October 14, 1998

RECOMMENDATION: BUY

AMBI Inc. (NASDAQ: AMBI)

"AHP and Cultor Food Science Deals: Transforming Corporate Events"

SUMMARY INVESTMENT CONSIDERATIONS

AMBI is executing an innovative and profitable growth strategy: developing and commercializing nutritional products for cardiovascular, diabetic and other medical conditions. Its products are proprietary, and are put through pharmaceutical-like clinical trials to demonstrate efficacy and safety. The Company has recently announced two "transforming" strategic alliances with American Home Products ("AHP") and Cultor Food Science, Inc. ("Cultor") that validate AMBI’s strategy, provide the Company with national retail and ingredient distribution for its products, strengthen the balance sheet, and position the Company for future growth. We believe AMBI’s strategic and financial turnaround is completed and the company is poised for growth: In FY98, AMBI earned $1.1 million in net income and more than $3.0 million in EBITDA, and management expects to net over $1.0 million for 1Q99 (ended September 30, 1998).

1. AHP and Cultor Alliances Transform AMBI

• Initial payments and equity purchases by AHP to total $5.0 million, strengthening AMBI’s balance sheet; AHP provides national retail distribution
• Cultor provides nationwide distribution for AMBI products used as "ingredients" in packaged foods
• Alliances validate AMBI strategy; position company for growth

2. Compelling Valuation at Current Levels

• We believe AMBI’s strategy and investment case is not widely understood or appreciated by the investment community; low institutional ownership and limited research sponsorship
• AMBI trades at a significant discount to other small cap healthcare companies and at multiples below that of other nutritional companies

3. Unique Aggressive Growth Strategy in High Growth Industry

• AMBI’s nutritional products are proprietary; AMBI performs clinical trials on its products, and publishes the results
• The US nutritional supplements market is over $10 billion, with anticipated growth rates of over 15% for the next several years

4. Experienced Management — Credible Execution

• Fredric D. Price, AMBI’s President and CEO, has assembled a strong management team with significant pharmaceutical, corporate finance and marketing experience
• AHP, Cultor and Nutrition 21 transactions are indicative of AMBI’s ability to execute its strategy

COMPANY OVERVIEW

AMBI is executing an innovative and profitable growth strategy: developing and commercializing proprietary nutritional products for cardiovascular, diabetic and other medical conditions. Three of AMBI’s key differentiating competitive advantages are as follows: First, its products are proprietary, protected by composition-of-matter, use, formulation patents and/or other know-how. This should afford AMBI pricing power and higher, pharmaceutical-like margins, a characteristic that distinguishes AMBI from other nutritional products companies that have suffered from recent price competition. Second, AMBI puts its products through pharmaceutical-type clinical trials, and publishes or presents the results. This should have the effect of positively influencing healthcare professionals, whose "buy-in" and/or endorsement should expand usage, encourage mainstream acceptance of the benefits of nutritional products, and ultimately drive overall demand. Third, AMBI has a first-class management team with broad pharmaceutical and financial experience, and a track record of being able to execute. Not all micro-cap companies with $20 million in revenues have the vision, the strategy, or the management team to see its way to being a $100 million revenue company. We believe AMBI does.

1. AHP and Cultor Alliances Transform AMBI

• On September 18, 1998, AMBI announced a strategic alliance with American Home Products ("AHP"). In return for license fees and equity investments (initial payments total $5.0 million), AHP received an exclusive license to sell AMBI’s Cardia® Salt Alternative in the US retail markets, and an option to negotiate for exclusive rights and licenses on additional AMBI products.
• On October 6, 1998, AMBI announced it had entered into a distribution agreement with Cultor Food Science, Inc., whereby Cultor will market AMBI’s Cardia Salt Alternative as a food ingredient to the US processed food industry.
• These alliances are very significant as they provide national retail and ingredient distribution for AMBI’s products, validate AMBI’s unique approach to the nutritional products business, strengthen the balance sheet, and position AMBI for significant future growth.

2. Compelling Valuation At Current Levels

• We believe AMBI’s new business strategy and investment case are not currently understood, or appreciated, by the investment community. There is low institutional ownership, and limited investment research sponsorship. We believe the recent transactions will be the catalyst for more institutional interest and research support.
• AMBI trades at a significant discount to other small cap healthcare companies, and at multiples below that of other nutritional product companies. We look for a 12 to 18 month price target of $4 to $5 per share.

3. Unique Aggressive Growth Strategy in High Growth Industry

• Unique strategy in sector: AMBI performs clinical studies, and publishes the results of these studies, on its proprietary nutritional products. We believe this is critical in establishing credibility among industry opinion leaders and should result in increased demand for AMBI’s products.
• Industry sources estimate the size of the US nutritional supplements at over $10 billion, with anticipated annual growth rates of over 15% for the next several years.
• AMBI has identified new products (both internally and externally) to drive revenue and profitability. Its recently announced AHP alliance strengthens the balance sheet, and should enhance AMBI’s ability to acquire new products and companies.

4. Experienced Management and Boards — Credible Execution

• Fredric Price, AMBI’s President & CEO, has assembled an experienced senior management team, and a Board of Directors and Scientific Advisory Board with extensive related industry experience. The team has proven its ability to manage costs, is focused on driving profitability, and can execute and intelligently finance its acquisition strategy.

AMBI PRODUCTS AND PRODUCT PIPELINE

AMBI is developing proprietary nutritional products, with a particular emphasis in the areas of cardiovascular disease and diabetes. With more than 60 million Americans suffering from some form of cardiovascular disease, and 16 million afflicted with "adult-onset" diabetes, AMBI is focused on a large and growing market. Borrowing from lessons learned in the pharmaceutical industry, AMBI puts its products through well-designed clinical trials to demonstrate both safety and efficacy, and publishes or presents these results in well-known journals and at industry conferences.

With respect to establishing proprietary positions for its products, AMBI has 11 issued patents, and an additional 11 patents pending. We believe the proprietary nature of AMBI’s products is a key differentiating component to its strategy, and the investment case. Proprietary products should command higher prices, and larger margins, and therefore be less susceptible to the price competition that has negatively impacted the large nutritional company share prices over the past weeks. Additionally, AMBI is building a brand name, CardiaNutrition, which it intends to use on all of its products, that should become synonymous with high quality manufacturing and clinically proven effectiveness. Branding could provide additional pricing power and product differentiation and is another important competitive tactic for AMBI’s products.

With respect to its product pipeline, AMBI is actively pursuing a two-pronged strategy of internal development, and in-licensing or acquisition. Products in development internally include Arginine Silicate, a new ingredient product covered by a composition-of-matter patent, and Cardio Beverage and Diabetes Beverage, two beverages being developed as "physical delivery" systems for anti-hypertensive and anti-diabetic drugs. Both beverage products are being formulated with ingredients that enhance the activity of the drugs, and may result in improved compliance and reduced side effects, hence lowering healthcare costs. In addition to these programs, AMBI has an active in-licensing and acquisition program. We anticipate AMBI will complete acquisitions of additional products and/or businesses over the next six to 12 months.

Biotechnology Assets: AMBI has some interesting biotechnology assets which are being managed prudently. The Company is developing nisin and lysostaphin as treatments for serious infection. AMBI is actively seeking corporate partners or buyers for these assets. In any event, continued commercialization of this technology is no longer a drain on the financial or managerial resources of the Company.

COMPANY STRATEGY

AMBI is executing a nutritional products growth strategy with three components: "Retail Shelf," "Direct Response," and "Ingredient Sales." Retail Shelf involves the direct sale of AMBI’s products through pharmacies, grocery stores, health food stores, mass merchandisers and specialty retailers. The recently announced strategic alliance with American Home Products provides the national retail distribution that AMBI sought for its Retail Shelf strategy. Direct Response includes sales through catalogs, infomercials and the internet. AMBI will launch an interactive website at www.CardiaNutrition.com that we encourage readers to visit. From AMBI’s website, readers can sign up to receive copies of Heart’s Content, as well as receive information on the Company and its products. Ingredient Sales are sales of its products in bulk form for private label products. AMBI’s current Ingredient Sales customers include Rexall Sundown, General Nutrition Companies, Twinlabs and others. AMBI’s recently announced distribution agreement with Cultor Food Science adds significant distribution power to this component of the Company’s business.

AMBI has an active corporate development program focused on identifying, in-licensing and acquiring new products and businesses that are complementary to its current operations and consistent with its corporate strategy. A successful example of this program was the August 1997 acquisition of Nutrition 21, a leader in the nutritional ingredient product development and marketing. Nutrition 21 has a strong intellectual property and product portfolio, which includes the chromium picolinate and selenium product lines. The structure and financing of the acquisition greatly limited dilution to existing shareholders, and the post-acquisition integration has been smooth. Investors should note that Nutrition 21 had pre-tax income of $6 million prior to the acquisition by AMBI, and $10 million pre-tax in the year since its acquisition, reflecting AMBI’s ability to manage and grow a business post-acquisition. AMBI is actively seeking additional products and businesses to add to its current portfolio, and we anticipate additional announcements in this area as the Company moves forward.

NUTRITIONAL PRODUCTS INDUSTRY — SUMMARY CHARACTERISTICS AND DYNAMICS

The Nutritional Products industry is large, rapidly growing, and highly fragmented. Industry sources estimate the market to be over $10 billion in the US, and growing in excess of 15% per annum. Trends and demographics such as the aging population, increased focus on preventative health maintenance, acceptance of alternative health remedies, and heightened media attention to the sector, should benefit companies such as AMBI. And the industry is fragmented. There are several hundred small manufacturers and marketers of nutritional products offering a wide range or products, with very few firms generating revenues in excess of $100 million. We anticipate considerable consolidation in the industry over the next decade, and companies such as AMBI (with differentiated, proprietary branded products, and a strong, acquisitive management team) should see numerous opportunities to acquire brands, products and businesses, further propelling growth.

Industry regulation has long been an area of confusion and concern for both customers and investors. Questions have been raised as to the quality of manufacturing practices, and product claims, labeling and advertising. Congress enacted legislation called the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). While these regulations are still being finalized and implemented, we believe that the net effect of DSHEA will be positive for the industry, and for high-quality manufacturing firms like AMBI. Positive implications of DSHEA: greater dissemination of information about the benefits of dietary supplements, provision of guidelines and procedures for product labeling, especially as it pertains to health-related claims and safety issues, and empowerment of the FDA to establish Good Manufacturing Practice (GMP) guidelines for dietary supplements. Concerns about DSHEA: added regulation adds costs, especially as it pertains to upgrading facilities to GMP level production, and additional labeling expense. However, quality manufacturers like AMBI, with proprietary products (which should command premium pricing), should be less vulnerable to margin pressure.

MANAGEMENT

AMBI has assembled a strong management team, supplemented by an experienced Board of Directors and Science Advisory Board. The team has established its credibility by hitting milestones, achieving the financial turnaround, doing smart acquisitions and financings, and putting AMBI in a position to take advantage of a growing market with favorable demographic trends. We reiterate the successful acquisition of Nutrition 21, and post-acquisition integration and earnings growth, as indicative of the team’s ability to execute and manage its growth strategy.

Fredric D. Price, AMBI’s President and CEO since September 1994, has more than 25 years experience in the pharmaceutical and biotechnology industries, in various senior management positions. From 1973 to 1986, he was at Pfizer Pharmaceuticals as a Vice President with both line and staff responsibilities. From 1986 to 1991, he ran his own consulting firm providing strategic planning, market development and new product introduction services to the pharmaceutical business, and from July 1991 to September 1994, he was Vice President and CFO of Regeneron Pharmaceuticals, Inc.

AMBI has been building its senior management team, and has recently announced several key management additions. Gerald Shapiro former Managing Director of Corporate Finance at KPMG, joined as V.P.-Finance and Administration and CFO; Alan Gallantar, formerly with Bradley Pharmaceuticals, joined as Treasurer and Controller; and Steven Morvay, formerly President of Collier Newfield Publications who has had considerable branded and direct marketing experience, joined as the V.P.-Marketing and Sales.

FINANCIAL INFORMATION AND VALUATION DISCUSSION

With the guidance of AMBI management, and based upon an analysis of comparable companies in the sector, we have generated five-year financial projections for AMBI (see below). We believe that the revenue projections are achievable, given the growth in current products, the Company’s internal product development plans, the recently announced AHP strategic alliance, and the opportunities for acquisitions and in-licensing available to the Company. We believe our margin assumptions are also achievable, and can be compared to larger, more established companies that are currently manufacturing and marketing nutritional products and supplements. Gross margins are higher generally than that experienced by the comparable set, but we believe the AMBI’s strategy of clinical-research supported proprietary products, and its branding strategy, should support higher margins more consistent with that of the pharmaceutical industry.

Valuation: We have provided a variety of different valuation methodologies, including P/E multiples, revenue multiples, terminal P/E multiples, and terminal operating income multiples. We have run other valuation methodologies as well, including multiple analyses and a discounted cash flow model. Regardless of the valuation methodology, AMBI’s share price appears undervalued at its current level. We believe current fair value to be in the range of $2 to $3 per share. Based upon the expected growth in net earnings and EBITDA, we believe an appropriate 12-18 month price target of $4 to $5 is achievable. Given the management’s ability to make smart acquisitions, financed intelligently to minimize dilution, and its recently announced alliances with AHP and Cultor, we also believe AMBI could offer considerable upside valuation from these levels.

"Why is it undervalued?" We believe there are a number of possible reasons, few of which have to do with AMBI’s current business or prospects. First, the small-cap and micro-cap sector has been in a cyclical bear market (by anyone’s definition) for several months now. Companies with good businesses, management teams, strategies and prospects have been sold indiscriminately, and there are many like AMBI that have suffered from this sell-off. Second, AMBI’s transition from a biotechnology company to a proprietary nutritional company has gone virtually unnoticed by investors, analysts and the Wall Street community. AMBI has limited investment research coverage and low institutional investment. As this changes, we believe AMBI’s share price could move higher very quickly. Third, the nutritional products companies have sold off recently due to earnings disappointments and the announcements that companies have begun to cut prices. The announcement by one leading company in mid-August resulted in a sell-off throughout the entire sector. And last, a nutritional products company like AMBI doesn’t fall "neatly" into the research universes of Wall Street analysts: it’s not biotech, it’s not pharmaceuticals, and it’s not really comparable to General Nutrition Companies, Inc. and Herbalife International Inc. which tend to be covered by "specialty retailing" analysts.

Earnings Model and Valuation Analyses: click here

Note 1: Balance sheet for June 30, 1998, does not include $5.0 million received from AHP on October 8, 1998.

RISK CONSIDERATIONS

This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of AMBI Inc. For a complete description of risks and uncertainties to AMBI’s business, see the "Risk Factors" section in AMBI’s Registration Statement and Prospectus dated May 12, 1998, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the internet. Other potential risks include:

• Market risk: Like many small-cap and micro-cap stocks, AMBI share price is trading near its 52-week low. Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
• Business risk: AMBI has limited experience in the manufacturing, marketing, and the distribution of nutritional products. Many of its products are in the early stage of commercialization, and in early-stage development. Additionally, AMBI intends to grow its business through acquisition of products and businesses. There can be no assurance that these acquisitions will materialize, be completed, be successfully integrated and/or achieve the desired levels of revenues or profitability as expected.
• Regulatory risk: The regulatory environment of the nutritional products business is evolving. Although most view these changes as beneficial to the industry in general, certain Federal regulations, including the DSHEA, and state regulations could impose manufacturing and marketing practices (such as GMP or additional labeling requirements) that could add additional costs, be difficult to comply with, and negatively impact margins.
• Competitive risk: The nutritional industry is extremely competitive, and many perceive the barriers to entry to be low. Added competition could lead to price competition and lower margins.

FOR ADDITIONAL INFORMATION

Contact SmallCaps Online LLC — 212-554-4158

For corporate inquiries: Jeffrey B. Davis

For investor inquiries: Jennifer LaVin

For media inquiries: Jeni Gray

SOURCES FOR ADDITIONAL INFORMATION

The following are website addresses offering related information, and links to other sources of information.

www.AMBIinc.com AMBI’s corporate website

www.CardiaNutrition.com AMBI’s internet commerce site, currently under construction

www.SmallCapsOnline.com SmallCaps Online’s site for company information and research

www.FDA.gov US Food and Drug Administration homepage

www.WHO.int World Health Organization homepage

www.Diabetes.org American Diabetes Association homepage

www.AmHrt.org American Heart Association National Center homepage

www.AMA-Assn.org American Medical Association homepage

www.ASH-US.org American Society of Hypertension homepage

www.SEC.gov U.S. Securities and Exchange Commission, with links to EDGAR filings

212-327-2038 Chromium Information Bureau, Inc.

The information in this report has been obtained from sources which we believe to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opionion expressed constitutes a solicitation by SmallCaps Online LLC for the purchase or sale of any securities. SmallCaps Online LLC has performed investment banking, consulting or other services for or may solicit investment banking, consulting or other business from, any company mentioned in this report. SmallCaps Online LLC or persons associated with SmallCaps Online LLC may at anytime be long or short any of the securities referred to herein and may make purchases or sales thereof while this report is in circulation or posted on the SmallCaps Online LLC website at www.SmallCapsOnline.com. This material, or any portion thereof, may not be reproduced without prior permission from SmallCaps Online LLC. SmallCaps Online LLC is not responsible for the contents of this document which is intended for electronic transmission and could be thus subjected to tampering or alteration. Copyright © 1998 by SmallCaps Online LLC. All rights reserved.