<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:                                            December 31, 1997


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 February 2, 1998
-----------------------------          ----------------------------------------

                                      1

<PAGE>


                            AMBI INC. & SUBSIDIARY

                                     INDEX



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

Item 1       Financial Statements


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


             Condensed Consolidated Statements of
                      Operations for the three months and
                      six months ended December 31, 1997                    5
                      and December 31, 1996


             Condensed Consolidated Statement of
                      Changes in Stockholders' Equity                       6
                      for the six months ended
                      December 31, 1997


             Condensed Consolidated Statements of
                      Cash Flows for the six months
                      ended December 31, 1997 and                           7
                      December 31, 1996


             Notes to Condensed Consolidated
                      Financial Statements                                  8


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


PART II      OTHER INFORMATION

Item 6       Exhibits and Reports on Form 8-K                              19


                                      2

<PAGE>


                            AMBI INC. & SUBSIDIARY

                     CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                           December 31        June 30
                                                              1997             1997
                                                           (Unaudited)        (Note)
                                                             $'000            $'000
                                                           ----------       ----------
<S>                                                        <C>              <C>  

ASSETS

Current assets:

Cash and cash equivalents                                         507            8,615
Trade accounts receivable less allowance for
  doubtful accounts of $267,000 at December 31, 1997
  and $104,000 at June 30, 1997                                 3,055              390
Inventories                                                     1,588              606
Prepayments and other current assets                              738              404
                                                           ----------       ----------

Total current assets                                            5,888           10,015

Property, plant and equipment at cost less
  accumulated depreciation of $513,000 at December
  31, 1997 and $382,000 at June 30, 1997                        1,024            1,082
Patent costs, licensed technology and other
  intangible assets at cost less accumulated
  amortization of $1,356,000 at December 31, 1997               9,422            1,584
  and $862,000 at June 30, 1997
Goodwill at cost less accumulated amortization of
  $43,000 at December 31, 1997 and $0 at June 30,
  1997                                                          2,108
Other assets                                                      295               73
                                                           ----------       ----------

TOTAL ASSETS                                                   18,737           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>
                                                                December 31           June 30
                                                                   1997                 1997
                                                                (Unaudited)            (Note)
                                                                   $'000               $'000
                                                                ------------        ------------
<S>                                                             <C>                 <C>

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long term debt and lease obligation                 1,084                 156
Accounts payable                                                         734               1,283
Accrued expenses                                                       1,570               1,181
Preferred dividends payable                                              480                 340
Contingent payments payable - Nutrition 21 acquisition                   575
                                                                ------------        ------------

Total current liabilities                                              4,443               2,960

Long term debt and lease obligation, less current portion              3,949               2,184
Revolving line of credit facility                                      1,092
Accrued royalties                                                        301
                                                                ------------        ------------

TOTAL LIABILITIES                                                      9,785               5,144
                                                                ------------        ------------

STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 5,000,000:
  Series C convertible preferred, 222 shares
  outstanding at December 31 and June 30 respectively
  (aggregate liquidation value Series C $2,610,355)                        *                   *
Series D convertible preferred, 45,000 shares issued and
  22,600 shares outstanding at December 31 and 45,000
  shares issued and outstanding at June 30
  (aggregate liquidation value Series D $2,348,047)                        *                   *
Common stock, $0.005 par value, authorized
  65,000,000 shares. Issued and outstanding 20,898,297
  at December 31 and 18,783,342 at June 30                               104                  94
Additional paid-in capital                                            54,055              51,416
Accumulated deficit                                                  (45,207)            (43,900)
                                                                ------------        ------------

TOTAL STOCKHOLDERS' EQUITY                                             8,952               7,610
                                                                ------------        ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            18,737              12,754
                                                                ============        ============
</TABLE>


*Value less than $500

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            Six Months Ended
                                               December 31                 December 31
                                            1997          1996          1997          1996
                                           $'000         $'000         $'000         $'000
                                           -----         -----         -----         -----
<S>                                       <C>           <C>           <C>           <C>  

Revenues                                   5,789         4,199         9,032         8,565

Cost of goods sold                          (695)       (1,164)       (1,350)       (3,653)
                                          ------        ------        ------        ------

GROSS PROFIT                               5,094         3,035         7,682         4,912

Marketing and sales expenses              (1,600)       (2,850)       (3,047)       (6,006)
Research and development expenses         (1,067)       (1,112)       (1,562)       (2,512)
General and administrative expenses       (1,316)       (1,552)       (2,559)       (3,001)
Depreciation and amortization               (485)         (241)         (625)         (483)
                                          ------        ------        ------        ------

OPERATING INCOME/(LOSS)                      626        (2,720)         (111)       (7,090)
Interest income                               15            42            59           109
Interest expense                            (161)          (50)         (185)          (87)
Gain on sale of Aplin & Barrett            9,683         9,683
                                          ------        ------        ------        ------

INCOME/(LOSS) BEFORE TAX EXPENSE             480         6,955          (237)        2,615
Income tax expense                           (50)          (96)          (57)         (141)
                                          ------        ------        ------        ------

NET INCOME/(LOSS)                            430         6,859          (294)        2,474
                                          ======        ======        ======        ======

EARNINGS/(LOSS) PER SHARE

-Basic                                    $ 0.00        $ 0.33        $(0.04)       $ 0.11
-Diluted                                  $ 0.00        $ 0.32        $(0.04)       $ 0.11
</TABLE>


See notes to condensed consolidated financial statements

                                      5

<PAGE>


                            AMBI INC. & SUBSIDIARY

      CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
                                  (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                          796         (796)
Preferred stock dividends                                                               (217)
Net loss for the period                                                                 (294)
                                                           ------        ------      -------

Balance at December 31, 1997                                  104        54,055      (45,207)
                                                           ======        ======      ======= 
</TABLE>


See notes to condensed consolidated financial statements

                                      6

<PAGE>


                            AMBI INC. & SUBSIDIARY

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                      Six Months Ended
                                                                                         December 31
                                                                                  1997                  1996
                                                                                 $'000                 $'000
                                                                                 -----                 -----
<S>                                                                            <C>                   <C>  

Cash flows from operating activities:
  Net (loss)/income                                                               (294)                2,474
Adjustments to reconcile net (loss)/income
  to net cash used in operating activities:
     Depreciation and amortization                                                 625                   483
     Gain on Sale of Aplin & Barrett                                                                  (9,683)
     Other non-cash items                                                                                 65
  Changes in assets and liabilities, net of effects
   from the acquisition of Nutrition 21 and the sale
   of Aplin & Barrett:
     (Increase) in trade accounts receivable                                       (58)                 (635)
     (Increase)/decrease in inventories                                           (526)                  275
     (Increase) in other current assets                                           (257)                 (209)
     (Decrease) in taxes payable                                                                        (254)
     (Decrease)/increase in accounts payable and accrued expenses                 (617)                1,147
     Increase in accrued royalties                                                 301
     Increase in other liabilities                                                                       189
                                                                               -------               -------
Net cash (used in) operating activities                                           (826)               (6,148)
                                                                               -------               -------

Cash flows from investing activities:
  Purchases of property, plant and equipment                                       (39)                 (754)
  Patent costs                                                                    (328)                 (121)
  Increase in other assets                                                        (201)
  Payment for Nutrition 21 and related acquisition costs                       (10,499)
  Proceeds from the sale of Aplin & Barrett                                                            8,000
                                                                               -------               -------
Net cash (used in)/provided by investing activities                            (11,067)                7,125
                                                                               -------               -------

Cash flows from financing activities:
  Term loan borrowings                                                           3,300
  Revolving line of credit borrowings                                            1,092
  Term loan repayments                                                            (500)
  Capital lease obligation repayments                                             (107)               (1,103)
  Capital lease proceeds                                                                                 328
  Proceeds from issuance of common stock                                                                 294
                                                                               -------               -------
Net cash provided by/(used in) financing activities                              3,785                  (481)
                                                                               -------               -------

Effect of exchange rate movement                                                                         (10)

Net (decrease)/ increase in cash and cash equivalents                           (8,108)                  486
Cash and cash equivalents at beginning of period                                 8,615                 8,431
                                                                               -------               -------
Cash and cash equivalents at end of period                                         507                 8,917
                                                                               =======               =======

Supplementary disclosure of cash flow information:
  Interest paid                                                                     83                    62
  Tax paid                                                                           7
</TABLE>


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
                                                                      =======
                                      7

<PAGE>


                            AMBI INC. & SUBSIDIARY

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               DECEMBER 31, 1997


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 six month period ended
                  December 31, 1997 are not necessarily indicative of the
                  results that may be expected for the 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, 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. Based on sales
                  through December 31, 1997

                                      8

<PAGE>


                            AMBI INC. & SUBSIDIARY

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               DECEMBER 31, 1997


                  a contingent payment of $575,000 has been accrued. As of
                  December 31, 1997 no royalty payments were due. The
                  acquisition was accounted for under the purchase method. As
                  such, as of December 31, 1997 the Company has recorded
                  approximately $2,150,000 of goodwill and $7,963,000 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
                  six months ended December 31, 1997 the Company recorded
                  approximately $422,000 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 then 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. Based on sales of chromium picolinate from August
                  11, 1997 through December 31, 1997 and the Company's stock
                  price at December 31, 1997, the Company has accrued $301,000
                  in royalties to the individuals described above.


Note C            Inventory

                  All inventory consists of finished goods at December 31 and
                  June 30, respectively.


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 six months
                  ended December 31, 1997 and 1996 are computed based on the
                  weighted average number of shares outstanding for the
                  respective periods as follows:

                                      9

<PAGE>


                            AMBI INC. & SUBSIDIARY

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                                       3 months ended                      6 months ended
                                                                         December 31                         December 31
                                                                     1997          1996                  1997          1996
                                                                        No. of Shares                       No. of Shares
                                                                        -------------                       -------------
<S>                                                                <C>             <C>                <C>             <C>       

                  Weighted average shares                          19,820,502      20,243,174         19,464,121      20,387,206
                                                                  -----------     -----------        -----------     -----------

                                                                        $'000           $'000              $'000           $'000
                                                                  -----------     -----------        -----------     -----------
                  Net income/(loss)                                       430           6,859               (294)          2,474
                  Preferred stock dividend                               (103)           (100)              (217)           (194)
                  Conversion discount on convertible
                    preferred stock                                      (420)                              (796)
                                                                  -----------     -----------        -----------     -----------
                  Net income/(loss) attributable to
                    common stockholders                                   (93)          6,759             (1,307)          2,280
                                                                  ===========     ===========        ===========     ===========

                  Basic earnings/(loss) per share of
                    common stock                                        $0.00           $0.33             ($0.07)          $0.11
</TABLE>

                  Diluted earnings per share for the three and six month
                  periods ended December 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 and six month
                  periods ended December 31, 1996 are computed based on the
                  weighted average number of shares outstanding plus the
                  shares that would be outstanding assuming the exercise of
                  certain stock options and warrants and the conversion of
                  preferred stock to common stock. The number of shares that
                  would be issued from the exercise of stock options and
                  warrants has been reduced by the number of shares that could
                  have been purchased from the proceeds at the average market
                  price of the Company's stock. The computation of diluted
                  earnings per share is as follows:

                                      10

<PAGE>


                            AMBI INC. & SUBSIDIARY

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                                   3 months ended                   6 months ended
                                                                     December 31                      December 31
                                                                  1997          1996               1997          1996
                                                                     No. of Shares                    No. of Shares
                                                                     -------------                    -------------
<S>                                                            <C>             <C>               <C>             <C>       

                  Average shares outstanding                   19,820,502      20,243,174        19,464,121      20,387,206
                  Stock options and warrants                                      192,323                           448,302
                  Conversion of preferred stock                                 1,094,632                           896,381
                                                              -----------     -----------       -----------     -----------

                  Total average shares                         19,820,502      21,530,129        19,464,121      21,731,889
                                                              -----------     -----------       -----------     -----------

                                                                    $'000           $'000             $'000           $'000
                                                              -----------     -----------       -----------     -----------
                  Net income/(loss)                                   430           6,859              (294)          2,474
                  Preferred stock dividend                           (103)                             (217)               
                  Conversion discount on convertible
                    preferred stock                                  (420)                             (796)               
                                                              -----------     -----------       -----------     -----------
                  Net income/(loss) attributable to
                    common stockholders                               (93)          6,859            (1,307)          2,474

                  Diluted earnings/(loss) per share of
                    common stock                                    $0.00           $0.32            ($0.07)          $0.11
</TABLE>

                  At December 31, 1997 the Company had 5,202,000 stock options
                  and warrants outstanding to purchase common stock at
                  exercise prices ranging from $1.25 to $7.69 , but were not
                  included in the computation of diluted earnings per share
                  because such inclusion would be antidilutive.

                  The Company has 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 December 31, 1997, 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)
                               DECEMBER 31, 1997


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 to form $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. 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 it had the effect of
                  reducing net income available to common stockholders for the
                  three and six months ended December 31, 1997 (See Note D).
                  The Company expects to amortize an additional $730,000 in
                  additional preferred dividends relating to the conversion
                  discount on the series D preferred stock for the six 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 six
                  months ended December 31, 1997 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
                  December 31, 1997 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). At such a time
                  when the fixed conversion price becomes more beneficial to
                  the Series C investors (when the Company's stock price
                  exceeds $3.23) or the Series 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 loans. 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 June
                  30, 2000.

                                      12

<PAGE>


                            AMBI INC. & SUBSIDIARY

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               DECEMBER 31, 1997


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 six months ended December 31, 1997
                  and 1996 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.

<TABLE>
<CAPTION>
                                                                    Six Months Ended
                                                                       December 31

                                                                  1997             1996
                                                                  $000             $000
                                                                  ----             ----
<S>                                                             <C>              <C>   

                  Revenues                                      10,355           16,649

                  Net income                                       209            4,614

                  Basic (loss)/earnings per share               ($0.04)           $0.22

                  Diluted (loss)/earnings per share             ($0.04)           $0.21
</TABLE>

                  The results for the six months ended December 31, 1996,
                  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 December 31, 1997 the Company has not
                  borrowed any amounts under this revolving line of credit.


Note I            Recently issued accounting standards

                  In April 1997, the FASB issued SFAS number 130 "Reporting
                  Comprehensive Income" and SFAS number 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)
                               DECEMBER 31, 1997


                  SFAS No. 14 "Financial Reporting for Segments of a Business
                  Enterprise", but retains the requirement to report
                  information about major customers. These statements are
                  effective for financial statements for both interim and
                  annual periods ending after December 31, 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 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 US 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. Nutrition 21 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, 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 1996 by
38% to $5.8 million, and for the six month period by 5% to $9.0 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
decline in revenues from other products. Revenues also reflect the absence of
the Company's food preservative business which was discontinued 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


Cost of goods sold

Gross profit for the Company as a percentage of net revenues was 88% for the
quarter and 85% for the six months ended December 31, 1997, compared to 72%
for the quarter and 57% for the six months ended December 31, 1996. This
increase in gross profits reflects a sales mix which includes the higher
margin N21 products for the

A&B products for the quarter and the six months ended December 31, 1996. N21
products had a gross profit percentage of net revenues of approximately 91%
for the quarter and six months ended December 31, 1997, while A&B had a gross
profit as a percentage of net revenues of approximately 61% for the quarter
and 52% for the six months ended December 31, 1996.

Marketing and sales expenses

Marketing and sales expenses decreased $1.3 million or 45% for the quarter and
$3.0 million or 50% for the six months ended December 31, 1997, compared to
the quarter and six months ended December 31, 1996. 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 six months
ended December 31, 1997 by $1.9 million and $3.7 million respectively.

Research and development costs

Research costs decreased $25 thousand (2%) in the quarter and $930 thousand
(37%) in the six month period compared to the same periods last year. This
decrease is due to the Company's decision to only fund research activities
that are focused on achieving drug development milestones.

General and administrative expenses ("G&A")

G&A expenses decreased $0.2 million or 15% for the quarter and $0.4 million or
15% for the six months ended December 31, 1997, compared to the quarter and
six months ended December 31, 1996. These decreases are largely due to due to
the absence of A&B for the quarter (a decrease of $0.4 million) and six months
(a decrease of $0.6 million).

Depreciation and amortization

The increase in depreciation and amortization for the three and six month
period ended December 31, 1997 was caused by 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
December 31, 1997, compared with a loss of $2.7 million in the quarter ended
December 31, 1996. In the six months ended December 31, 1997, the Company
recorded an operating loss of $0.1 million, compared with a loss of $7.1
million in the six months ended December 31, 1996. The decline in the
operating loss is mainly due to the decrease in spending and the increase in
gross profits attributable to the acquisition of N21.

Income/(loss) before tax expense

The Company recorded income before tax expenses of $0.5 million in the quarter
ended December 31, 1997, compared with income of $7.0 million in the quarter
ended December 31, 1996. In the six months ended December 31, 1997, the
Company recorded a loss before tax expense of $0.2 million, compared with
income of $2.6 million in the six months ended December 31, 1996. The income
in 1996 was due to the gain on the sale of A&B which occurred on December 12,
1996 (See Note H).

                                      16

<PAGE>


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


Tax expense

The Company's tax expense for the quarter and in the six months is a result of
taxes on the profits of N21 in the state of California.

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 December 31, 1997, the Company had working capital of $1.1 million,
which included cash and cash equivalents of $0.5 million. On June 30, 1997,
working capital was $7.1 million, which included cash and cash equivalents of
$8.6 million.

As of December 31, 1997 the Company had a loan balance of $3.9 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 a revolving credit line of up to $4 million, and any
amount borrowed under this facility is not due until June 30, 2000. The
Company has borrowed approximately $1.1 million under this line of credit as
of December 31, 1997.

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.

With respect to the acquisition of N21, the Company expects that as of fiscal
year-end June 30, 1998, the Company will owe the former partners of Nutrition
21 a contingent payment of $2.5 million (see Note B). As of December 31, 1997
the Company has accrued $575 thousand 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 anticipates a continued decline in spending as it seeks to find
pharmaceutical partners to fund research and development and it has eliminated
expenditures that are not critical to the process of generating sales. The
Company may report operating income during the fiscal year ending June 30,
1998 as a result of the aforementioned expense reduction combined with
operating income provided from the recent acquisition of N21 in August 1997.

                                      17

<PAGE>


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


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 December 31, 1997 approximately $1.1 million had been drawn down
on this line. The Company believes that cash generated from operations or the
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, Great Plains Dynamics, is currently
Year 2000 compliant. The Company is studying the impact of the Year 2000
problem on other aspects of its business and as of December 31, 1997 this
impact on the future financial position, operating results, and cash flows of
the Company is not determinable.


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 April 1997, the FASB issued SFAS number 130 "Reporting Comprehensive
Income" and SFAS number 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.

These statements are effective for financial statements for both interim and
annual periods ending after December 31, 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 6 - Exhibits and Report on Form 8-K


Exhibit 27 - Financial Data Schedule


The Company filed reports on Form 8-K/A and Form 8-K/A2 relating to the
purchase of Nutrition 21 on October 22 and December 19, 1997, respectively.

The Company filed reports on Form 8-K/A and Form 8-K/A2 relating to the sale
of its Aplin and Barrett subsidiary on November 6 and December 19, 1997,
respectively.

                                      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: February 17, 1998            By:   /s/ Fredric D. Price
                                         -------------------------------------
                                         Fredric D. Price
                                         President and Chief Executive Officer


                                      20