interest income                                              2           210                 61           319
Interest expense                                          (106)          (25)              (291)         (112)
Gain on sale of Aplin & Barrett                             --            --                 --         9,683
                                                        -------       -------            -------       -------

INCOME/(LOSS) BEFORE TAX EXPENSE                           533        (5,012)               296        (2,397)
Income tax expense                                          (1)           (9)               (58)         (150)
                                                        -------       -------            -------       -------

NET INCOME/(LOSS)                                          532        (5,021)               238        (2,547)
                                                        =======       =======            =======       =======


EARNINGS/(LOSS) PER SHARE

Basic                                                    $0.00       ($0.28)            $(0.06)       ($0.14)
Diluted                                                  $0.00       ($0.28)            $(0.06)       ($0.14)

</TABLE>



See notes to condensed consolidated financial statements

                                       5

<PAGE>


                             AMBI INC. & SUBSIDIARY


       CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                    FOR THE NINE MONTHS ENDED MARCH 31, 1998
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                            Common     Additional   Accumulated
                                                             Stock       Paid In      Deficit
                                                                         Capital
                                                             $000         $000          $000
                                                             ----         ----          ----

<S>                                                       <C>           <C>          <C>     
Balance at June 30, 1997                                       94        51,416      (43,900)
Common stock issued in connection with the
  acquisition  of Nutrition 21                                  3         1,772
Conversion of preferred stock                                   7            71
Conversion discount on convertible preferred stock                        1,222       (1,222)
Preferred stock dividends                                                               (295)
Net income for the period                                                                238
                                                           ------        ------       ------

Balance at March 31, 1998                                     104        54,481      (45,179)
                                                              ===        ======      ========

</TABLE>








See notes to condensed consolidated financial statements


                                       6



<PAGE>



                             AMBI INC. & SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                 Nine Months Ended
                                                                                     March 31
                                                                              1998               1997
                                                                             $'000              $'000
                                                                             -----              -----
<S>                                                                        <C>                 <C>
Cash flows from operating activities:
  Net income/(loss)                                                            238             (2,547)
Adjustments to reconcile net income/(loss)
  to net cash used in operating activities:
     Depreciation and amortization                                           1,075                630
     Gain on Sale of Aplin & Barrett                                            --             (9,683)
     Other non-cash items                                                       --                 65
  Changes in assets and liabilities, net of effects from sale of subsidiary:
     (Increase)/decrease in trade accounts receivable                         (356)               455
     (Increase)/decrease in inventories                                       (414)               287
     Increase in other current assets                                         (297)              (486)
     Increase in other non current assets                                     (397)                --
     (Decrease)/increase in accounts payable and accrued expenses             (612)             1,427
     Decrease in taxes payable                                                  --               (254)
     Increase in other liabilities                                              --                189
                                                                          --------            -------
Net cash used in operating activities                                         (763)            (9,917)
                                                                          --------            -------

Cash flows from investing activities:
  Purchases of property and equipment                                         (123)              (783)
  Patent costs                                                                (477)              (355)
  Acquisition of Nutrition 21                                              (10,499)                --
  Proceeds from the sale of Aplin & Barrett                                     --              8,000
                                                                          ---------           -------
Net cash (used in)/provided by investing activities                        (11,099)             6,862
                                                                          ---------           -------

Cash flows from financing activities:
  Term loan borrowings                                                       3,300                 --
  Revolving line of credit borrowings                                        1,608                 --
  Capital lease proceeds                                                        --                328
  Term loan repayments                                                        (656)                --
  Capital lease obligation repayments                                         (141)            (1,164)
  Proceeds from issuance of common stock                                        --                436
                                                                          ---------           -------
Net cash provided by/(used in) financing activities                          4,111               (400)

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

Effect of exchange rate movement                                                --                (10)

Net decrease in cash and cash equivalents                                   (7,751)            (3,465)
Cash and cash equivalents at beginning of period                             8,615              8,431
                                                                          ---------           -------
Cash and cash equivalents at end of period                                     864              4,966
                                                                          =========           =======

Supplementary disclosure of cash flow information:
  Interest paid                                                                191                 87
  Tax paid                                                                       8                  9
  Contingent payments accrued for the Nutrition 21 acquisition               1,515                 --

On August 11, 1997 the Company acquired the net assets of Nutrition 21 in
exchange for $10,000,000 in cash and 500,000 shares of the Company's common
stock. In connection with the acquisition; liabilities were assumed as follows:

           Fair value of assets acquired                                   $11,644
             Cash purchase price                                            10,000
             Stock issued                                                    1,187
                                                                          --------
             Liabilities assumed                                              $457
                                                                          ========

See notes to condensed consolidated financial statements

                                       7

<PAGE>



                             AMBI INC. & SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 1998



Note A            Basis of Presentation

                  The accompanying unaudited condensed consolidated financial
                  statements have been prepared in accordance with generally
                  accepted accounting principles for interim financial statement
                  reporting and in accordance with the instructions to Form 10-Q
                  and Rule 10-01 of Regulation S-X. Accordingly, they do not
                  include all the information and footnotes required by
                  generally accepted accounting principles for complete
                  financial statements. In the opinion of management, all
                  adjustments (consisting of normal recurring accruals)
                  considered necessary for a fair presentation have been
                  included. Operating results for the three and nine month
                  periods ended March 31, 1998 are not necessarily indicative of
                  the results that may be expected for the fiscal year ending
                  June 30, 1998. For further information, refer to the
                  consolidated financial statements and notes thereto, included
                  in the Company's annual report on Form 10-K as amended for the
                  year ended June 30, 1997.


Note B            Acquisition of Nutrition 21

                  On August 11, 1997, the Company acquired the entire beneficial
                  interest in Nutrition 21 ("N21"), a limited partnership, by
                  way of the acquisition of Selene Systems, Inc. ("Selene"),
                  which was the general partner of N21, J. Bie Enterprises, Inc.
                  ("J. Bie"), which was a limited partner of N21, and the
                  limited partnership interests owned by all other limited
                  partners of N21, pursuant to a Purchase Agreement. The Company
                  retained the former chief executive officer of N21 as a
                  consultant.

                  N21 is engaged in the business of developing, producing and
                  marketing proprietary nutrition products and dietary
                  supplements. N21 has its products manufactured and formulated
                  to its specifications by contract manufacturers as bulk raw
                  materials. N21 then sells the raw materials to customers who
                  incorporate them into over nine hundred finished products such
                  as vitamin/mineral formulas, dietary supplements, baked goods,
                  beverages and other products. These products are sold by
                  customers under a variety of brands throughout the world
                  through natural/health food stores, supermarkets, drug stores

                  and direct mail catalogs. Currently N21's primary product is
                  chromium picolinate, which is marketed under the registered
                  trademark "Chromax." N21 has an exclusive license from the
                  United States Department of Agriculture ("USDA") for the
                  duration of a patent which covers the composition of chromium
                  picolinate and its uses. This patent expires on August 8,
                  2000. The USDA license grants N21 the exclusive right to
                  manufacture, use, and sell chromium picolinate in the United
                  States. N21 also owns U.S. Patents expiring in 2009, relating
                  to chromium picolinate treatments for reducing hyperglycemia
                  and stabilizing the level of serum glucose, for preventing
                  undesirable high levels of blood serum lipids, and for
                  increasing lean body mass and reducing body fat, and other
                  patents relating to, among other things, arginine silicate
                  complexes for preventing or inhibiting atherosclerosis, and
                  magnesium taurate treatments of cardiac conditions.

                  The purchase price for the acquisition was $10,000,000 in cash
                  plus 500,000 restricted shares of common stock of the Company.
                  The Purchase Agreement also provides for annual contingent
                  payments for each of the next four years of $2.5 million
                  adjusted for the achievement of certain sales levels, and
                  royalties of 2.5% to 5.0% on net sales of products recommended
                  for certain patented uses. These contingent payments, which
                  will be made to former partners of N21, will be recorded as an
                  addition to the purchase price as the amounts are earned and
                  amortized over the remaining life of the acquired assets.


                                       8


<PAGE>


                             AMBI INC. & SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 1998



                  Based on sales through March 31, 1998 a contingent payment of
                  $1,515,000 has been accrued. As of March 31, 1998 no royalty
                  payments were due. The acquisition was accounted for under the
                  purchase method. As such, as of March 31, 1998 the Company has
                  recorded approximately $2,280,000 of goodwill and $8,786,000
                  of other intangible assets, consisting primarily of patents
                  and trademarks, in connection with the acquisition. The
                  Company is amortizing the goodwill over fifteen years and
                  amortizing the other intangible assets over their useful
                  economic lives, which range from three to fifteen years.
                  During the nine months ended March 31, 1998 the Company
                  recorded approximately $766,000 in amortization expense

                  related to the goodwill and other intangible assets described
                  above.

                  Approximately $3,300,000 of the purchase price was provided as
                  a term loan pursuant to a Revolving Credit and Term Loan
                  Agreement ("Loan Agreement") with State Street Bank and Trust
                  Company ("State Street"). The loans earned interest at the
                  bank's prime rate plus one percent and were due February 1,
                  1998. However, on December 31, 1997 the Company refinanced its
                  loans with State Street (See Note F). Approximately $6,700,000
                  of the purchase price was provided from internal working
                  capital.

                  To replace a prior royalty agreement with certain individuals
                  who assisted the prior owners of N21 in the development of
                  chromium picolinate, the Company in November 1997 issued
                  200,000 shares of its common stock to these individuals and
                  agreed on August 8, 2000 to issue to these individuals a
                  number of additional shares of common stock which then have a
                  value equal to the amount (if any) by which the then value of
                  the 200,000 shares of stock is less than 10% of chromium
                  picolinate net sales (as defined) during the period from
                  August 11, 1997 through August 8, 2000. The Company has
                  capitalized the cost of the stock at its market value on the
                  date of issuance and it is amortizing the cost of the stock
                  over the term of the agreement. As of March 31, 1998, the
                  Company has accrued $356,000 to these individuals.

                  The Company further amended its agreement during April 1998 to
                  replace the existing agreement with the following:

                      (a)  200,000 shares of the Company's common stock
                           previously issued remain outstanding;

                      (b)  The Company will pay a total of $1.4 million as
                           follows: $100,000 quarterly during the third and the
                           fourth quarter of fiscal 1998 and the first and
                           second quarter of fiscal 1999; $125,000 quarterly
                           during the third and fourth quarter of fiscal 1999
                           and the first quarter of fiscal 2000; $175,000
                           quarterly during the second, third and fourth quarter
                           of fiscal 2000 and $100,000 on August 11, 2000.

Note C            Inventory

                  All inventory consists of finished goods at March 31, 1998 and
                  June 30, 1997, respectively.

                                       9

<PAGE>


                             AMBI INC. & SUBSIDIARY


        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 1998

Note D            Earnings/(loss) per share

                  The Company has adopted the provisions of the Financial
                  Accounting Standards Board ("FASB") Statement of Financial
                  Accounting Standards ("SFAS") No.128, "Earnings Per Share."
                  Accordingly, the earnings per share calculations for the prior
                  periods have been restated to conform with the provisions of
                  SFAS No. 128. This statement replaces the presentation of
                  primary earnings per share and fully diluted earnings per
                  share with basic and diluted earnings per share, respectively.

                  Basic earnings/(loss) per share for the three and nine months
                  ended March 31, 1998 and 1997 are computed based on the
                  weighted average number of shares outstanding for the
                  respective periods as follows:



</TABLE>
<TABLE>
<CAPTION>

                                                         3 months ended                  9 months ended
                                                            March 31                        March 31
                                                        1998          1997              1998          1997
                                                          No. of Shares                   No. of Shares
                                                          -------------                   -------------

<S>                                                   <C>          <C>                <C>           <C>       
                  Weighted average shares             20,898,297   18,524,049         19,919,345    19,826,189
                                                     -----------   -----------       -----------   -----------
<CAPTION>

                                                          $'000         $'000             $'000         $'000
                                                          -----         -----             -----         -----
<S>                                                   <C>          <C>                <C>           <C>       

                  Net income/(loss)                         532         (5021)              238        (2,547)
                  Preferred stock dividend                  (78)          (87)             (295)         (281)
                  Conversion discount on convertible
                    preferred stock                        (427)           --             (1222)           --
                                                          -----         -----            ------         -----
                  Net income/(loss) attributable to
                    common stockholders                      27        (5,108)           (1,279)       (2,828)
                                                          =====        ======            ======        ======
                  Basic earnings/(loss) per share of
                    common stock                          $0.00        ($0.28)           ($0.06)       ($0.14)

</TABLE>

                  Diluted loss per share for the nine month period ended March
31, 1998 and the three and nine month periods ended March 31, 1997 do not

reflect the incremental shares from the assumed conversion of stock options or
warrants or the conversion of the preferred stock or convertible debt to common
stock because the effect of such inclusion would be to reduce the loss per
share. Diluted earnings per share for the three month period ended March 31,
1998 does not reflect the incremental shares from the conversion of the
preferred stock or convertible debt to common because the effect of such
inclusion would be anti-dilutive.

                                       10

<PAGE>



                             AMBI INC. & SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 1998

<TABLE>
<CAPTION>


                                                         3 months ended                  9 months ended
                                                            March 31                        March 31
                                                        1998          1997              1998          1997
                                                          No. of Shares                   No. of Shares
                                                          -------------                   -------------

<S>                                                  <C>           <C>               <C>           <C>       
                  Weighted average shares
                  outstanding                        20,898,297    18,524,049        19,919,345    19,826,189
                  Stock options and warrants             13,894            --                --            --
                                                      ----------    ----------        ----------    ----------
                  Total weighted average shares       20,912,191    18,524,049        19,919,345    19,826,189
                                                      ----------    ----------        ----------    ----------
<CAPTION>

                                                          $'000         $'000             $'000         $'000
                                                          -----         -----             -----         -----

<S>                                                  <C>           <C>               <C>           <C>       
                  Net income/(loss)                         532         (5021)              238        (2,547)
                  Preferred stock dividend                  (78)          (87)             (295)         (281)
                  Conversion discount on convertible
                    preferred stock                        (427)           --            (1,222)           --
                                                          -----         -----             -----         -----
                  Net income/(loss) attributable to
                    common stockholders                      27        (5,108)           (1,279)       (2,828)
                                                          =====         =====             =====         =====
                  Diluted earnings/(loss) per share of
                    common stock                          $0.00        ($0.28)           ($0.06)        ($0.14)
</TABLE>


                  At March 31, 1998 the Company had 5,400,000 stock options and
                  warrants outstanding to purchase common stock at exercise
                  prices ranging from $1.25 to $7.69, but these were not
                  included in the computation of diluted earnings per share for
                  all periods except the three month period ending March 31,
                  1998 because such inclusion would be antidilutive.

                  The Company issued a $2 million note at an interest rate of
                  5%, payable to Nippon Shoji Kaisha (NSK) on March 18, 1999.
                  The note provides that (1) if an Investigational New Drug
                  application (IND) for the treatment of diseases of the colon
                  is filed and accepted by the United States Food and Drug
                  Administration (FDA) by March 18, 1998, the Company has the
                  right to repay $1 million of the note with its common stock,
                  and (2) if rat and dog toxicology programs related to
                  treatment of nosocomial antibiotic resistant infections are
                  completed by September 18, 1998, the Company has the right to
                  repay $1 million of the note with its common stock. The common
                  stock for repayment purposes is valued at the average closing
                  price during the ten (10) consecutive trading days immediately
                  prior to the Company notifying NSK of its election to repay
                  with common stock. The Company has been advised that the FDA
                  has accepted its IND for diseases of the colon. The Company,
                  as a result, intends to repay $1 million of the note with its
                  common stock.

                  As more fully discussed in Note E, the Company has convertible
                  preferred stock outstanding that can be converted into common
                  stock. At March 31, 1998, these amounts have not been included
                  in the computation of diluted earnings per share because such
                  inclusion would be antidilutive.

                                       11


<PAGE>


                             AMBI INC. & SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 1998



Note E            Convertible preferred stock

                  With respect to the Company's Series C Preferred Stock (the "C
                  Preferred"), on December 5, 1997 the Company reduced the fixed
                  conversion price from $3.25 to $2.75. The maturity date for
                  mandatory conversion was extended to October 13, 1999. The
                  holders of the C Preferred agreed not to convert any of their
                  remaining holdings for a period of six months ending on June
                  5, 1998.


                  With respect to the Company's Series D Preferred Stock (the "D
                  Preferred"), on December 5, 1997 the holders of the D
                  Preferred (the " D Investors") converted fifty percent of
                  their holdings into common stock of the Company at a
                  twenty-five percent discount to the average closing bid prices
                  for the Company's Common Stock for the five (5) consecutive
                  trading days immediately preceding conversion. The Company
                  reduced the fixed conversion price and the warrant exercise
                  price from $2.50 to $2.25. The maturity date for mandatory
                  conversion was extended to May 8, 2001. The D Investors agreed
                  not to convert any of their remaining holdings for a period of
                  six months ending on June 5, 1998. The twenty-five percent
                  conversion discount described above has been recorded as
                  additional preferred dividends and reduced net income
                  available to common stockholders for the three and nine months
                  ended March 31, 1998 (See Note D). The Company expects to
                  amortize an additional $303,000 in additional preferred
                  dividends relating to the conversion discount on the series D
                  preferred stock for the three months ended June 30, 1998.

                  The reduction in the fixed conversion price described above
                  for the Series C and Series D Preferred Stock has not been
                  recorded as additional preferred dividends for the nine months
                  ended March 31, 1998 because the Company's stock price is not
                  high enough for the fixed conversion price to be beneficial to
                  the Series C and Series D investors. As of March 31, 1998 the
                  original discounts of fifteen and twenty-five percent granted
                  to the Series C and Series D investors are more beneficial for
                  conversion purposes. As such, these conversion discounts have
                  been recorded as additional preferred dividends (See Note D).
                  Should the fixed conversion price become more beneficial to
                  the Series C investors (when the Company's stock price exceeds
                  $3.23) or the D Investors (when the Company's stock price
                  exceeds $3.00) the Company will record additional preferred
                  dividends based on the Company's stock price at that time.


Note F            Debt refinancing

                  On December 31, 1997 the Company entered into a new Revolving
                  Credit and Term Loan Agreement with State Street to refinance
                  its prior loans from State Street. The refinanced loans
                  consist of a term loan of $2.8 million ("Term Loan") and a
                  revolving credit line of up to $4.0 million ("Revolving
                  Loan"), both bearing interest at the prime rate plus one
                  percent and are due June 30, 2000. The Company is making
                  monthly payments of principal and interest on the Term Loan.
                  The Revolving Loan is an asset based loan, with any amounts
                  borrowed due by the expiration date of the revolving loan
                  (June 30, 2000). On March 31, 1998 the outstanding balance on
                  the term loan and revolving loan were $2,644,000 and
                  $1,608,000, respectively. The Company has a zero balance on
                  its revolving loan as of the filing date of this Form 10-Q.


                                       12

<PAGE>



                             AMBI INC. & SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 1998



Note G            Pro forma financial information

                  The following represents the pro forma consolidated results of
                  operations as if the Company and Nutrition 21 had been
                  combined for the entire nine months ended March 31, 1998 and
                  1997 respectively. The pro forma results of operations reflect
                  amounts adjusted to their accounting basis as if the
                  acquisition had occurred at the beginning of the respective
                  periods. The pro forma information is not necessarily
                  indicative of the results of operations as they may be in the
                  future or as they would have been had the acquisition been
                  effected on the assumed dates.

                                                          Nine Months Ended
                                                               March 31

                                                           1998       1997
                                                           $000       $000
                                                           ----       ----

                  Revenues                                 15,688     24,026

                  Net income                                  741      2,628

                  Basic (loss)/earnings per share         ($0.04)      $0.10

                  Diluted (loss)/earnings per share       ($0.04)      $0.09

                  The results for the nine months ended March 31, 1997, include
                  a $9.7 million one time gain from the sale of Aplin & Barrett,
                  a food preservative business (See Note H).


Note H            Sale of Aplin & Barrett

                  The Company completed the sale of its United Kingdom based
                  food preservative business, Aplin & Barrett, Ltd., to Burns
                  Philp & Company Ltd. on December 12, 1996. As a result, the
                  operations of Aplin & Barrett are included in the financial
                  statements through that date. Key terms of the transaction

                  included the payment to the Company of $13.5 million in cash,
                  ($8.0 million paid on December 12, 1996 and $5.5 million paid
                  on June 12, 1997), and the payment of 2.42 million shares of
                  the Company's common stock held by Burns Philp. In addition,
                  Burns Philp has provided the Company with a revolving line of
                  credit of up to $2.5 million that could be forgiven under
                  certain circumstances related to the performance of the food
                  preservative business through June 30, 1999. As of March 31,
                  1998 the Company has not borrowed any amounts under this
                  revolving line of credit.


Note I            Recently issued accounting standards

                  In June 1997, the FASB issued SFAS No. 130 "Reporting
                  Comprehensive Income" and SFAS No. 131 "Disclosures about
                  Segments of an Enterprise and Related Information." SFAS No.
                  130 establishes standards of reporting and display of
                  comprehensive income and its components in a full set of
                  general purpose financial statements. SFAS No. 131 supersedes

                                       13

<PAGE>



                             AMBI INC. & SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 1998


                  SFAS No. 14 "Financial Reporting for Segments of a Business
                  Enterprise", but retains the requirement to report information
                  about major customers. In February 1998, the FASB issued SFAS
                  No. 132 "Employers Disclosures About Pensions and Other
                  Post-Retirement Benefits." This statement revises employers
                  disclosures about pension and other post- retirement benefit
                  plans. These statements are effective for financial statements
                  for annual periods beginning after December 15, 1997. It is
                  not expected that the adoption of these statements will have a
                  material impact on the Company's financial position or
                  operating results.

                                       14




<PAGE>


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


The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and related notes thereto of the Company
included elsewhere herein.

General

The Company's historical revenues have been primarily attributable to sales of
its own products. The Company has acted in the past as selling agent for certain
products of both affiliated as well as unaffiliated companies. Effective July 1,
1995, the Company assumed responsibility for selling products in the U.S. on
behalf of an affiliated company, Burns Philp & Company Ltd. ("Burns Philp").
This relationship was discontinued effective September 11, 1996. The Company
also receives royalty income from users of its patented technology and milestone
payments from research partners.

The Company completed the sale of its UK-based food preservative business, Aplin
& Barrett Ltd. ("A&B"), to Burns Philp on December 12, 1996. As a result, the
operations of A&B are included in the financial statements through that date.
The decision to sell A&B to Burns Philip was made by the Company's Board of
Directors in 1996. At that time directors unaffiliated with Burns Philp
constituted a majority of the Board of Directors. The Board's decision was based
upon its view that the Company's resources would be more profitably employed in
pursuing the development and/or acquisition of other products or businesses and
that such development and acquisitions would be facilitated by the cash proceeds
of the sale of A&B. After the sale, Burns Philip owned approximately 40% of the
Company's Common Stock.

On August 11, 1997, the Company acquired the entire beneficial interest in
Nutrition 21 ("N21"), a limited partnership. N21 is engaged in the business of
developing, producing, and marketing proprietary nutrition products and dietary
supplements. Currently N21's primary product is chromium picolinate, which is
marketed under the registered trademark "Chromax." N21 has an exclusive license
from the United States Department of Agriculture ("USDA") for the duration of a
patent which covers the composition of chromium picolinate and its uses. This
patent expires on August 8, 2000. The USDA license grants N21 the exclusive
right to manufacture, use, and sell chromium picolinate in the United States.
N21 also owns U.S. Patents expiring in 2009, relating to chromium picolinate
treatments for reducing hyperglycemia and stabilizing the level of serum
glucose, for preventing undesirable high levels of blood serum lipids, and for
increasing lean body mass and reducing body fat, and other patents relating to,
among other things, arginine silicate complexes for preventing or inhibiting
atherosclerosis, and magnesium taurate treatments of cardiac conditions.

Cost of sales includes both direct and indirect manufacturing costs. Marketing
and sales expenses include salaries, third party fees, royalties and all other
costs associated with selling the Company's products. Research and development
expenses include internal expenditures as well as expenses associated with third

party collaborators. General and administrative expenses include salaries,
overheads, third party fees and expenses, and costs that are not associated with
selling the Company's products or research and development. Depreciation and
amortization include the depreciation of the companies property, plant and
equipment and the amortization of goodwill, patent costs and other intangible
assets. The Company amortizes goodwill over fifteen years and it amortizes all
other intangible assets over their useful economic lives, which range from three
to fifteen years.

Results of Operations

Revenues

Revenues for the quarter increased from the corresponding period in 1997 by 187%
to $5.3 million, and for the nine month period by 38% to $14.4 million. These
increases in revenues are a result primarily of the acquisition of N21. The
increase in revenue from the acquisition of N21 is partially offset by the
absence of significant revenues from other products. Revenues also reflect the
absence of the Company's food preservative business (A&B) which was sold during
the quarter ended December 31, 1996 (See Note H).

                                       15

<PAGE>


Item 2 - Management's Discussion and Analysis of Financial Condition and 
Results of Operations, Continued

Cost of goods sold

Gross profit for the Company as a percentage of revenues was 86% for the quarter
and nine months ended March 31, 1998, compared to 59% for the quarter and 58%
for the nine months ended March 31, 1997. This increase in gross profits
reflects a sales mix which includes the higher margin N21 products for the three
and nine months ending March 31, 1998 replacing the A&B products included for
the nine months ended March 31, 1997. A&B had gross profit as a percentage of
revenues of approximately 61% for the nine months ended March 31, 1997. A&B
products were not included in the Company's revenues for the quarter ended March
31, 1997.

Marketing and sales expenses

Marketing and sales expenses decreased $2.6 million or 62% for the quarter and
$6.7 million or 59% for the nine months ended March 31, 1998, compared to the
quarter and nine months ended March 31, 1997, respectively. The decrease is
primarily due to lower spending on Cardia Salt Alternative and Wipe Out Dairy
Wipes. Combined spending on these products declined for the quarter and nine
months ended March 31, 1998 by $3.5 million and $8.0 million respectively.

General and administrative expenses ("G&A")

G&A expenses increased $0.3 million or 31% for the quarter and $1.1 million or
36% for the nine months ended March 31, 1998, compared to the quarter and nine

months ended March 31, 1997. These increases are largely due to general and
administrative expenses relating to N21 which were approximately $0.3 million
and $0.9 million for the three and nine months ended March 31, 1998 and are not
included for the corresponding periods during 1997.

Research and development costs

Research and development costs decreased $0.4 million or 43% for the quarter and
$1.3 million or 39% for the nine months ended March 31, 1998 compared to the
quarter and nine months ended March 31, 1997. This decrease is due to the
Company's decision to reduce research activities related to the infectious
disease drug business.

Depreciation and amortization ("D&A")

D&A expenses increased by $0.3 million or 206% for the quarter and $0.4 million
or 71% for the nine months ended March 31, 1998 compared to the quarter and nine
months ended March 31, 1997. The increase in D&A for the three and nine month
periods ended March 31, 1998 was due to the amortization of the goodwill and
other intangible assets associated with the acquisition of N21.

Operating income (loss)

The Company recorded operating income of $0.6 million in the quarter ended March
31, 1998, compared with a loss of $5.2 million in the quarter ended March 31,
1997. In the nine months ended March 31, 1998, the Company recorded an operating
loss of $0.5 million, compared with a loss of $12.3 million in the nine months
ended March 31, 1997. The Company became profitable for the quarter and reduced
its operating loss for the nine months ended March 31, 1998 by reducing
marketing and sales expenses as well as research and development costs and
increasing revenues associated with N21.

Tax expense

The Company's tax expense for the quarter and nine months ended March 31, 1998
resulted from net income from N21 operations in the state of California. The tax
expense for the quarter and nine months ended March 31, 1997 related to foreign
taxes for the Company's foreign subsidiary, Aplin & Barrett which was sold in
December 1996.

                                       16

<PAGE>


Item 2 - Management's Discussion and Analysis of Financial Condition and 
Results of Operations, Continued

Net income/(loss) and earnings/(loss) per share

The Company recorded net income of $0.5 million ($0.00, diluted earnings per
share) in the quarter ended March 31, 1998, compared with a net loss of $5.0
million ($0.28, diluted loss per share) in the quarter ended March 31, 1997. For
the nine months ended March 31, 1998, the Company recorded net income of $0.2

million ($0.06, diluted loss per share), compared with a net loss of $2.5
million ($0.14, diluted loss per share) in the nine months ended March 31, 1997.
The loss in fiscal 1997 included a gain of $9.683 million on the sale of A&B
which occurred on December 12, 1996 (See Note H). The calculation of earnings
per share for the nine months ending March 31, 1998, includes deductions from
net income for accrued preferred dividends and a conversion discount on
preferred stock previously issued by the Company. The Company is therefore
reporting a loss per share of common stock for the nine months of fiscal 1998
even though the Company reported positive net income for that period. See Note D
for further information.

The Company reported net income and earnings per share for the quarter and
reported net income and reduced its loss per share for the nine months ended
March 31, 1998 as compared to the same period during 1997 by reducing marketing
and sales expenses as well as research and development costs and increasing
revenues associated with N21.

Quarterly Variations

On a quarter-to-quarter basis, the Company's sales and income may vary widely,
as a result of various factors, including, for example, customers placing orders
in anticipation of a price increase and customers adjusting finished goods
inventory levels. As a result, the Company may report sales increases or
declines and/or income gains or losses for a particular quarter that may not
reflect end-customer usage of the Company's products.

Liquidity and capital resources

As of March 31, 1998, the Company had a working capital deficit of $0.6 million,
which included cash and cash equivalents of $0.9 million. The Company continues
to take steps to improve its working capital position by increasing sales from
existing business and reducing operating expenses. On June 30, 1997, working
capital was $7.1 million, which included cash and cash equivalents of $8.6
million.

As of March 31, 1998 the Company had a loan balance of $2.6 million with State
Street Bank. The Company had originally borrowed $3.3 million from State Street
to fund the acquisition of N21. At December 31, 1997 , the Company refinanced
the loan with State Street. Under the revised terms the Company now has a $2.8
million term loan which is amortized over a 30 month period, at an interest rate
at the bank's prime rate plus one percent. The bank also continues to provide an
asset based revolving credit line of up to $4 million, and any amount borrowed
under this facility is due by the expiration date of the credit line (June 30,
2000). The Company has borrowed approximately $1.6 million under this line of
credit as of March 31, 1998. The Company has a zero balance under this line as
of the date of this Form 10-Q filing.

As a result of the sale of A&B, the Company experienced a significant decline in
revenues during the latter part of fiscal 1997. This loss of revenues also
contributed to the increase in the operating loss to $16.6 million in fiscal
1997, compared with an operating loss of $4.6 million in fiscal 1996. A&B
generated cash flows of $0.5 million and $3.1 million in fiscal 1997 and fiscal
1996, respectively. The sale of A&B did generate cash proceeds of $13.5 million
which provided adequately for the Company's short-term capital requirements. The

Company has only recently reinvested the proceeds from this sale into the
acquisition of N21, which has thus far generated revenues greater than those
lost as a result of the sale of A&B.

In connection with the sale of A&B, Burns Philp provided the Company with a
revolving credit line of up to $2.5 million that could be forgiven under certain
circumstances related to the performance of the Nisaplin food preservative
business through June 30, 1999. Borrowings under this credit line will accrue
interest at a rate equal to the prime rate set from time to time by Citibank. To
date the Company has not borrowed any amounts under this credit line, nor is it
determinable at this time whether the future performance of the food
preservative business would result in the forgiveness of any debt.

                                       17

<PAGE>


Item 2 - Management's Discussion and Analysis of Financial Condition and 
Results of Operations, Continued

With respect to the acquisition of N21, the Company expects that as of the end
of its fiscal year on June 30, 1998, the Company will owe the former partners of
N21 a contingent payment of approximately $2.5 million (see Note B). As of March
31, 1998 the Company has accrued $1.5 million towards that expected contingent
payment. The Company believes that it will be able to use cash generated from
operations or its short term revolving line of credit to satisfy the contingent
payment obligation. The ability to satisfy the contingent payment obligation
will be a significant factor in the Company's ability to maintain an adequate
level of cash flow. The Company continues to reduce expenditures related to the
infectious disease drug business and it has eliminated expenditures that are not
critical to the process of generating sales.

After the acquisition of N21, the Company's two primary sources of financing are
cash generated from continuing operations and the State Street revolving line of
credit. The revolving line of credit was originally obtained as part of the
financing for the N21 acquisition. The availability under this revolving line of
credit is based on the Company's accounts receivable and inventory. At March 31,
1998 approximately $1.6 million had been drawn down on this line. The Company
has a zero balance under this line as of the filing date of this Form 10-Q. The
Company believes that cash generated from operations along with amounts
available under the line of credit will provide sufficient liquidity to fund
operations.

Year 2000 compliance

The Company is currently analyzing the potential impact of the Year 2000 on the
processing of date sensitive information by the Company's computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather then four) to define an applicable year.
The Company's general ledger system is currently Year 2000 compliant. The
Company is studying the impact of the Year 2000 on other aspects of its
business. Based upon current information, costs of addressing issues relating to
Year 2000 compliance are not expected to have a material impact on the Company's

financial position, results of operations, or cash flows in future periods.


Inflation and prevailing economic conditions

The Company does not believe inflation has had a significant impact on the
Company's operations.

The Company does not believe exchange rates have had a significant impact on the
Company's operations.

Seasonality

The Company does not believe there is any significant seasonal effect on the
Company's operations. There may be variations between quarters due to other
factors. See "Quarterly Variations."

Recently issued accounting standards

In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards of reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting
for Segments of a Business Enterprise", but retains the requirement to report
information about major customers. In February 1998, the FASB issued SFAS No.
132 "Employers Disclosures About Pensions and Other Post-Retirement Benefits."
This statement revises employes disclosures about pension and other
post-retirement benefit plans. These statements are effective for financial
statements for annual periods beginning after December 15, 1997. It is not
expected that the adoption of these statements will have a material impact on
the Company's financial position or operating results.


                                       18

<PAGE>


                           PART II - OTHER INFORMATION




Item 1 - Legal Proceedings


The Company is a defendant in a lawsuit brought in 1997 in the United States
District Court for the Southern District of New York (Civil Action No. 97
Civ.5802 (BDP)) by RCN Products, Inc. ("RCN"). RCN sells a product called
"NoSalt - The NO Sodium Salt Alternative." RCN is suing under the Lanham Act and
New York General Business Law, alleging that the term "Salt Alternative" used by
AMBI to describe its Cardia(R) product, amounts to unfair competition by leading
consumers to believe that the Cardia product is salt free. RCN is seeking to
enjoin the Company from using the term "Salt Alternative" and unspecified
damages. The Corporation believes that the Cardia label is clear that the
product is not salt free. The label states, among other things, that the product
contains 54% less sodium than table salt, and lists sodium chloride as an
ingredient. The Company is contesting RCN's claim, and in the opinion of
management, the RCN claim is without merit. The cost of defending this lawsuit,
except for a $100,000 deductible which has been expensed by the Company, are
being reimbursed by the Company's insurers.


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

The Company's annual meeting of stockholders was held on March 31, 1998. The
following actions were taken at the meeting:

     Election of Directors

                               Votes For              Votes Withheld

     Audrey T. Cross, PhD      19,129,986                 275,387
     Robert E. Flynn           19,134,386                 270,987
     Sheldon G. Gilgore, MD    19,134,386                 270,987
     Marvin Moser, MD          19,134,386                 270,987
     Fredric D. Price          19,134,386                 270,987
     Robert E. Pollack, PhD    19,134,386                 270,987



     Appointment of KPMG Peat Marwick LLP as auditors for the
     fiscal year ending June 30, 1998

     Votes For 19,269,306 ; Votes Against 99,329; Abstentions 36,738


Item 6 - Exhibits and Report on Form 8-K



Exhibit 27 - Financial Data Schedule


The Company filed a report on Form 8-K/A3 on February 20, 1998, amending its
Form 8-K report relating to the purchase of Nutrition 21.

The Company filed a report on Form 8-K/A3 on February 20, 1998, amending its 
Form 8-K report relating to the sale of its Aplin and Barrett subsidiary.

                                       19



<PAGE>


                              AMBI INC.& SUBSIDIARY

                                   SIGNATURES



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





                                                               AMBI INC.
                                                              Registrant






Date: May 14, 1998         By:      /S/ Fredric D. Price
                                    --------------------
                                    Fredric D. Price
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


                                    /S/ Gerald A. Shapiro
                                    Gerald A. Shapiro
                                    Vice President and Chief Financial Officer
                                    (Principal Financial Officer)

                                       20