<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>c21963_10k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For Fiscal Year ended June 30, 2001

[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934

For the transition period from                   to                          .
                               -----------------    ------------------------

                         Commission File Number 0-14983

                               NUTRITION 21, INC.
                               ------------------
             (Exact Name of Registrant as Specified in its Charter)

                  NEW YORK                           11-2653613
-----------------------------------------   -----------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

         4 Manhattanville Road

         PURCHASE, NEW YORK                            10577-2197
-----------------------------------------   ------------------------------------
(Address of Principal Executive Offices)               (Zip Code)

Registrant's telephone number, including Area Code:           (914) 701-4500
                                                         -----------------------

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

                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                    COMMON STOCK (PAR VALUE $.005 PER SHARE)
                                 Title of Class

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 twelve (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 ninety (90) days.

         Yes     X                No
             ---------               -------

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
registrant's  best  knowledge,  in definitive  proxy or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.             [X]

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant was approximately $18,146,619 as of September 24, 2001.

The number of shares  outstanding of  Registrant's  Common Stock as of September
24, 2001: 32,342,818.

                                       1
<PAGE>

                             FORM 10-K REPORT INDEX

10-K Part
and Item No.                                                            Page No.
--------------------------------------------------------------------------------

PART I

Item 1       Business                                                         3
Item 2       Properties                                                      11
Item 3       Legal Proceedings                                               11
Item 4       Submission of Matters to a Vote of Security Holders             11


PART II

Item 5       Market Price of Registrant's Common Equity and
             Related Stockholder Matters                                     12
Item 6       Selected Financial Data                                         13
Item 7       Management's Discussion and Analysis of Financial
             Condition and Results of Operations                             14
Item 7a      Quantitative and Qualitative Disclosures About Market Risk      21
Item 8       Financial Statements and Supplementary Data                     21
Item 9       Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure                             21


PART III

Item 10      Directors and Executive Officers of the Registrant              22
Item 11      Executive Compensation                                          26
Item 12      Security Ownership of Certain Beneficial Owners
             and Management                                                  32
Item 13      Certain Relationships and Related Transactions                  34


PART IV

Item 14      Exhibits, Financial Statement Schedules, and
             Reports on Form 8-K                                             35


                                       2
<PAGE>

                                     PART I

ITEM 1.           BUSINESS

THE COMPANY

         NUTRITION 21, INC.  (formerly AMBI Inc.) (the  "Company")  develops and
markets clinically  substantiated,  proprietary nutritional products that make a
significant contribution to the health and well-being of consumers.

         The Company develops  Nutrition Products that are regulated by the 1994
Dietary Supplement Health and Education Act (DSHEA), and markets its products to
manufacturers,  wholesalers,  and  consumers,  and  supports  the  use of  these
Nutrition  Products  with data from  clinical  studies  and  patents.  Nutrition
Products  may  take the  form of  either  foods  or  beverages  and can  include
vitamins,   minerals,   enteral  and  parenteral   supplements,   other  dietary
supplements, healthy foods, functional foods, special dietary foods, and medical
foods, and are sometimes referred to colloquially as "nutraceuticals".

         The  Company   concentrates   its   business   primarily  on  research,
development, and sales of proprietary chromium-based nutritional ingredients and
finished nutritional products ("Nutrition  Products").  The Company supports the
value of its Nutrition Products with  "pharmaceutical-type"  clinical trials and
patent  filings.  The Company's  Nutrition  Products are developed for consumers
concerned   primarily  about  the  benefits  associated  with  improved  insulin
resistance  and blood  sugar  management,  and health  concerns  for people with
diabetes, cardiovascular disease, obesity, and depression.

BACKGROUND

         The Company is a New York corporation that was incorporated on June 29,
1983 to develop and commercialize  antibacterial  technologies for new drugs. In
August  2000,  the  Company  completed  the  out-licensing  of the rights to its
antibacterial   technologies.   The  Company  now   concentrates   on  its  core
competencies in proprietary Nutrition Products.

         On August 11, 1997, the Company acquired the entire beneficial interest
in Nutrition 21, a limited partnership. Nutrition 21 was engaged in the business
of  developing,   producing,   and  marketing   proprietary  trace  minerals  as
ingredients for supplements. The products acquired from Nutrition 21 constituted
a large majority of the Company's revenues during the fiscal year ended June 30,
2001.

         On September 17, 1998,  the Company  entered into a strategic  alliance
with  American  Home  Products  Corporation  ("AHP") for the right to distribute
certain of the  Company's  proprietary  Nutrition  Products  in  certain  retail
channels in the U.S.  The Company  retained the  exclusive  rights to market its
products in both direct response and ingredient channels.

                                       3
<PAGE>

         On January 21,  l999,  the Company  acquired  substantially  all of the
assets and assumed certain of the liabilities of Optimum Lifestyle, Inc. ("OLI")
relating  to the  business  of  developing,  producing,  and  marketing  dietary
supplements,  primarily  nutrition  bars that are marketed  under the registered
trademark  "Lite Bites" through the QVC, Inc.  ("QVC")  television  network (the
"Lite  Bites   Business").   These  products  are  manufactured  to  proprietary
specifications under agreements with third party manufacturers.

         On August 13,  1999,  the Company  entered  into a  Strategic  Alliance
Agreement  with  QVC  that  provides  for the  continuation  of the  Lite  Bites
Business,  and for the introduction of additional branded nutrition products for
marketing through QVC.

         On December  30,  1999,  the Company  sold its Wipe Out(R)  Dairy Wipes
business  to ImmuCell  Corporation  ("ImmuCell").  The Dairy Wipes  consist of a
moistened towel using a nisin-based antibacterial formulation that is for use in
preparing  dairy cows for milking.  On April 12, 2000,  the Company  exclusively
licensed to ImmuCell  worldwide  rights to develop and market new  antibacterial
drugs for animals using the Company's technologies.

         On August 2, 2000,  the  Company  exclusively  licensed  to  Biosynexus
Incorporated  ("Biosynexus")  rights  to  nisin  and  lysostaphin  antibacterial
technologies  for  development  and  marketing of new drugs for human uses.  The
Company  received  a payment  of $1.4  million,  and the  license  provides  for
milestone  payments  of up to $14  million,  and  royalties.  The  Company  also
received warrants to acquire Biosynexus stock.

NUTRITION PRODUCTS

         INGREDIENT PRODUCTS

         The Company develops and markets  proprietary  essential trace elements
to  vitamin  and  nutritional  supplement  manufacturers,   which  are  sold  as
ingredients  for use nutritional  products.  Currently,  the Company's  flagship
product is chromium picolinate,  a form of the essential trace mineral chromium.
Chromium is required for the proper  function of insulin,  the master  metabolic
hormone, which regulates the body's ability to process  carbohydrates,  fats and
protein.  Proper insulin function is therefore important to the healthy function
of virtually every cell in the body.

          The Company owns or has exclusive  rights to eighteen U.S. and various
foreign  patents  that  cover  certain  chromium  compositions  and their  uses,
including three U.S. patents that expire in 2009, for the basic nutritional uses
of chromium  picolinate in the management of cholesterol,  for glucose  control,
and for  increasing  lean body mass and reducing body fat. The chromium  patents
owned by the  Company  also  include  composition  of matter  patents  for novel
chromium  picolinate  complexes and their uses. The improved chromium picolinate
complexes contain combinations of chromium,  and various nutrients for enhancing
the benefits of chromium  picolinate.  These new complexes  should provide added
benefits  to people  concerned  about the  management  of  cholesterol,  glucose
control,  and  increasing  lean  body  mass and  reducing  body


                                       4
<PAGE>

fat.  These new complexes  will have patent  protection  into the year 2018. See
"Proprietary Rights."

         In June 2001,  the Company  introduced  a new  proprietary  nutritional
compound called Diachrome(TM), comprised of two nutritional ingredients, Chromax
chromium  picolinate and biotin.  The compound's  ingredients have been shown to
work   synergistically   to  enhance  blood  sugar  control  and  improve  blood
cholesterol  profiles.  Several other  chromium  compounds  are in  development,
including Chromax chromium  picolinate  combined with conjugated  linoleic acid,
which has been shown to potentiate glucose uptake in muscle cells in the absence
of insulin stimulation.

         The Company is also developing novel forms of other essential  minerals
such as calcium taurate,  magnesium taurate and others for which the Company has
patent protection, and may commercialize these or other products.

         CONSUMER PRODUCTS

         In addition to Ingredients,  the Company  develops and markets Consumer
Products.  The Consumer Products are essentially  applications for the company's
proprietary  ingredients.  The health benefits  associated with the use of these
Consumer Products are also substantiated by pharmaceutical type clinical trials.

         The  Company's  flagship  Consumer  Product  line is the Lite  Bites(R)
family of  brands,  which are sold on the QVC  television  network  and the iQVC
internet  site in the United  States.  The same  product  line is sold under the
Brite Bites(TM) family of brands on the QVC television  network in the U.K. and,
in the future,  is expected to be sold in other direct response outlets (such as
catalogs,  direct mail, multi-level marketing, and the internet, etc.). The Lite
Bites  products  constitute  part  of  a  fat  fighting  system  that  has  been
demonstrated in a peer-reviewed  clinical trial to promote weight loss when used
as part of a program including diet and exercise.

         In May 2001, the Company launched its new Metabolic Makeover(TM) weight
loss  system  on QVC.  The  Metabolic  Makeover  system is a  supplement  system
designed to provide the user with a patented  combination of essential nutrients
that support  optimum  metabolism.  In  connection  with the QVC  alliance,  the
Company  issued  to QVC  420,000  performance-based  warrants  to  purchase  the
Company's  Common Stock.  During the year ended June 30, 2001, QVC accounted for
approximately 26% of revenues.

 Other consumer  products with  proprietary  features are developed and marketed
for sale in  various  distribution  channels.  Triumph  Bars are sold in  retail
stores by Solgar  Vitamin  and Herb,  an  operating  unit  under  American  Home
Product's Whitehall-Robins Healthcare Division.

         In October  1995,  the Company  acquired an  exclusive  license  from a
division of Orion Corporation  ("Orion"),  of Finland,  to sell Orion's patented
salt in the United  States.  The Company began selling  Cardia(R)  Salt in April
1996.  This  product has reduced  sodium  compared

                                       5
<PAGE>

to regular salt and contains  potassium and magnesium,  essential  minerals that
have been shown to promote  healthy blood  pressure.  The Company has terminated
its exclusive license and is negotiating a non-exclusive license with Orion.

         CLINICAL STUDIES

         Nutrition  21's Chromax  chromium  picolinate  has been studied in more
than 30  well-controlled  clinical trials in people concerned about  maintaining
healthy blood glucose  levels,  increasing lean body mass and reducing body fat,
and promoting healthy cholesterol levels. In 2000, scientists presented research
at the 60th annual  scientific  sessions of the  American  Diabetes  Association
(ADA)  and the 41st  annual  scientific  sessions  of the  American  College  of
Nutrition  that  supports the emerging role for the dietary  supplement  Chromax
chromium picolinate in the management of diabetes and hypercholesterolemia.

         Babak  Bahadori,  MD, of the  University  of Graz in Austria found that
chromium picolinate may enhance the effects of metformin and oral sulfonylureas,
the most commonly used drugs in the treatment of diabetes.  Dr.  Bahadori's data
suggest that in obese patients with type 2 diabetes receiving a sulfonylurea and
metformin,   supplementation  with  chromium  picolinate  significantly  lowered
fasting insulin levels without a detrimental effect on glucose control.

         The ability of chromium  picolinate to lower fasting  insulin levels in
patients already receiving diabetic  medications is clinically important because
an  elevated  insulin  level in the  blood is an  established  risk  factor  for
cardiovascular disease. These findings suggest the use of chromium picolinate as
a nutritional adjunct in the dietary management of diabetes.

         Additional  research  conducted  in  1999 by  William  T.  Cefalu,  MD,
Associate  Professor of Medicine in the  Endocrinology,  Diabetes and Metabolism
Unit at the University of Vermont College of Medicine,  described an improvement
in insulin  sensitivity in obese people with pre-diabetic  symptoms who received
Chromax(R) chromium picolinate.

         Furthermore,  Alexander Ravina,  MD, of the Diabetes  Department at the
Linn Clinic in Haifa, Israel,  published results of a clinical trial in DIABETIC
MEDICINE that showed that chromium picolinate reduced or eliminated the symptoms
in 41 out of 44 patients  with  steroid-induced  diabetes  after  standard  drug
therapy  failed.  In Dr.  Ravina's  study,  the 41  patients  who had  developed
diabetes as a result of undergoing  steroid  treatment  and who  benefited  from
Chromax  chromium  picolinate  were able to reduce or eliminate  their  diabetic
medication, such as insulin. Patients were given Chromax supplements starting at
daily doses of 600  micrograms of chromium and  gradually  decreasing to 200-400
micrograms daily within one week.

         In 2000,  Malcolm McLeod,  MD, Clinical  Professor of Psychiatry at the
University  of North  Carolina  School of  Medicine,  published  the  beneficial
effects he has seen after  initiating  chromium  supplementation  in some of his
patients  with  depression.  All of these  patients  have  previously  failed to
respond to common  prescription drug treatments.  A follow-up  clinical study is
currently  ongoing at Duke  University  Medical Center to learn more about these
new benefits.

                                       6
<PAGE>

         Chromium  picolinate  is marketed by the Company  under its  registered
trademark Chromax(R).  In addition, the Company also markets zinc picolinate and
selenium  formulations.  The Company has funded and  continues to fund  research
studies  investigating the uses of chromium picolinate and other  micronutrients
or minerals as dietary supplements with preventative and therapeutic benefits to
humans.

PHARMACEUTICAL PRODUCTS AND PARTNERS

         The Company has  infectious  disease  drug  technology  for diseases in
humans,  centered  around the compound nisin, a member of the lanthocin class of
peptides, as a potential treatment for infections of the colon, and lysostaphin,
an enzyme,  as a potential  treatment  for  endocarditis,  and  lysostaphin  and
antibiotic  compositions to treat infections while  suppressing the formation of
staphylococcal and antibiotic resistance. The Company determined that it did not
have the  resources  necessary  to take these  pharmaceutical  products  for the
treatment of infectious  diseases from the development stage through  regulatory
filings and ultimately to the marketplace, should a product be proven to be safe
and efficacious.  In March 1996, the Company entered into an exclusive Agreement
with AZWELL,  Inc. (formerly Nippon Shoji Kaisha, Ltd. of Osaka,  Japan),  under
which AZWELL received exclusive rights to develop and market certain nisin-based
drug  products  as a  treatment  of  infections  of  the  colon  and  nosocomial
infections in Japan, certain Asian countries, Australia and New Zealand.

         In August 2000,  the Company  exclusively  licensed to  Biosynexus  the
Company's remaining rights to nisin and lysostaphin  antibacterial  technologies
for development and marketing of new drugs for human uses. The Company  received
a payment of $1.4 million, and the license provides for milestone payments of up
to $14 million,  and  royalties.  The Company also received  warrants to acquire
common stock of Biosynexus, currently a privately held company.

         The Company also has infectious  disease  technology  centered on nisin
and lysostaphin for the treatment of diseases in animals,  including a moistened
towel using a nisin-based  formulation for mastitis  prevention that is used for
preparing  dairy cows for milking.  The Company  launched the product  under its
trademark  Wipe Out(R)  Dairy Wipes in April 1996.  On December  30,  1999,  the
Company  sold  its  Wipe  Out  Dairy  Wipes  business  to  ImmuCell  Corporation
("ImmuCell").  On April 12, 2000, the Company  exclusively  licensed to ImmuCell
worldwide rights to develop and market new antibacterial drugs for animals using
the Company's technologies.

         The  Company has  developed a patented  taste  masking  technology  for
making the taste of certain  minerals  such as  potassium,  calcium,  magnesium,
iron,  copper,  chromium,  and zinc. The Company is seeking to license its taste
masking technology to companies that offer  mineral-enriched  beverages designed
to be  taken  with  mineral-depleting  medications,  such as  diuretics,  and to
companies  that offer  mineral-enriched  beverages  such as sports  drinks.  The
Company is  evaluating  other  proprietary  Nutrition  Products  in the areas of
cardiovascular  disease,  diabetes,

                                       7
<PAGE>

infectious disease, and gastrointestinal disorders.

GOVERNMENTAL REGULATION

         DIETARY SUPPLEMENTS AND PHARMACEUTICALS

         Depending upon the  ingredients of a specific  product,  some nutrition
products  can be marketed in the U.S.  under the Dietary  Supplement  Health and
Education  Act (DSHEA) or the Orphan Drug Act.  The  Company's  human  nutrition
products  fall in  regulatory  categories  that do not require FDA  approval for
marketing,  but are  subject  to  monitoring  by the  FDA.  In  addition  to FDA
regulations, the Federal Trade Commission ("FTC") regulates  product-advertising
claims. Prior to the Company's acquisition of Nutrition 21, Nutrition 21 and the
FTC entered into a consent  agreement,  which  culminated  in an FTC order that,
among other things, requires that claims for dietary supplements be supported by
competent and reliable scientific evidence.

         Products that are intended for use in the diagnosis,  cure, mitigation,
treatment or prevention of disease in humans or animals are subject to extensive
governmental   regulation.    All   such   products   must   undergo   extensive
characterization,   and  are  subject  to  regulation  for  quality   assurance,
toxicology and safety.  Products  containing  such agents must undergo  thorough
preclinical  and clinical  evaluations  of performance as to safety and efficacy
under approved  protocols.  To take a pharmaceutical  product from the discovery
stage  through  research  and  preclinical  development  to the point  where the
Company  and/or its  partners  can make the  necessary  filings  (to the FDA and
governmental  agencies  outside the U.S.) to conduct human  clinical  trials may
take  several  years.  Regulatory  requirements  for human  clinical  trials are
substantial, depend upon a variety of factors, vary by country, and will further
add to the time  necessary  to  determine  whether  a product  candidate  can be
approved for human use. The Company  does not have any  pharmaceutical  products
that have completed this process.  There can be no assurance that if the Company
has proposed drug products,  that they will prove to be safe and effective under
these regulatory procedures. See also "Pharmaceutical Products."

         In 1996,  chromium  picolinate  was approved by the U.S.  Food and Drug
Administration  ("FDA") for use as a  supplement  in animal  feed for swine.  In
addition to sales for human consumption,  the Company sells chromium  picolinate
for use in certain animal feed applications

RESEARCH AND DEVELOPMENT

         The Company conducts preclinical,  formulation,  and clinical trials on
its nutrition  products and product  candidates.  These efforts are conducted in
cooperation with research and academic institutions in various countries. During
the fiscal years ended June 30, 2001, 2000 and 1999, approximately $2.5 million,
$2.6  million,  and $1.8  million,  respectively,  were  spent on  research  and
development by the Company.


                                       8
<PAGE>


PROPRIETARY RIGHTS

         TRADEMARKS

         Chromax, Diachrome,  Selenomax, Zinmax, and Magnemax are among the more
well known  trademarks  owned by Nutrition 21: Chromax for chromium  picolinate;
Diachrome for chromium picolinate and biotin;  Selenomax for high selenium yeast
and yeast-free selenium; Zinmax for zinc picolinate;  and Magnemax for manganese
picolinate.  The Company is developing other nutrition products to be sold under
its Chromax  trademarks.  Cardia,  Lite Bites,  Lite Bites  Fat-Fighting  System
Chewies,  and  Metabolic  Makeover  are  trademarks  used by the  Company in the
marketing  of its  Consumer  Products  in the  US,  while  Brite  Bites  is a UK
trademark.

         NUTRITION PATENTS

         The Company owns 27 patents on Nutrition  Products,  and has  exclusive
licenses  under  additional  patents.  Eighteen  patents cover certain  chromium
compositions  and their uses,  including  three patents that expire in 2009, for
the  basic  nutritional  uses  of  chromium  picolinate  in  the  management  of
cholesterol,  glucose  control,  and increasing lean body mass and reducing body
fat. The chromium  patents  owned by the Company  also  include  composition  of
matter patents for novel chromium  picolinate  complexes.  The improved chromium
picolinate  complexes contain combinations of chromium and various nutrients for
enhancing  the  benefits of chromium  picolinate,  including  the basic uses for
chromium picolinate, and have patent protection into the year 2018.

         The  Company  owns other  patents  relating  to,  among  other  things,
chromium/biotin  treatments for reducing hyperglycemia and stabilizing levels of
serum  glucose,   magnesium  taurate  treatments  of  cardiac  conditions,   and
arginine-silicate-inositol    complexes    for    preventing    or    inhibiting
atherosclerosis, which expire during the period from 2015 through 2018.

         The   Company   maintains    non-disclosure    safeguards,    including
confidentiality agreements,  with employees, and certain consultants.  There can
be no assurance,  however,  that others may not  independently  develop  similar
technology  or that secrecy  will not be breached  despite any  agreements  that
exist.

         PHARMACEUTICAL PATENTS

         The Company owns more than 200 patents relating to, among other things,
the  expression  and  production of proteins by  recombinant  Bacillus  strains;
plasmid  vectors and  methods of  construction;  expression  and  production  of
recombinant  lysostaphin;  novel bacteriocin compositions and their use as broad
spectrum  bactericides;  the use of  bacteriocin  compositions  to treat  bovine
mastitis;  the use of bacteriocin  compositions in oral  healthcare;  the use of
bacteriocin  compositions  on skin for  healthcare  and hygiene;  and the use of
bacteriocin  compositions  in  gastrointestinal  healthcare.  These  patents are
licensed to AZWELL, Biosynexus, and ImmuCell.

                                       9
<PAGE>

         The Company  maintains trade secret  protection for bacterial  strains,
technical  know-how,   and  other  information  it  considers   proprietary  and
beneficial for the manufacture,  use, regulatory approval,  and marketing of the
Company's products.

         COMPETITION

         The nutritional products industry is intensely competitive. Competitors
include major companies with raw materials and finished  product  divisions that
also engage in the  development and sale of dietary  supplements.  Many of these
competitors  have  financial and technical  resources as well as production  and
marketing  capabilities  substantially  greater  than those of the  Company.  In
addition,  many  of the  Company's  competitors  have  experience  significantly
greater  than  that of the  Company  in the  developing  and  testing  of new or
improved products.

         The Company  believes that its success in competing with others will in
part be based on enforcing  its patents  portfolio.  Although the Company  holds
exclusive  rights to basic  patents  covering the  nutritional  uses of chromium
picolinate,  and its other  chromium-based  supplements,  the industry  does not
always recognize the value of a patented  position.  The industry is fragmented,
and both foreign and  domestic  companies  appear  willing at times to disregard
patent rights.

MANUFACTURING

         Contractors, who manufacture to the Company's specifications, sometimes
using  the  Company's   proprietary   technology,   manufacture   the  Company's
Ingredients and Consumer Products for the Company.  The Company believes that it
has  adequate   inventory  of  products  to  accommodate  a  suspension  in  the
manufacture of any of its products. There are numerous sources of supply for all
of the raw materials used in the  manufacture of the Company's  Ingredients  and
Consumer Products.

         The Company's  Ingredient  products are  manufactured  in bulk and then
sold as raw materials to customers who  incorporate  them into over 900 finished
products such as vitamin/mineral  formulas,  dietary  supplements,  baked goods,
beverages and other products. These products are sold by the Company's customers
under a variety  of brands  throughout  the world  through  natural/health  food
stores,  supermarkets,  drug stores,  and mass  merchandisers,  and also through
direct sales and catalogues sales.

EMPLOYEES

         As of June 30, 2001, the Company had 23 full-time employees,  of whom 3
were executive employees, 6 were administrative, 9 were engaged in marketing and
sales,  and 5 were involved in research,  process and product  development,  and
manufacturing.  The Company does not have a collective bargaining agreement with
any of its personnel and  considers  its  relationship  with its employees to be
satisfactory.

                                       10
<PAGE>

ITEM 2.           PROPERTIES

         Since  September  1998,  the Company  maintains its  headquarters  at 4
Manhattanville Road, Purchase, New York 10577-2197 (Tel: 914-701-4500). Pursuant
to a seven and one-half year sublease  entered into September  1998, the Company
is  paying  an  annual  rent for its  headquarters  location  in the  amount  of
$589,420,  which sum is due in  monthly  installments.  The rent is  subject  to
annual  increases  over the term of the  lease  based on  increases  in  certain
building  operating  expenses.  With the completion of the  out-licensing of its
antibacterial  technologies,  the Company closed its laboratories at 777 Old Saw
Mill River Road, Tarrytown, New York 10591.

ITEM 3.           LEGAL PROCEEDINGS

         The Company in the ordinary  course of its business has brought  patent
infringement  actions against companies that are selling chromium  picolinate in
violation of the Company's patent rights.  As of this date, two of these actions
are  ongoing,  and the Company  intends to  vigorously  protect its  proprietary
rights.  Various actions have been terminated on terms that the Company believes
will protect its rights.

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

         No matters were  submitted  to the  Company's  shareholders  during the
fiscal quarter ended June 30, 2001.


                                       11
<PAGE>



                                     PART II

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

         The  Company's  Common  Stock is traded on the Nasdaq  National  Market
System under the symbol "NXXI".

         The Company has not paid a cash dividend to its public  shareholders on
its Common Stock. The Company intends to retain all earnings for the foreseeable
future for use in the operation and expansion of its business and,  accordingly,
the Company does not  contemplate  paying any cash dividends on its Common Stock
in the near future.

         The  following  table  sets  forth  the high and low  sales  prices  as
reported by the Nasdaq National Market for the Common Stock.

                                  COMMON STOCK

 Fiscal Quarter Ended              High          Low
--------------------------------------------------------------------------------

September 30, 1999                $3.875        $1.938

December 31, 1999                 $3.00         $1.906

March 31, 2000                    $8.00         $2.25

June 30, 2000                     $5.50         $2.703

September 30, 2000                $3.094        $1.50

December 31, 2000                 $1.563        $0.875

March 31, 2001                    $1.563        $0.656

June 30, 2001                     $1.23         $0.87



         As of  September  20,  2001,  there were  approximately  469 holders of
record of the Common Stock.  The Company  believes that the number of beneficial
owners is  substantially  greater than the number of record  holders,  because a
large portion of its Common Stock is held of record in broker "street names."


                                       12
<PAGE>


ITEM 6.           SELECTED FINANCIAL DATA

         The following tables  summarize  selected  consolidated  financial data
that should be read in conjunction  the more detailed  financial  statements and
related  footnotes  and  management's   discussion  and  analysis  of  financial
condition  and  results of  operations  included  herein.  Figures are stated in
thousands of dollars, except per share amounts.

<TABLE>
<CAPTION>
SELECTED STATEMENT OF                                YEAR ENDED JUNE 30,
OPERATIONS DATA:                       2001        2000       1999(3)      1998(2)      1997(1)
------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>         <C>          <C>          <C>
Total Revenues                        $23,252     $32,814     $28,301      $20,758      $11,280
Gross Profit                           17,629      27,034      23,519       17,802        6,282
Operating (Loss) Income               (1,003)       7,041       6,469        1,467     (16,635)
Income (Loss) Before Taxes              1,400       7,004       6,347        1,168      (6,661)
Income Taxes                              335         523         482          116          152
Net Income (Loss)                       1,065       6,490       5,865        1,052      (6,813)
Diluted Earnings (Loss) per Share        0.03        0.20        0.19       (0.04)       (0.38)
</TABLE>

<TABLE>
<CAPTION>
                                                          AT JUNE 30,
SELECTED BALANCE SHEET DATA:            2001        2000       1999         1998          1997
------------------------------------------------------------------------------------------------
<S>                                    <C>         <C>         <C>        <C>            <C>
Working Capital (deficit)              $6,392      $6,486      $1,879     $(2,269)       $7,055
Total Assets                           38,887      41,085      34,541       20,735       12,754
Total Liabilities                       6,495      10,430      12,950       10,437        5,144
Long-Term Obligations                     122       1,278       3,807        1,543        2,184
Redeemable Preferred Stock                418         676         921           --           --
Stockholders' Equity                   31,974      29,979      20,670       10,298        7,610
</TABLE>

------------------
(1) The results for the year ended June 30,  1997,  are those of the Company and
    Aplin & Barrett (a former  subsidiary)  for the period July 1, 1996  through
    December  11, 1996 and those of the Company  only for the  remainder  of the
    fiscal year (see Item 13-Certain Relationships and Related Transactions) and
    a gain of $9.7 million on sale of Alpin & Barrett

(2) Consolidated  Statements of Operations  includes the operations of Nutrition
    21 from August 11, 1997, the date of acquisition.

(3) Consolidated  Statements of Operations  includes the  operations of the Lite
    Bites business from January 1, 1999, the effective date of acquisition.

                                       13
<PAGE>


ITEM 7            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.

OVERVIEW

         The following table sets forth items in the Consolidated  Statements of
Income as a percent of revenues:

                                                           Fiscal Year
                                                       Percent of Revenues
                                                   2001       2000       1999
                                                   ----       ----       ----
Revenues                                          100.0%     100.0%     100.0%

Gross profit*                                       73.0       82.1       82.2
Selling, general and administrative expense         44.6       40.6       44.0
Research and development expenses                   10.9        8.0        6.3
Operating (loss) income                            (4.3)       21.5       22.9
Net income                                           4.6       19.8       20.7

*Based upon percent of net sales


RESULTS OF OPERATIONS

1.       Year ended June 30, 2001 vs. Year ended June 30, 2000

REVENUES

Net sales of $20.8 million for fiscal 2001 declined  $11.5 million when compared
to net sales of $32.3  million for fiscal 2000.  The decline is due primarily to
price reductions instituted in August 2000 on expiration of a patent exclusively
licensed to the Company on the Company's Chromax(R) chromium picolinate product.
Partially  offsetting  the decline  was a 40%  increase in the volume of Chromax
chromium picolinate sold in fiscal 2001 vs. fiscal 2000.

Other  revenues of $2.4  million for fiscal 2001  increased  $1.9  million  when
compared to other revenues of $0.5 million in fiscal 2000.  Fiscal 2001 included
$1.9 million of license fees earned from  Biosynexus  Incorporated in accordance
with  a  License  Agreement  entered  into  on  August  2,  2000,  and  ImmuCell
Corporation  in accordance  with a License  Agreement  entered into on April 12,
2000.

COST OF GOODS SOLD

Cost of goods sold of $5.6  million for fiscal 2001  declined  $0.2 million when
compared to $5.8

                                       14
<PAGE>

million in fiscal 2000.  In fiscal 2000,  cost of goods sold included the impact
of the  Company's  Wipe  Out(R)  Dairy Wipes  business,  which was sold prior to
fiscal  2001.  The gross  margin on product  sales for fiscal  2001 was 73.0% as
compared to 82.1% in fiscal 2000. The decrease in the gross margin percentage is
due  primarily  to  the  price  reductions  instituted  in  August  2000  on the
expiration  of the  exclusively  licensed  patent  on the  Company's  Chromax(R)
chromium picolinate product as well as the mix of products sold.

SELLING, GENERAL AND ADMINISTRATIVE

Selling,  general and  administrative  expense for fiscal 2001 of $10.4  million
decreased  $2.9  million  when  compared to $13.3  million in fiscal  2000.  The
decrease is due primarily to lower royalty  expense due to the expiration of the
licensed patent in August 2000; a reduction in the use of outside consultants as
well as cost savings  resulting from a restructuring  undertaken by the Company.
Partially offsetting these reductions was a non-recurring charge of $0.5 million
related to the departure of the Company's previous CEO.

RESEARCH AND DEVELOPMENT

Research costs of $2.5 million for fiscal 2001, decreased slightly when compared
to $2.6 million for the same period a year ago. An increase in expenses incurred
for NutritionU.com of $0.3 million was offset by the cost savings resulting from
a restructuring undertaken by the Company in the second quarter of fiscal 2001.

RESTRUCTURING AND OTHER CHARGES

The Company  recorded  $2.4 million for  restructuring  and other  non-recurring
charges,  related to its nutritional  products segment, in the second quarter of
fiscal  2001. A $1.6  million  restructuring  charge was recorded as part of the
Company's initiative to reduce costs and to create a more flexible and efficient
organization.  Included in the  restructuring  charge were $0.7  million of cash
termination benefits associated with the separation of twenty employees.  All of
the affected  employees  left their  positions  as of June 30, 2001.  All of the
termination  benefits  were paid in fiscal  2001.  This cash  outlay  was funded
through cash from operations.  Approximately  $0.9 million of the  restructuring
charge relates to the Company's decision to discontinue its efforts to launch NO
YO, a consumer  weight  loss  product  intended  for the retail  channel  and to
consolidate certain of the Company's facilities.

Other charges of $0.7 million include a non-cash write off of the carrying value
of the website development costs related to NutritionU.com, the Company's online
nutrition education internet company. The Company believes that since sufficient
uncertainty  surrounds the ability of the Company to find strategic partners for
NutritionU.com,  there will be no substantive  future benefit to be derived from
the website  development costs. In addition,  other charges include $0.1 million
for the write off of the  remaining  carrying  value of a license fee for one of
its products.


                                       15
<PAGE>

OPERATING (LOSS) INCOME

The  Company's  operating  loss was $1.0  million for fiscal 2001 as compared to
operating  income of $7.0  million  for the same  period a year  ago.  The price
reductions  offered  to the  Company's  chromium  picolinate  customers  and the
non-recurring  charges  recorded  in the second  quarter of fiscal 2001 were the
contributing  factors.  Partially  offsetting these factors were license fees of
$1.9 million  earned from  Biosynexus  Incorporated  an ImmuCell  Corporation in
accordance with the License  Agreements entered into on August 2, 2000 and April
12, 2000, respectively.

INTEREST INCOME, NET AND OTHER INCOME

Interest income, net of $61 thousand dollars,  for fiscal 2001 was $174 thousand
dollars greater than the comparable  period a year earlier.  Interest income was
derived  primarily  from the  investment of funds  received from the  successful
settlement of patent infringement claims.

Other income of $2.3 million for fiscal 2001 includes the successful settlements
of patent infringement claims brought by the Company.

INCOME TAXES

The  effective  tax rate for fiscal 2001 was 24.0% as compared to 7.5% in fiscal
2000.  The difference  between the effective tax rate and the federal  statutory
tax rate of 34% is due primarily to the utilization of fully reserved tax credit
carryforwards.  The effective tax rate in fiscal year 2000 of 7.5% differed from
the federal  statutory  tax rate of 34%,  due  primarily to  utilization  of the
federal loss carryforwards.

2.  Year ended June 30, 2000 vs. Year ended June 30, 1999

REVENUES

Net sales for fiscal 2000  increased  $5.4  million,  or 20%, to $32.3  million,
compared to net sales of $26.9 million for fiscal 1999.  The  improvement in net
sales is due to increased  nutritional  product sales of $2.9 million  resulting
from the January 1999  acquisition  of the Lite Bites Business as well as a $2.4
million increase in ingredient sales.

Other  revenues  for fiscal  2000  declined  $0.9  million to $0.5  million,  as
compared to other revenues of $1.4 million for fiscal 1999. Fiscal 1999 included
a $1.0 million non-refundable payment for the rights granted to Whitehall-Robins
Healthcare division of American Home Products Corporate (AHP) in accordance with
the License, Option and Marketing Agreement entered into on October 8, 1998.


                                       16
<PAGE>



COST OF GOODS SOLD

Cost of goods  sold for  fiscal  2000  increased  $1.0  million or 20.9% to $5.8
million  compared to $4.8 million for fiscal 1999. The increase in cost of goods
sold  reflects  the  higher  costs  associated  with the  Company's  Lite  Bites
nutritional products.

GROSS PROFIT

Gross profit for fiscal 2000  increased  $3.5 million or 14.9% to $27.0  million
compared to $23.5  million for fiscal 1999.  The increase in gross profit is due
to the full year's benefit of the Lite Bites nutritional  products combined with
the gross profit from the increased  ingredient sales.  Partially offsetting the
improvement was a decline in other revenues of $0.9 million, as noted above.

SELLING, GENERAL AND ADMINISTRATIVE

Selling,  general and  administrative  expense increased $0.9 million or 6.9% to
$13.3  million in fiscal 2000  compared  to $12.5  million in fiscal  1999.  The
increase  is due  primarily  to  marketing  initiatives  related  to  ingredient
products as well as increased  marketing and selling costs  associated  with the
nutritional products business.

RESEARCH AND DEVELOPMENT

Research and development expense increased $0.8 million or 46.1% to $2.6 million
in fiscal 2000,  compared to $1.8  million in fiscal  1999.  The increase is due
primarily to $0.5 million of costs  associated with  NutritionU.com,  our online
nutrition education subsidiary, combined with increased spending of $0.3 million
for  ongoing  product   development,   quality  control  and  quality  assurance
development activities.

OPERATING INCOME

Operating  income  increased $0.5 million or 8.8% to $7.0 million in fiscal 2000
compared to $6.5 million in fiscal 1999.  The increased  sales of ingredient and
nutritional  products,  partially offset by increases in selling,  general,  and
administrative  expense and  amortization  costs  associated with the Lite Bites
Business acquisition, were the primary reasons for the increase.

INTEREST EXPENSE NET AND MINORITY INTEREST

Interest  expense,  net  decreased  $95  thousand or 45.7% to $113  thousand for
fiscal 2000 compared to $208  thousand in fiscal 1999,  due primarily to reduced
debt  levels  and  additional  interest  income  earned  on  funds  invested  in
interest-bearing  deposits.  Minority  interest,  net of tax of $9  thousand  in
fiscal 2000, is related to minority shareholder interest in the Company's online
internet subsidiary.


                                       17
<PAGE>

INCOME TAXES

Income taxes increased $41 thousand to $0.5 million in fiscal 2000 when compared
to fiscal 1999.  The increase is primarily  due to estimated  state income taxes
resulting  from  the  Company's   increased   profitability.   The  Company  has
substantially  utilized  its  federal  tax  loss  carryforwards;  therefore  its
effective tax rate will increase significantly.

BUSINESS SEGMENTS

The  Company  operates  in two  business  segments -  Nutritional  Products  and
Pharmaceutical Products.

NUTRITIONAL PRODUCTS

1.       Year ended June 30, 2001 vs. Year ended June 30, 2000

Nutritional  product  revenues of $21.1 million for fiscal 2001 decreased  $11.1
million,  when  compared to  nutritional  product  revenues of $32.2 million for
fiscal  2000.  The decrease in revenues is primarily  due to  reductions  in the
selling  price  of  chromium   picolinate  offered  to  our  ingredient  product
customers, as a result of the expiration of the composition-of-matter  patent in
August 2000.  The decrease was partially  offset by a 40% increase in the volume
of Chromax chromium picolinate sold in fiscal 2001 vs. fiscal 2000.

Nutritional products operating loss for fiscal 2001 was $2.9 million as compared
to operating  income of $7.0 million for the same period a year ago. The decease
is due primarily to the  reduction in the selling price of chromium  picolinate,
and the  funding  of the  operations  of  NutritionU.com,  which was part of the
restructuring charge as previously discussed.

2.       Year ended June 30, 2000 vs. Year ended June 30, 1999

Nutritional  product revenues in fiscal 2000 increased $4.9 million, or 17.8% to
$32.2 million compared to $27.3 million in fiscal 1999. The increase in revenues
is due to increased nutritional product sales of $2.8 million resulting from the
January 1999  acquisition of the Lite Bites Business;  as well as a $2.4 million
increase in ingredient  product sales,  partially  offset by reduced revenues of
$0.4 million due to the sale of the Company's  Wipe Out(R) Dairy Wipes  business
in December 1999.

Nutritional  products  operating  income  was $7.0  million in fiscal  2000,  an
increase of $0.4 million or 5.6%  compared to $6.6  million in fiscal 1999.  The
increase  is  primarily  due to the  full  year's  benefit  resulting  from  the
acquisition of the Lite Bites Business, as well as increased sales of ingredient
products.  Partially offsetting these increases were higher selling, general and
administrative expense as well as increased amortization cost resulting from the
acquisition of the Lite Bites Business.


                                       18
<PAGE>

PHARMACEUTICAL PRODUCTS

1.       Year ended June 30, 2001 vs. Year ended June 30, 2000

Pharmaceutical  product  revenues of $2.1 million for fiscal 2001 increased $1.5
million  when  compared to $0.6  million for fiscal  2000.  The  increase is due
primarily  to  license  fees  earned  from  users  of  the  Company's   patented
technologies.

Pharmaceutical  products  operating  income  for  fiscal  2001 was $1.9  million
compared to $63  thousand in the  comparable  period a year ago. The increase is
due  primarily  to license  fees  earned  from users of the  Company's  patented
technologies.

2.       Year ended June 30, 2000 vs. Year ended June 30, 1999

Pharmaceutical products revenues were $0.6 million in fiscal 2000, a decrease of
$0.3 million  compared to $0.9 million in fiscal 1999.  The decrease in revenues
is due to reduced sales of nisin-based animal health products resulting from the
sale of the nisin-based animal health business in December 1999.

Pharmaceutical  products  operating  income was $63 thousand in fiscal 2000,  as
compared to an operating  loss of $139 thousand in fiscal 1999.  The increase is
primarily  due to  reduced  costs  in the  Company's  Wipe  Out(R)  Dairy  Wipes
business, as well as increased sales of the Company's lysostaphin products.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents  at June 30,  2001  decreased  $3.1  million  to $5.4
million  compared to $8.5  million at June 30, 2000.  As of June 30,  2001,  the
Company had a working  capital  surplus of $6.4  million,  compared to a working
capital surplus of $6.5 million as of June 30, 2000.

Net cash  provided by  operations  for fiscal 2001 was $3.6 million  compared to
$9.4  million  for fiscal year 2000.  The  decrease  is due  primarily  to lower
profitability.

Net cash used in investing  activities for fiscal 2001 was $5.0 million compared
to $4.2 million for fiscal 2000.  The increase in cash used is due  primarily to
increased contingent payments made to the former owners of Nutrition 21.

Net cash used in financing  activities in fiscal 2001 was $1.8 million  compared
to $1.1  million for fiscal  2000.  There were no cash  exercises of options and
warrants in fiscal 2001.

The Loan Agreement  with Citizens Bank of  Massachusetts  ("Citizens")  is for a
$5.5  million  term loan and a $4.0 million  revolving  credit  facility for the
purposes  of  acquiring  the  Lite  Bites  Business  and for  general  corporate
purposes.  Loans from  Citizens  bear interest at the prime rate plus 1% and are
due February 1, 2002.  The Company is making  monthly  payments of principal and
interest on the loan.  The Company had no  outstanding  balance on the revolving
credit

                                       19
<PAGE>

facility  as of  June  30,  2001.  As of  June  30,  2001,  the  Company  had an
outstanding term loan balance of $1.1 million with Citizens.

In accordance  with the Purchase  Agreement for the acquisition of Nutrition 21,
the Company recorded on its balance sheet at June 30, 2001, a current  liability
of $1.3 million for the  contingent  payment due in September 2001 to the former
owners of Nutrition 21 as provided for in the purchase  agreement.  On September
30, 2000, the Company paid the former owners of Nutrition 21 approximately  $3.6
million,  representing  the full  amount of the  contingent  payment due for the
12-month  period  September 1999 through August 2000. The Company  utilized cash
generated from operations to satisfy the contingent payment.

In  accordance  with the Agreement of Purchase and Sale of Assets of OLI entered
into on January 19, 1999, the Company  recorded on its balance sheet at June 30,
2001,  a current  liability  of $0.4  million  for a  contingent  payment due in
January 2002 to the former owners of OLI. On February 8, 2001,  in  satisfaction
of a contingent payment  requirement,  the Company paid the former owners of OLI
$1.0  million in cash,  and issued to them 941 shares of its Series G  Preferred
Stock.  The Company  used cash  generated  from  operations  to satisfy the cash
portion of the contingent payments.

The Company's  primary  sources of financing are cash generated from  continuing
operations and the Citizens  revolving credit facility.  The availability  under
the  Citizens  revolving  credit  facility  is based on the  Company's  accounts
receivable and inventory. At June 30, 2001, the availability under the revolving
line of credit was $3.3 million. At June 30, 2001, the Company had no borrowings
under this line.

The Company  believes that cash  generated  from  operations  and cash available
under the revolving  credit facility will provide  sufficient  liquidity to fund
operations,  debt service and other scheduled  contingent  payments for the next
twelve months.

Future  acquisition  activities  and any increases in marketing and research and
development expenses over the present levels may require additional funds. Also,
the  Company is  obligated  to repay the  borrowings  to  Citizens no later than
February  2002.  The Company  intends to seek any necessary  additional  funding
through  arrangements  with corporate  collaborators,  through public or private
sales of its securities,  including equity securities, or through bank financing
arrangements.  The Company does not currently have any specific arrangements for
additional  financing and there can be no assurance that additional funding will
be available at all or on terms acceptable to the Company.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The  Company  has  substantially  utilized  it's  federal  tax loss  and  credit
carryforwards,  and  therefore it is expected  that its  effective tax rate will
increase  from 24% in  fiscal  2001 to an  effective  tax  rate of 36%,  thereby
reducing  net  income  and  earnings  per  share in  future  periods  as well as
affecting comparisons with prior periods.

                                       20
<PAGE>

RECENTLY ISSUED ACCOUNTING STANDARDS

The Securities and Exchange  Commission (SEC) released Staff Accounting Bulletin
(SAB) No. 101 "Revenue Recognition in Financial Statements" on December 3, 1999,
SAB No.  101A on March 24, 2000 and SAB No. 101B on June 26, 2000 and a document
issued on October  12, 2000  responding  to  frequently  asked  questions  (FAQ)
regarding  accounting  standards related to revenue recognition and SAB No. 101.
For fiscal year 2001, there was no material impact on our financial  position or
results of operations as a result of the above.

In June 2001,  the Financial  Accounting  Standards  Board issued  Statements of
Financial  Accounting  Standards No. 141,  BUSINESS  COMBINATIONS,  and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual  impairment  tests in accordance  with the Statements.
Other  intangible  assets will continue to be amortized over their useful lives.
The Company has not yet determined what the effect of these Statements will have
on the future financial position and results of operations of the Company.

ITEM 7a  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk  represents the risk of changes in value of a financial  instrument,
derivative or non-derivative,  caused by fluctuations in interest rates, foreign
exchange rates and equity prices. The Company has no financial  instruments that
give it exposure  to foreign  exchange  rates or equity  prices.  The  Company's
existing term loan with Citizens Bank of Massachusetts (successor in interest to
State Street Bank and Trust Company) bears interest at a rate equal to the prime
lending rate plus one percent.  As a result,  the Company does have  exposure to
changes in  interest  rates.  For  example,  if interest  rates  increase by one
percentage  point from  current  levels,  the Company  would  incur  incremental
interest expense of $7 thousand through the scheduled  maturity of the term loan
on February 1, 2002.

ITEM 8            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are included herein commencing on page F-1.

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

At a meeting  held on January  12,  2001,  the Audit  Committee  of the Board of
Directors  of the Company  approved the  engagement  of Ernst & Young LLP as its
independent  auditors  for the fiscal  year  ending June 30, 2001 to replace the
firm of KPMG LLP,  who were  dismissed  as  auditors  of the  Company  effective
January 18, 2001.

The audit reports of KPMG LLP on the consolidated  financial  statements of AMBI
Inc. and  subsidiaries as of and for the years ended June 30, 2000 and 1999, did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting principles.


                                       21
<PAGE>

PART III

ITEM 10           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

OFFICERS AND DIRECTORS

         The officers and directors of the Company are as follows:

                                   Year Joined
       Name and Age                Company         Position
-------------------------------------------------------------------------------
Gail Montgomery (48)               1999            President, Chief
                                                   Executive Officer,
                                                   and Director

Robert E. Flynn (68)*              1996            Chairman of the Board

P. George Benson, PhD (55)         1998            Director

Audrey T. Cross, PhD (56)          1995            Director

John H. Gutfreund (71)*            2000            Director

Alan J. Kirschbaum (56)            1999            Senior Vice President,
                                                   Finance and Administration,
                                                   and Chief Financial Officer

Marvin Moser, MD (77)              1997            Director

Robert E. Pollack, PhD (61)        1995            Director

Benjamin T. Sporn (63)             1986            Senior Vice President,
                                                   General Counsel, and
                                                   Secretary

* Mr.  Gutfreund  will  become  Chairman  of the Board on  September  30,  2001,
succeeding Mr. Flynn who will remain on the Board until December 31, 2001.

         Gail  Montgomery  has been  President,  Chief  Executive  Officer and a
Director of the Company since September 29, 2000, when she succeeded Fredrick D.
Price.  From July 1999 to September 2000, she served the Company's  Nutrition 21
subsidiary in various  capacities,  most recently as Vice  President and General
Manager. From November 1998 to July 1999, Ms. Montgomery was President of Health
Advantage Consulting,  a consulting firm, which provided strategic planning, new
product introduction, and market development services to the nutrition industry.
From 1992 to 1998 she worked for Diet Workshop,  a diet franchise network,  most
recently as President and CEO. From 1979 to 1992,  Ms.  Montgomery has served in
various

                                       22
<PAGE>

capacities  in the health and fitness  sector.  She  received a BA from  Douglas
College of Rutgers University in communications.

         Robert E. Flynn was elected a Director  of the Company in October  1996
and Chairman of the Board of Directors in October 1997. He served as Chairman of
the  NutraSweet  Company from June 1990 until he retired in December  1995.  Mr.
Flynn also served as Chief Executive Officer of the NutraSweet Company from June
1990  until  March  1995.  From 1981 to 1990,  he served  in  various  executive
capacities with Fisher Controls International Inc., including Chairman and Chief
Executive Officer.  Prior thereto from 1957 to 1981, Mr. Flynn held positions of
increasing importance with The Carborundum Co. Mr. Flynn is also a member of the
Board of Stantec Inc. and WorldPages.com. He received a BSc from Loyola College,
a BEE from McGill University and an MBA from Rutgers University

         P. George  Benson,  PhD,  was elected a Director of the Company in July
1998. Dr. Benson is Dean of the Terry College of Business and holds the Simon S.
Selig,  Jr. Chair for Economic  Growth at the University of Georgia.  Dr. Benson
was previously the Dean of the Faculty of Management at Rutgers University and a
professor  of  decision  sciences  at the Carlson  School of  Management  of the
University  of Minnesota.  In 1997,  he was  appointed by the U.S.  Secretary of
Commerce to a three-year term as one of the nine judges for the Malcolm Baldrige
National  Quality Award. In 1996,  Business News New Jersey named Dr. Benson one
of New  Jersey's  "Top 100  Business  People".  He  received a BS from  Bucknell
University and a PhD in business from the University of Florida.

         Audrey T. Cross,  PhD, was elected a Director of the Company in January
1995. Dr. Cross has been Associate  Clinical Professor at the Institute of Human
Nutrition at the School of Public Health of Columbia  University since 1988. She
also works as a consultant in the areas of nutrition and health policy.  She has
served as a special  assistant to the United States  Secretary of Agriculture as
Coordinator  for Human  Nutrition  Policy  and has  worked  with both the United
States Senate and the California State Senate on nutrition  policy matters.  Dr.
Cross  received a BS in dietetics,  a Master of Public Health in nutrition and a
PhD from the  University of  California at Berkeley,  and a JD from the Hastings
College of Law at the University of California at San Francisco.

         John H.  Gutfreund  was  elected a Director  of the Company in February
2000. Mr. Gutfreund is president of Gutfreund & Company,  Inc., a New York-based
financial  consulting firm that specializes in advising select  corporations and
financial  institutions in the United States,  Europe and Asia. He is the former
chairman and chief executive  officer of Salomon Inc., and past vice chairman of
the New York Stock Exchange and a past board member of the  Securities  Industry
Association.  Mr.  Gutfreund  is  active in the  management  of  various  civic,
charitable,  and  philanthropic  organizations,  including  the New York  Public
Library, and the Astor, Lenox, Tilden, and Aperture  Foundations.  Mr. Gutfreund
is also a director of AccuWeather,  Inc., Arch Wireless, Ascent Assurance, Inc.,
Evercel Inc., LCA-Vision,  Inc., Maxicare Health Plans, Inc., The LongChamp Core
Plus Fund Ltd.,  and The  Universal  Bond Fund.  He  received a BA from  Oberlin
College.

                                       23
<PAGE>

         Alan J.  Kirschbaum  was  elected  Senior Vice  President,  Finance and
Administration, and Chief Financial Officer, in March 2001. From October 1999 to
March  2001,  he served  the  Company  as  Controller.  From  1996 to 1999,  Mr.
Kirschbaum was Vice President and Controller of AMS Asset  Management  Services.
From  1984 to  1996,  he held a series  of  increasingly  responsible  financial
positions  with  Ascom  Timeplex,  Inc.  He holds a BS from  Pennsylvania  State
University, an MBA from Pace University, and is a Certified Public Accountant.

         Marvin Moser, MD was elected to the Board of Directors in October 1997.
He is clinical  professor of medicine at Yale and senior  medical  consultant at
the National High Blood Pressure  Education  Program of the National Heart, Lung
and Blood Institute.  Dr. Moser's work has focused on various  approaches to the
prevention and treatment of  hypertension  and heart  disease.  He has published
extensively  on this  subject  with over 400  publications.  He has  authored or
contributed to more than 30 books and numerous  physician and patient  education
programs.  He is editor-in  chief of the Journal of Clinical  Hypertension.  Dr.
Moser is also a member  of the  Board of The Third  Avenue  Value  Funds and the
Trudeau  Institute.  Dr. Moser holds a BA from Cornell University and an MD from
Downstate University College of Medicine.

         Robert E.  Pollack,  PhD,  was  elected a  Director  of the  Company in
January  1995.  Dr.  Pollack  has been a  Professor  of  Biological  Sciences at
Columbia  University  since 1978. In addition,  from 1982 to 1989 he was Dean of
Columbia  College.  Prior thereto he was Professor of  Microbiology at the State
University  of New York School of Medicine at Stony Brook,  Senior  Scientist at
Cold Spring Harbor  Laboratory,  Special NIH fellow at the Weizmann Institute in
Israel,  and NIH Fellow in the  Department  of Pathology at New York  University
School of Medicine. He is the author of more than one hundred research papers on
the  molecular  biology of viral  oncogenesis,  a dozen  articles in the popular
press, and three books. He received a BA in physics from Columbia University and
a PhD in biology from Brandeis University.

         Benjamin T. Sporn has been legal  counsel to the Company since 1990 and
has served as Secretary of the Company since 1986, and was appointed Senior Vice
President  and General  Counsel in February  1998.  He was an attorney with AT&T
from 1964 until  December  1989 when he retired from AT&T as a General  Attorney
for Intellectual  Property Matters. Mr. Sporn was a director of the Company from
1986 until 1994. He received a BSE degree from Rensselaer  Polytechnic Institute
and a JD degree from American University.

         The directors'  serve for a term of one year and until their successors
are duly elected and  qualified.  Officers serve at the pleasure of the Board of
Directors.  There are no  family  relationships  among  directors  or  executive
officers.

ARRANGEMENTS REGARDING THE ELECTION OF DIRECTORS

         So long as  Burns  Philp &  Company  Limited  (an  owner  of 24% of the
Company's  outstanding  common  shares)  owns  at  least  20% of  the  Company's
outstanding  common stock, BP is entitled to nominate one member for election to
the Company's  Board.  Currently,  BP has not nominated a member for election to
the  Company's   Board.   See  Item  13.  Certain   Relationships   and  Related
Transactions.

                                       24
<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS

         The  Company  has an  audit  committee  consisting  of Mr.  Flynn,  Mr.
Gutfreund, and Dr. Benson. In addition, the Company has a compensation committee
consisting of Dr. Cross, Mr. Flynn, and Dr. Pollack.  During the year ended June
30, 2001, the audit committee met three times,  and the  compensation  committee
met three times.




                                       25
<PAGE>

ITEM 11.          EXECUTIVE COMPENSATION

The following table sets forth the  compensation  paid or accrued by the Company
during the periods  indicated for (i) each person that served as chief executive
officer  during fiscal year 2001 and (ii) certain other person that served as an
executive officer in fiscal year 2001 whose total annual salary and bonus was in
excess of $100,000.

<TABLE>
<CAPTION>
                                  SUMMARY COMPENSATION TABLE (1)(2)
===========================================================================================================
                                                                                LONG-TERM        ALL OTHER
NAME AND PRINCIPAL POSITION                          ANNUAL COMPENSATION       COMPENSATION    COMPENSATION
                                      ---------------------------------------------------------------------
                                             PERIOD         SALARY      BONUS    SECURITIES         ($)
                                                              ($)        ($)     UNDERLYING
                                                                                  OPTIONS
                                                                                    (#)
-----------------------------------------------------------------------------------------------------------
<S>                                    <C>                  <C>         <C>       <C>           <C>
Gail Montgomery, President,
Chief Executive Officer and Director   7/27/99 - 6/30/00    113,180     50,000    25,000
(3)
                                      ---------------------------------------------------------------------
                                       7/1/00 - 6/30/01     257,307    275,000   200,000

-----------------------------------------------------------------------------------------------------------
Fredric D. Price, former President,
Chief Executive Officer and Director   7/1/98 - 6/30/99     275,000    275,000
(4)
                                      ---------------------------------------------------------------------
                                       7/1/99 - 6/30/00     275,000    275,000                   21,154 (5)

                                      ---------------------------------------------------------------------
                                       7/1/00 - 6/30/01  68,750 (6)                             227,404 (6)

-----------------------------------------------------------------------------------------------------------
Jonathan de la Harpe, PhD, former
Senior Vice President, Commercial      7/1/98 - 6/30/99     129,923     30,000    15,000
Operations (7)
                                      ---------------------------------------------------------------------
                                       7/1/99 -6/30/00      160,000     50,000    32,000          2,713 (5)

                                      ---------------------------------------------------------------------
                                       7/1/00 -6/30/01      150,267     50,000    32,000          2,713 (5)

-----------------------------------------------------------------------------------------------------------
Alan J. Kirschbaum, Senior Vice
President, Finance and                 7/1/99 - 6/30/00     137,500     15,000    15,000
Administration, and Chief Financial
Officer
                                      ---------------------------------------------------------------------
                                       7/1/00 - 6/30/01     150,000     30,000

-----------------------------------------------------------------------------------------------------------
Benjamin T. Sporn, Senior Vice
President, General Counsel and         7/1/98 - 6/30/99     160,000     50,000    25,000
Secretary
                                      ---------------------------------------------------------------------
                                       7/1/99 - 6/30/00     190,000     75,000

                                      ---------------------------------------------------------------------
                                       7/1/00 - 6/30/01     207,500     66,688

===========================================================================================================
</TABLE>

(1) The above  compensation  does not include the use of an automobile and other
    personal  benefits,  the total  value of which do not exceed as to any named
    officer or director,  the lesser of $50,000 or 10% of such  person's  annual
    salary and bonus.

                                       26
<PAGE>

(2) Pursuant to the  regulations  promulgated  by the  Securities  and  Exchange
    Commission (the "Commission"),  the table omits a number of columns reserved
    for types of compensation not applicable to the Company.

(3) Ms.  Montgomery  succeeded  Mr.  Price as CEO,  President  and  Director  on
    September 29, 2000.

(4) Mr.  Price's  employment  with the Company  terminated  September  29, 2000.
    Includes  salary  and  payments  made to Mr.  Price  under  the  terms  of a
    consulting agreement entered into as of September 29, 2000.

(5) Represents loans and interest forgiven.

(6) Mr. Price's  employment  with the Company  terminated on September 29, 2000.
    Effective as of such date the Company  entered  into a consulting  agreement
    with Mr. Price as described under  "Employment  and Consulting  Agreements."
    For fiscal 2001,  the "other  compensation"  for Mr. Price was  comprised of
    $206,250 paid pursuant to such  consulting  agreement and the forgiveness of
    $21,154 of loans and interest pursuant to such agreement.

(7) Dr. de la Harpe employment by the Company terminated April 30, 2001.

None of the  individuals  listed above  received any  long-term  incentive  plan
awards during the fiscal year.

EMPLOYMENT AND CONSULTING AGREEMENTS

         The Company entered into an employment agreement,  effective October 1,
2000,  with Gail  Montgomery.  The agreement has a two-year term,  which ends on
September 30, 2002, and provides for an annual salary of $275,000, and the grant
of Stock Options to purchase up to 150,000 shares of the Company's  common stock
at $1.3125  per share.  The  Options  vest 50% on  October  16,  2001 and 50% on
October 16, 2002, but only if Ms. Montgomery is employed by the Company on these
dates,  and expire in 2005. The agreement also provides for certain  performance
bonuses.  Although  employment  under the agreement is at will, if employment is
terminated by the Company  under  certain  circumstances,  Ms.  Montgomery  will
receive  continuation of her salary for one year, certain benefits will continue
for twelve months after termination,  and all of Ms.  Montgomery's stock options
will vest.  In  addition,  in the event of  certain  changes in control in stock
ownership of the Company, Ms. Montgomery will receive a minimum of two times her
annual salary.

         Mr.  Price's  employment  with the Company  terminated on September 29,
2000. Effective as of such date, the Company entered into a consulting agreement
with Mr. Price.  The agreement is for the period of October 1, 2000 through June
30,  2004,  and  provides for payment of $206,250 for the period from October 1,
2000 through June 30, 2001, and a fee at an annual

                                       27
<PAGE>

rate of $100,000 thereafter.  All of Mr. Price's stock options ( 900,000 shares)
vest and are exercisable until June 30, 2004. Upon the occurrence of a change of
control (as defined in the agreement),  the agreement terminates and the Company
is required to pay to Mr. Price a lump-sum  payment equal to the fees that would
have been paid to him over the remaining term of the agreement had the change of
control not occurred.

         The  following  tables  set forth  information  with  regard to options
granted during the fiscal year (i) to the Company's Chief Executive Officer, and
(ii) to other officers of the Company named in the Summary Compensation Table.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                Individual Grants                           Potential Realizable Value
                                                                            At Assumed Annual Rates
                                                                            Of Stock Price Appreciation
                                                                            For Option Term
---------------------------------------------------------------------------------------------------------------

                                                 Percent Of
                                 Number Of          Total
                                Securities         Options       Exercise
                                Underlying       Granted To      Of Base
                                  Options       Employees In      Price      Expiration
            Name                Granted (#)     Fiscal Year       ($/Sh)        Date        5% ($)    10% ($)

---------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>            <C>           <C>        <C>        <C>
A.  Jonathan de la Harpe         25,000            1.95           $0.938        (1)        $6,479     $14,376
                                 50,000            3.90           $1.813        (1)        $25,044    $55,343
---------------------------------------------------------------------------------------------------------------

B. Alan J. Kirschbaum            5,000             0.39           $1.813        (2)        $2,505     $5,534
                                 10,000            0.78           $0.813        (2)        $2,246     $3,773
                                 30,000            2.34           $1.140        (2)        $9,448     $20,879
                                 30,000            2.34           $0.938        (3)        $7,775     $17,180
---------------------------------------------------------------------------------------------------------------

C. Gail Montgomery               50,000            3.90           $1.813        (2)        $25,044    $55,343
                                 150,000           11.71          $1.313        (4)        $54,414    $120,239
---------------------------------------------------------------------------------------------------------------

D.  Fredric D. Price                0                0               -           -            -           -
---------------------------------------------------------------------------------------------------------------

E.  Benjamin T. Sporn            35,000            2.73           $0.938        (3)        $9,070     $20,043
                                 50,000            3.90           $1.813        (2)        $25,044    $55,343
                                 40,000            3.12           $1.140        (2)        $12,598    $27,839
                                 40,000            3.12           $1.140        (5)        $47,544    $72,675
---------------------------------------------------------------------------------------------------------------
</TABLE>


(1)   Options are expired by reason of termination of employment.

(2)   Vesting 20% per year; expiration the earlier of 5 years from vesting or 89
      days after termination of employment.

                                       28
<PAGE>

(3)   Vesting 33 and 1/3% on date of grant and on the next two  anniversaries of
      the grant; expiration the earlier of 5 years from vesting or 89 days after
      termination of employment.

(4)   Vesting 50% per year;  expiration  the earlier of 5 years from  vesting or
      one year after termination of employment.

(5)   Vested;  expiration  earlier  of 10 years  from  vesting  or 89 days after
      termination of employment.


               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------------------------
      Name          Shares         Value     Number of Unexercised Options   Value of Unexercised In-the-
                   Acquired    realized ($)         at FY-End (#)              Money Options at FY-End
                      in
                   Exercise
                     (#)
                                            --------------------------------------------------------------
                                             Exercisable     Unexercisable    Exercisable   Unexercisable
----------------------------------------------------------------------------------------------------------
<S>                       <C>            <C>      <C>              <C>            <C>             <C>
Jonathan de               0              0             0                0             $0              $0
la Harpe
----------------------------------------------------------------------------------------------------------

Alan J.
Kirschbaum                0              0        29,000           86,000         $1,570          $4,278
----------------------------------------------------------------------------------------------------------

Gail                      0              0         5,000          270,000             $0              $0
Montgomery
----------------------------------------------------------------------------------------------------------

Fredric D.                0              0       900,000                0             $0              $0
Price
----------------------------------------------------------------------------------------------------------

Benjamin T.               0              0       106,666          140,833         $2,356          $4,713
Sporn
----------------------------------------------------------------------------------------------------------
</TABLE>

PENSION PLANS

NUTRITION 21, INC.

         Eligible  employees of the Company are entitled to  participate  in the
Burns  Philp  Inc.  Retirement  Plan  for  Non-Bargaining   Unit  Employees,   a
non-contributory  pension plan (the "Pension Plan") maintained by Burns Philp as
long as Burns  Philp  maintains  the  Pension  Plan and owns at least 20% of the
Company's  outstanding Common Stock.  Burns Philp currently holds  approximately
24% of the Company's  outstanding Common Stock.  Assuming  retirement at age 65,
the  Pension  Plan  provides  benefits  equal to the  greater of (a) 1.1% of the
employee's

                                       29
<PAGE>

final average  earnings  multiplied  by the number of years of credited  service
plus 0.65% of the employee's  final average earnings in excess of the average of
the contribution and the benefit basis in effect under Section 230 of the Social
Security Act for each year in the 35-year  period ending with the year of Social
Security retirement age as calculated under Section 401(l)(5)(E) of the Code and
Table I of IRS Notice  89-70,  multiplied  by the  employee's  years of credited
service up to 35, minus any predecessor  plan benefit in the case of an employee
who  participated  in a predecessor  plan or (b) $24 multiplied by the number of
years of  credited  service up to 25 years plus $12  multiplied  by the years of
employment from 26-40 years,  minus any predecessor  plan benefit in the case of
an employee who participated in a predecessor plan. The "final average earnings"
are the average earnings during the five highest-paid consecutive calendar years
within  the last  ten  calendar  years of  credited  service  with the  Company.
Earnings include the salary and bonus listed in the summary  compensation table.
Earnings,  which may be  considered  under the  Pension  Plan,  are  limited  to
$170,000 per year subject to annual cost of living  adjustments as determined by
the IRS.

         The following table sets forth estimated  annual benefits  payable upon
retirement,  assuming  retirement  at age 65 in 2001 and a single  life  annuity
benefit,  according to years of credited service and final average earnings. The
benefits  listed are not subject to any deduction  for Social  Security or other
offset amounts.

                            YEARS OF CREDITED SERVICE

Final average
earnings            15          20           25          30           35
-------------------------------------------------------------------------------
$25,000             $4,320      $5,760       $7,200      $8,250       $9,625

$50,000             $9,497      $12,663      $15,828     $18,994      $22,159

$75,000             $16,059     $21,412      $26,766     $32,119      $37,472

$100,000            $22,622     $30,162      $37,030     $45,244      $52,748

$150,000            $35,747     $47,662      $59,578     $71,494      $83,409

$170,000            $40,997     $54,600      $68,328     $81,994      $95,659
and up

         Alan J. Kirschbaum,  Gail  Montgomery,  and Benjamin T. Sporn each have
2.5, 1.9, and 9 years, respectively,  of credited service under the Pension Plan
as of June 30,  2001,  and, at age 65, would have  approximately  11, 19, and 11
years of credited service, respectively.

DIRECTOR COMPENSATION

         Non-management  Directors  each receive a quarterly  director's  fee of
$1,800 and the  Chairman  of the Board  receives a quarterly  director's  fee of
$3,600.  Each also  receives  $500 for

                                       30
<PAGE>

each meeting of the Board attended in person, $250 for each meeting of the Board
attended  telephonically,  and each receives  annually options to acquire 10,000
shares of Common Stock, which were granted at an exercise price of $0.875.  Each
also  received an  additional  grant of 10,000  shares at an  exercise  price of
$0.875

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's officers and directors, and persons who own more than ten percent of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
ownership and changes in ownership with the Securities and Exchange  Commission.
Officers,  directors and greater than  ten-percent  shareholders are required by
SEC  regulation  to furnish the Company  with copies of all Section  16(a) forms
they file.

         Based  solely on review of the  copies of such forms  furnished  to the
Company, or written  representations that no Forms 5 were required,  the Company
believes  that during the period from July 1, 2000 through  June 30,  2001,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than ten-percent beneficial owners were complied with.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Board of Directors  determines  executive  compensation taking into
consideration  recommendations of the Compensation  Committee.  No member of the
Company's  Board  of  directors  is an  executive  officer  of a  company  whose
compensation  committee or board of directors  includes an executive  officer of
the Company.


                                       31
<PAGE>


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

         The following table sets forth,  as of September 24, 2001,  information
regarding the beneficial  ownership of the Company's Common Stock based upon the
most recent  information  available  to the Company for (i) each person known by
the Company to own  beneficially  more than five (5%)  percent of the  Company's
outstanding  Common  Stock,  (ii) each of the Company's  executive  officers and
directors  and (iii) all  executive  officers and  directors of the Company as a
group.  Unless  otherwise  indicated,  each  stockholder's  address  is c/o  the
Company, 4 Manhattanville Road, Purchase, New York 10577-2197.

                   Shares Owned Beneficially and of Record (1)

  Name and Address                       No. of Shares             % of Total

  P. George Benson (2)                       55,000                   *

  Audrey T. Cross (3)                        84,000                   *

  Robert E. Flynn (4)                       132,000                    *

  John H. Gutfreund (5)                      80,000                    *

  Alan J. Kirschbaum (6)                     42,500                    *

  Gail Montgomery (7)                       105,000                    *

  Marvin Moser (8)                          145,000                    *

  Robert E. Pollack (9)                      90,000                    *

  Benjamin T. Sporn (10)                    135,891                    *

  American Home Products Corporation      3,478,261                   10.75
  5 Giralda Farms
  Madison, NJ 07940

  Burns Philp & Company Limited (11)      7,763,837                   24.00
  7 Bridge Street
  Sydney, NSW 2000, Australia

o All Executive Officers and Directors      869,391                    2.63
  as a Group (9 persons) (12)

------------------
       * Less than 1%

                                       32
<PAGE>

(1) Unless otherwise indicated, each person has sole investment and voting power
with respect to the shares  indicated.  For purposes of this table,  a person or
group or group of persons is deemed to have "beneficial ownership" of any shares
as of a given date,  which such  person has the right to acquire  within 60 days
after such date. For purposes of computing the percentage of outstanding  shares
held by each  person  or group of  persons  named  above  on a given  date,  any
security  which such person or group of persons has the right to acquire  within
60 days  after  such  date is  deemed  to be  outstanding  for the  purposes  of
computing the percentage  ownership of such person or persons, but is not deemed
to be outstanding  for the purpose of computing the percentage  ownership of any
other person.

(2) Includes  50,000  shares  issuable  upon  exercise of currently  exercisable
options under the Company's Stock Option Plans.

(3) Includes  80,000  shares  issuable  upon  exercise of currently  exercisable
options under the Company's Stock Option Plans.

(4) Includes  120,000  shares  issuable upon  exercise of currently  exercisable
options under the Company's Stock Option Plans.

(5) Includes  30,000  shares  issuable  upon  exercise of currently  exercisable
options under the Company's Stock Option Plans.

(6) Includes  32,000  shares  issuable  upon  exercise of currently  exercisable
options under the Company's Stock Option Plans.

(7) Includes  95,000  shares  issuable  upon  exercise of currently  exercisable
options under the Company's Stock Option Plans.

(8) Includes  135,000  shares  issuable upon  exercise of currently  exercisable
options under the Company's Stock Option Plans.

(9) Consists of shares issuable upon exercise of currently  exercisable  options
under the Company's Stock Option Plans.

(10) Includes  106,666  shares  issuable upon exercise of currently  exercisable
options under the Company's Stock Option Plans.

(11) Consists of shares owned by subsidiaries.

(12) Includes  738,666  shares  issuable upon exercise of currently  exercisable
options under the Company's Stock Option Plans.


                                       33
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       On December 12, 1996, the Company completed the sale of its UK-based food
ingredients  subsidiary,  Aplin &  Barrett  Limited  ("A&B"),  to Burns  Philp &
Company  Limited  ("BP") for $13.5 million in cash and the return to the Company
of 2.42  million  shares of the  Company's  Common  Stock  held by BP.  The sale
included the Company's  nisin-based food  preservative  business.  In connection
with the transaction,  the Company and A&B entered into two License  Agreements.
Pursuant to the first License Agreement,  the Company is exclusively licensed by
A&B for  the use of  nisin  generally  in  pharmaceutical  products  and  animal
healthcare  products.   Pursuant  to  the  second  License  Agreement,   A&B  is
exclusively  licensed  by the Company  generally  for the use of nisin as a food
preservative and for food  preservation.  As long as BP owns at least 20% of the
Company's  outstanding  common stock,  BP is entitled to nominate one member for
election to the Company's  Board.  Currently,  BP has not nominated a member for
election to the Company's Board.  The amount of  consideration  for the sale was
arrived at through arms-length  negotiation and a fairness opinion was obtained.
As of June 30, 2001, BP owned  7,763,837  shares of Common Stock,  and continues
such Common Stock ownership as of the date hereof.

       In October 1998, the Company issued  3,478,261  shares of Common Stock to
AHP for $4.0 million.  AHP currently holds approximately 10.75% of the Company's
outstanding  Common Stock.  Under a separate agreement in October 1998, AHP paid
the Company $1.0 million for exclusive  rights to sell the Company's Cardia Salt
in retail markets in the United States. During fiscal 2001, AHP made payments to
the Company of $500,000. See "Item 1. Business - Background"

       The  Company  licensed  its  remaining  rights  to sell  lysostaphin  for
research  purposes,  to  Benjamin  T.  Sporn,  its senior  vice  president,  for
$300,000,  payable in cash over a three-year  period.  A payment of $100,000 has
been made,  and payments of $100,000 each are due prior to July 1, 2002 and July
1,  2003,  respectively.  The  price  and other  terms of the  transaction  were
established through arms-length negotiations.







                                       34
<PAGE>


                                     PART IV

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

       (a)     1.     Financial Statements

               The financial  statements are listed in the Index to Consolidated
               Financial  Statements  on page F-1 and are  filed as part of this
               annual report.

               2.     Financial Statement Schedules

               The following financial statement schedule is included herein:

               Schedule II - Valuation and Qualifying Accounts

               All  other  schedules  are not  submitted  because  they  are not
               applicable,  not required, or because the information is included
               in the Consolidated Financial Statements.

               3.     Exhibits

               The Index to Exhibits  following the Signature Page indicates the
               Exhibits, which are being filed herewith, and the Exhibits, which
               are incorporated herein by reference.

       (b)     Reports on Form 8-K

               The  Company  did not file any  Reports  on Form 8-K  during  the
               fiscal quarter ended June 30, 2001.






                                       35
<PAGE>


                                   SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                                 NUTRITION 21, INC.

                                                 By:  /s/ Gail Montgomery
                                                 -------------------------------
                                                 Gail Montgomery, President,
                                                 CEO and Director

Dated:  September 28, 2001

        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this  Report has been signed  below as of  September  28, 2001 by the  following
persons on behalf of Registrant and in the capacities indicated.


                                                 /s/ Gail Montgomery
                                                 -------------------------------
                                                 Gail Montgomery, President,
                                                 CEO and Director

                                                 /s/ Robert E. Flynn
                                                 -------------------------------
                                                 Robert Flynn,
                                                 Chairman of the Board


                                                 /s/ P. George Benson
                                                 -------------------------------
                                                 P. George Benson, Director


                                                 /s/ Audrey T Cross
                                                 -------------------------------
                                                 Audrey T. Cross, Director


                                                 /s/ John H. Gutfreund
                                                 -------------------------------
                                                 John H. Gutfreund, Director


                                                 /s/ Marvin Moser
                                                 -------------------------------
                                                 Marvin Moser, Director


                                                 /s/ Robert E. Pollack
                                                 -------------------------------
                                                 Robert E. Pollack, Director


                                                 /s/ Alan J. Kirschbaum
                                                 -------------------------------
                                                 Alan J. Kirschbaum, Chief
                                                 Financial Officer


                                       36
<PAGE>


                                    EXHIBITS

3.01          Certificate of Incorporation (1)

3.01a         Certificate of Amendment to the Certificate of Incorporation (2)

3.01b         Certificate of Amendment to the Certificate of Incorporation (3)

3.01c         Certificate of Amendment to the Certificate of Incorporation (11)

3.01d         Certificate of Amendment to the Certificate of Incorporation (11)

3.01e         Certificate of Amendment to the Certificate of Incorporation (12)

3.02          Amended and Restated By-laws (2)

10.01         Form of Incentive Stock Option Plan (8)

10.02         Form of Non-qualified Stock Option Plan (8)

10.02a        Form of 1989 Stock Option Plan (1)

10.02b        Form of 1991 Stock Option Plan (1)

10.02c        Form of 1998 Stock Option Plan (15)

10.24         Exclusive  Option  and  Collaborative  Research  Agreement   dated
              July 1, 1988  between the Company and the  University  of Maryland
              (4)

10.25         License and  License  Option  Agreement  dated  December  15, 1988
              between the Company and Babson Brothers Company (4)

10.36         Agreement, dated October 6, 1992 between the Company and PHRI (5)

10.47         Employment Agreement dated August 30, 1994 between the Company and
              Fredric D. Price, as amended and restated (6)

10.48         Lease dated as of February 7, 1995,  between the Company and Keren
              Limited Partnership (7)

10.49         Share  Purchase  Agreement  dated as of December 12, 1996,  by and
              among  Applied  Microbiology,  Inc.,  Aplin & Barrett  Limited and
              Burns Philp (UK) plc. (9)

10.50         License  Agreement dated as of December 12, 1996 between  Licensee
              Applied  Microbiology,  Inc. and Licensor Aplin & Barrett Limited.
              (9)

10.51         License  Agreement dated as of December 12, 1996 between  Licensee
              Aplin & Barrett

                                       37
<PAGE>

              Limited and Licensor  Applied  Microbiology,  Inc. (9)

10.52         Supply  Agreement  dated as of December 12, 1996  between  Aplin &
              Barrett Limited and Applied Microbiology, Inc. (9)

10.53         Investors'  Rights Agreement dated as of December 12, 1996 between
              Applied  Microbiology,  Inc.  and Burns  Philp  Microbiology.  Pty
              Limited. (9)

10.54         Revolving  Loan and  Security  Agreement  dated as of December 12,
              1996 between Burns Philp Inc. as Lender and Applied  Microbiology,
              Inc. as Borrower. (9)

10.55         Stock and  Partnership  Interest  Purchase  Agreement  dated as of
              August 11, 1997, for the purchase of Nutrition 21. (10)

10.57         Sublease  dated as of September 18, 1998,  between the Company and
              Abitibi Consolidated Sales Corporation (12)

10.58         Stock  Purchase  Agreement  dated as of September 17, 1998 between
              American Home Products Corporation and AMBI Inc. (13)*

10.59         License, Option, and Marketing Agreement dated as of September 17,
              1998  between   American  Home   Products,   acting   through  its
              Whitehall-Robins Healthcare division, and AMBI Inc. (13)*

10.60         Amended  and  Restated  Revolving  Credit and Term Loan  Agreement
              dated as of January 21,  1999  between  State  Street Bank & Trust
              Company as Lender and the Company and  Nutrition  21 as  Borrower.
              (14)

10.61         Agreement  of  Purchase  and Sale of Assets made as of January 19,
              1999 by and among  Dean  Radetsky  and  Cheryl  Radetsky,  Optimum
              Lifestyle, Inc. and AMBI Inc. (14)

10.62         Strategic  Alliance  Agreement dated as of August 13, 1999 between
              AMBI Inc. and QVC, Inc. (15)*

10.63         Asset  Purchase  Agreement  made as of December 30,  1999,  by and
              between ImmuCell Corporation and AMBI Inc. (16)

10.64         License  Agreement  entered into as of August 2, 2000 between AMBI
              Inc. and Biosynexus Incorporated. (17)**

10.65         License and Sublicense Agreement entered into as of August 2, 2000
              between AMBI Inc. and Biosynexus Incorporated. (17)**

10.66         Amendment  effective  as of June  30,  2000,  to the  Amended  and
              Restated  Revolving  Credit  and Term Loan  Agreement  dated as of
              January 21, 1999 between Citizens Bank of Massachusetts (successor
              in interest to loans  originally made by State Street

                                       38
<PAGE>

              Bank & Trust  Company) as Lender and the Company and  Nutrition 21
              as Borrower. (17)

10.67         Employment  Agreement  dated as of October 16, 2000  between  AMBI
              Inc. and Gail Montgomery (18)

10.68         Consulting Agreement entered into as of September 29, 2000 between
              AMBI Inc. and Fredrick D. Price. (19)

23.1          Consent of Ernst & Young LLP (19)

23.2          Consent of KPMG LLP (19)

--------------------------------------
(1)           Incorporated by reference to the Company's Report on Form 10-K for
              1991.

(2)           Incorporated  by  reference  to the  Company's  Report on Form 8-K
              dated September 4, 1992.

(3)           Incorporated by reference to the Company's  Registration Statement
              on Form S-8 dated August 8, 1996, file No. 333-09801.

(4)           Incorporated by reference to the Company's Report on Form 10-K for
              1988.

(5)           Incorporated by reference to the Company's Report on Form 10-K for
              the fiscal period January 31, 1992 through August 31, 1992.

(6)           Incorporated by reference to the Company's Report on Form 10-K for
              1994.

(7)           Incorporated by reference to the Company's Report on Form 10-K for
              1995.

(8)           Incorporated by reference to the Company's  Registration Statement
              on Form S-1 originally filed April 15, 1986, file No. 33-4822.

(9)           Incorporated  by  reference  to the  Company's  Report on Form 8-K
              dated December 27, 1996.

(10)          Incorporated  by  reference  to the  Company's  Report on Form 8-K
              dated August 25, 1997.

(11)          Incorporated by reference to the Company's  Report on Form 10-K/A2
              for 1997.

(12)          Incorporated  by reference to the Company's  Report on Form 10-K/A
              for 1998.

(13)          Incorporated by reference to the Company's Report on Form 10-Q for
              the quarter ended September 30. 1998.

(14)          Incorporated  by  reference  to the  Company's  Report on Form 8-K
              dated February 3, 1999.

                                       39
<PAGE>

(15)          Incorporated by reference to the Company's Report on Form 10-K for
              1999.

(16)          Incorporated by reference to ImmuCell Corporation's Report on Form
              8-K dated January 13, 2000.

(17)          Incorporated by reference to the Company's Report on Form 10-K for
              2000

(18)          Incorporated by reference to the Company's Report on Form 10-Q for
              the quarter ended December 31. 2000.

(19)          Filed Herewith.

*  Subject  to an order  by the  Securities  and  Exchange  Commission  granting
confidential treatment. Specific portions of the document for which confidential
treatment  has been granted have been blacked out. Such portions have been filed
separately  with the Commission  pursuant to the  application  for  confidential
treatment.

** Subject to a request for confidential  treatment  currently  pending with the
Securities and Exchange Commission.







                                       40
<PAGE>


                       NUTRITION 21, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                       FILED WITH THE ANNUAL REPORT OF THE

                              COMPANY ON FORM 10-K

                                  JUNE 30, 2001

                                                                       PAGE

REPORTS OF INDEPENDENT AUDITORS                                         F-2



CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2001 AND 2000                   F-4



CONSOLIDATED STATEMENTS OF INCOME FOR THE
         YEARS ENDED JUNE 30, 2001, 2000 AND 1999                       F-6



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
         FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999               F-7



CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
         YEARS ENDED JUNE 30, 2001, 2000 AND 1999                       F-8



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              F-9





                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Nutrition 21, Inc.



We have audited the  accompanying  consolidated  balance  sheet of Nutrition 21,
Inc. and  subsidiaries  (the  "Company")  as of June 30,  2001,  and the related
consolidated statements of income,  stockholders' equity, and cash flows for the
year then  ended.  Our audit  also  included  the  related  financial  statement
schedule  listed in the Index at Item  14(a).  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Nutrition 21, Inc.
and subsidiaries at June 30, 2001, and the results of their operations and their
cash  flows for the year then ended in  conformity  with  accounting  principles
generally  accepted in the United  States.  Also,  in our  opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.


                                                         /s/ Ernst and Young LLP
Stamford, CT
September 10, 2001



                                      F-2
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Nutrition 21, Inc.:


We have  audited the  consolidated  balance  sheet of  Nutrition  21,  Inc.  and
subsidiaries,  formerly known as AMBI Inc., as of June 30, 2000, and the related
consolidated  statements of income,  shareholders' equity and cash flows for the
years  ended  June 30,  2000 and  1999.  In  connection  with our  audits of the
consolidated financial statements,  we also have audited the financial statement
schedule as listed in the accompanying  index at Item 14(a).  These consolidated
financial statements and the financial statement schedule are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these consolidated  financial  statements and financial statement schedule based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Nutrition 21, Inc.
and  subsidiaries  as of June 30, 2000, and the results of their  operations and
their cash  flows for each of the years in the  two-year  period  ended June 30,
2000, in conformity with accounting  principles generally accepted in the United
States.  Also in our opinion,  the related financial  statement  schedule,  when
considered in relation to the basic consolidated financial statements taken as a
whole,  present  fairly,  in all material  respects,  the  information set forth
therein.

                                                           KPMG LLP


Stamford, CT
September 15, 2000


                                      F-3
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                            JUNE 30,    JUNE 30,
                                                             2001        2000
                                                             ----        ----
              ASSETS

Current assets:

  Cash and cash equivalents                                 $ 5,355     $ 8,488
  Accounts receivable (less allowance for
    doubtful accounts of $45 in 2001 and
    $134 in 2000)                                             3,963       4,587

  Other receivables                                           1,650         464

  Inventories                                                 1,322       1,382
  Prepaid expenses and other current assets                     475         717
                                                            -------     -------
        Total current assets                                 12,765      15,638


Property and equipment, net                                     633         734

Patents and trademarks (net of accumulated amortization
  of $10,375 in 2001 and $7,843 in 2000)                     22,804      21,711

Goodwill (net of accumulated amortization of
  $886 in 2001 and $449 in 2000)                              2,369       2,640

Other assets                                                    316         362
                                                            -------     -------

TOTAL ASSETS                                                $38,887     $41,085
                                                            =======     =======


See accompanying notes.


                                      F-4
<PAGE>


                       NUTRITION 21, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

                                                       JUNE 30,        JUNE 30,
                                                        2001             2000
                                                        ----             ----
  LIABILITIES, REDEEMABLE PREFERRED STOCK AND
  STOCKHOLDERS' EQUITY

  Current liabilities:
     Current portion of long-term debt                 $ 1,125         $ 1,500
     Accounts payable and accrued expenses               3,371           4,039
     Contingent payments payable                         1,855           3,584
     Preferred dividends payable                            22              29
                                                       -------         -------

     Total current liabilities                           6,373           9,152

  Long-term debt and lease obligation                       --           1,125
  Other long-term obligations                              122             153
                                                       -------         -------

  TOTAL LIABILITIES                                      6,495          10,430
                                                       -------         -------

  Commitments and contingent liabilities

  REDEEMABLE PREFERRED STOCK
    Series E convertible preferred,
    1,500 shares issued; 191 and 476
    shares outstanding at June 30, 2001
    and 2000, respectively (aggregate
    liquidation value $196)                                191             389

    Series F convertible preferred, 575
    shares issued; 227 and 343 shares
    outstanding at June 30, 2001 and
    2000, respectively (aggregate
    liquidation value $233)                                227             287

  STOCKHOLDERS' EQUITY
    Preferred stock, $0.01 par value,
      authorized 5,000,000 shares Series G
      convertible preferred, 1,769 shares
      issued, 941 and 663 shares
      outstanding at June 30, 2001 and
      2000, respectively (aggregate
      liquidation value $952)                              941             663

    Common stock, $0.005 par value,
      authorized 65,000,000 shares;
      32,342,818 shares and 31,581,427
      shares issued and outstanding at
      June 30, 2001 and 2000, respectively                 161             158


  Additional paid-in capital                            63,196          62,291

  Accumulated deficit                                  (32,324)        (33,133)
                                                       -------         -------

  TOTAL STOCKHOLDERS' EQUITY                           $31,974         $29,979
                                                       -------         -------

  TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
  AND STOCKHOLDERS' EQUITY                             $38,887         $41,085
                                                       =======         =======
  See accompanying notes.


                                      F-5
<PAGE>


                       NUTRITION 21, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30,
                                                                         --------------------
                                                           2001                 2000                 1999
                                                           ----                 ----                 ----
<S>                                                      <C>                  <C>                  <C>
Net sales                                                $20,809              $32,289              $26,911
Other revenues                                             2,443                  525                1,390
                                                           -----                  ---                -----
REVENUES                                                  23,252               32,814               28,301

Cost of goods sold                                         5,623                5,780                4,782
                                                         -------              -------              -------
GROSS PROFIT                                              17,629               27,034               23,519

Selling, general & administrative expense                 10,370               13,314               12,456
Research & development expense                             2,538                2,610                1,787
Depreciation & amortization expense                        3,359                4,069                2,807
Restructuring & other charges                              2,365                   --                   --
                                                          ------               ------                -----
OPERATING (LOSS) INCOME                                   (1,003)               7,041                6,469

Interest income                                              304                  306                  189
Interest expense                                             243                  419                  397
Other income                                               2,342                   76                   86
                                                          ------                -----                -----
INCOME BEFORE INCOME TAXES                                 1,400                7,004                6,347

Income taxes                                                 335                  523                  482
Minority interest in subsidiary                               --                    9                   --
                                                         -------              -------              -------

NET INCOME                                                $1,065               $6,490               $5,865
                                                          ======               ======               ======

Basic earnings per share                                   $0.03                $0.21                $0.20
                                                           =====                =====                =====
Diluted earnings per share                                 $0.03                $0.20                $0.19
                                                           =====                =====                =====

Weighted average number of common
  shares - basic                                      31,781,403           30,741,861           26,481,880
                                                      ==========           ==========           ==========
Weighted average number of common
  shares and equivalents - diluted                    31,879,614           32,546,198           27,754,827
                                                      ==========           ==========           ==========
</TABLE>

See accompanying notes.


                                       F-6
<PAGE>


                        NUTRITION 21, INC. & SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                            Preferred Stock     Preferred Stock    Preferred Stock
                                                                               Series C            Series D           Series G
                                                                            Shares      $       Shares       $      Shares   $
                                                                            ------     ---      ------      ---     ------  ---

<S>                                                                          <C>       <C>      <C>         <C>      <C>    <C>
Balance at June 30, l998                                                      222      $--      22,500      $--      --     $--

Conversion of Series D preferred stock to common stock, including
     dividends issued as common stock                                          --       --     (16,750)      --      --      --
Exchange and redemption of Series C preferred stock, including                 --       --          --       --      --      --
     accrued dividends for common stock and Series E preferred stock         (222)      --          --       --      --      --
Exchange and redemption of Series D preferred stock, including
     accrued dividends for common stock and Series F preferred stock                    --      (5,750)      --      --      --
Premium on redemption of Series F preferred stock                              --       --          --       --      --      --
Shares issued in connection with the settlement of AZWELL obligation           --       --          --       --      --      --
Preferred stock dividends                                                      --       --          --       --      --      --
Conversion of Series E preferred stock to common stock, including
     dividends issued as common stock
Issuance of common stock in connection with the acquisition of
     the Lite Bites Business                                                   --       --          --       --      --      --
Issuance of common stock to American Home Products                             --       --                   --      --      --
Compensation related to issuance and repricing of stock options
     and warrants to non-employees                                             --       --          --       --      --      --
Net income for the year                                                        --       --          --       --      --      --
                                                                            -----    -----       -----    -----   -----   -----
Balance at June 30, 1999                                                       --       --          --       --      --      --

Conversion of Series E preferred stock to common stock                         --       --          --       --      --      --
Common stock issued on exercise of options and warrants
Common stock issued for Optimum Lifestyle, Inc. contingent payment             --       --          --       --      --      --
Issuance of warrants                                                           --       --          --       --      --      --
Preferred stock dividends                                                      --       --          --       --      --      --
Preferred stock issued for Optimum Lifestyle, Inc. contingent payment          --       --          --       --     828     828
Conversion of Series G preferred stock to common stock                         --       --          --       --    (165)   (165)
Net income for the year                                                        --       --          --       --      --      --
                                                                            -----    -----       -----    -----   -----   -----
Balance at June 30, 2000                                                       --       --          --       --     663     663

Conversion of Series G preferred stock to common stock                         --       --          --       --    (663)   (663)
Cancellation of stock exercise                                                 --       --          --       --      --      --
Premium on redemption of Series F preferred stock                              --       --          --       --      --      --
Issuance of warrants                                                           --       --          --       --      --      --
Preferred stock dividends                                                      --       --          --       --      --      --
Preferred stock issued for Optimum Lifestyle, Inc. contingent payment          --       --          --       --     941     941
Conversion of Series E preferred stock to common stock                         --       --          --       --
Net income for the year                                                        --       --          --       --      --      --
                                                                            -----    -----       -----    -----   -----   -----
Balance at June 30, 2001                                                       --      $--          --      $--     941    $941
                                                                            =====    =====       =====    =====   =====   =====
=====
</TABLE>
See accompanying notes.
<PAGE>

                          Additional    Accumulated
       Common Stock     Paid-In Capital   Deficit       Total
    Shares          $          $             $            $
    ------        ----      -------      --------      -------

  20,898,297      $105      $54,942      $(44,749)     $10,298


   2,696,246        12          128            --          140
          --        --                                      --
     324,689         2       (1,729)         (242)      (1,969)

      78,166        --         (379)          (81)        (460)
          --        --           --          (117)        (117)
     780,488         4          996            --        1,000
          --        --           --          (201)        (201)

     591,812         3          604            --          607

   1,304,347         7        1,430            --        1,437
   3,478,261        17        3,983            --        4,000

          --        --           70            --           70
          --        --           --         5,865        5,865
------------     -----     --------     ---------     --------
  30,152,306       150       60,045       (39,525)      20,670

     243,546         1          249            --          250
     959,508         4        1,251            --        1,255
     200,000         1          503            --          504
          --        --           80            --           80
          --        --           --           (98)         (98)
          --        --           --            --          828
      26,067         2          163            --           --
          --        --           --         6,490        6,490
------------     -----     --------     ---------     --------
  31,581,427       158       62,291       (33,133)      29,979

     845,663         4          659            --           --
    (315,408)       (2)           2            --           --
          --        --           --          (110)        (110)
          --        --            8            --            8
          --        --           --          (146)        (146)
          --        --           --            --          941
     231,136         1          236            --          237
          --        --           --         1,065        1,065
------------     -----     --------     ---------     --------
  32,342,818      $161      $63,196      $(32,324)     $31,974
============     =====     ========     =========     ========


                                   F-7
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                      YEAR ENDED JUNE 30,
                                                                      -------------------
                                                                 2001         2000       1999
                                                                 ----         ----       ----
<S>                                                             <C>         <C>          <C>
Cash flows from operating activities:
Net income                                                      $1,065      $ 6,490      $5,865
Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization                               3,359        4,069       2,807
     Deferred taxes                                               (298)          --          --
     (Gain) loss on disposal of equipment                          (23)          11         138
     Gain on sale of product line                                   --          (19)         --
     Consulting expense                                             --          196         214
     Other, non-cash items                                           8           80          62
     Changes in assets and liabilities:
       Accounts receivable                                         624         (607)       (668)
       Other receivables                                        (1,186)           9        (377)
       Inventories                                                  60         (129)       (610)
       Prepaid and other current assets                            540          (32)       (272)
       Other assets                                                 46         (161)        (80)
       Accounts payable and accrued expenses                      (563)        (521)      1,707
                                                               -------      -------     -------
         Net cash provided by operating activities               3,632        9,386       8,786
                                                               -------      -------     -------

Cash flows from investing activities:
     Contingent payments for acquisitions                       (4,637)      (4,005)     (2,747)
     Purchases of property and equipment                          (167)        (194)       (443)
     Payments for patents and trademarks                          (209)        (541)     (1,145)
     Proceeds from sale of assets                                   32          512          76
     Payments for acquisition                                       --           --      (6,088)
                                                               -------      -------     -------
         Net cash used in investing activities                  (4,981)      (4,228)    (10,347)
                                                               -------      -------     -------

Cash flows from financing activities:
     Proceeds from term loan borrowings                             --           --       5,500
     Debt repayments                                            (1,500)      (2,250)     (4,036)
     Proceeds from exercise of options and warrants                 --        1,255       4,000
     Capital lease obligation repayments                            --          (63)       (122)
     Redemption of redeemable preferred stock                     (177)          --      (1,388)
     Preferred stock dividends paid                               (107)         (70)        (44)
                                                               -------      -------     -------
         Net cash ( used in) provided by financing activities   (1,784)      (1,128)      3,910
                                                               -------      -------     -------

Net (decrease) increase in cash and cash equivalents            (3,133)       4,030       2,349
Cash and cash equivalents at beginning of year                   8,488        4,458       2,109
                                                               -------      -------     -------
Cash and cash equivalents at end of year                       $ 5,355      $ 8,488     $ 4,458
                                                               =======      =======     =======
</TABLE>

See accompanying notes.

                                      F-8

<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           a)    CONSOLIDATION

                 Effective  March 8, 2001,  Nutrition  21,  Inc.  (the  Company)
                 changed  its name  from AMBI Inc.  The  consolidated  financial
                 statements for the year ended June 30, 1999 include the results
                 of  operations  of the Company,  its wholly  owned  subsidiary,
                 Nutrition 21 and the Lite Bites Business from January 21, 1999.
                 All intercompany balances and transactions have been eliminated
                 in consolidation.

           b)    USE OF ESTIMATES

                 The  preparation of the  consolidated  financial  statements in
                 conformity with accounting principles generally accepted in the
                 United  States  requires   management  to  make  estimates  and
                 assumptions  that  affect  the  reported  amounts of assets and
                 liabilities and disclosure of contingent assets and liabilities
                 at the date of the financial statements.  Estimates also affect
                 the  reported  amounts  of  revenues  and  expenses  during the
                 reporting  period.  Actual  results  could  differ  from  those
                 estimates.

           c)    CASH EQUIVALENTS

                 The Company  considers all highly liquid debt  instruments with
                 original  maturities  of  three  months  or  less  to  be  cash
                 equivalents.  Cash  equivalents  included  in the  accompanying
                 financial  statements  include  money  market  accounts,   bank
                 overnight investments and commercial paper.

           d)    INVENTORIES

                 Inventories  are  carried at the lower of cost (on a  first-in,
                 first-out method) or estimated net realizable value.

           e)    PROPERTY AND EQUIPMENT

                 Property  and  equipment  are  stated at cost less  accumulated
                 depreciation.  Depreciation is provided using the straight-line
                 method over the related  assets'  estimated  useful lives.  The
                 estimated useful lives are as follows:

                                   Leasehold improvements    --   Term of lease
                                   Furniture and fixtures    --   7 years
                                   Machinery and equipment   --   5 to 7 years
                                   Office equipment          --   3 to 5 years

           f)    PATENTS AND TRADEMARKS

                 The Company capitalizes certain patents and trademarks. Patents
                 and  trademarks  are amortized  over their  estimated  economic
                 lives, ranging from 2 to 15 years.

           g)    GOODWILL

                 Goodwill  represents  the excess of cost over the fair value of
                 net assets  acquired and is amortized  using the  straight-line
                 method over 15 years.

           h)    REVENUE RECOGNITION

                 Sales   revenue  from   proprietary   ingredient   products  is
                 recognized when title transfers, generally upon shipment of the
                 product.  Sales revenue from finished  nutritional products are
                 also recognized when title transfers, which is upon delivery at
                 the customer site. There are no customer acceptance  provisions
                 to lapse before the  recognition of any product  revenue.  Only
                 revenue  where   collectability  of  accounts   receivables  is
                 probable is recognized.  Other revenues are comprised primarily
                 of license and royalty fees  recognized as earned in accordance
                 with  agreements  entered  into by the Company when there is no
                 further involvement required by the Company.

                                      F-9

<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


   Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

           i)    RESEARCH AND DEVELOPMENT

                 Research and development costs are expensed as incurred.

           j)    INCOME TAXES

                 Income taxes are  accounted  for under the asset and  liability
                 method.  Deferred tax assets and liabilities are recognized for
                 future tax consequences attributable to the differences between
                 the  financial   statement   carrying  amounts  of  assets  and
                 liabilities  and their  respective tax bases and operating loss
                 and  tax  credit  carry  forwards.   Deferred  tax  assets  and
                 liabilities  are measured  using enacted tax rates  expected to
                 apply in the years in which  those  temporary  differences  are
                 expected to be recovered or settled. The effect on deferred tax
                 assets and  liabilities  of a change in tax rates is recognized
                 in the period that  includes the enactment  date.  Deferred tax
                 assets  are  reduced  by a  valuation  allowance  when,  in the
                 opinion of  management,  it is more  likely  than not that some
                 portion or all of the deferred tax assets will not be realized.

          k)     STOCK-BASED COMPENSATION

                 The Company  continues to account for stock-based  compensation
                 using the  intrinsic  value  method  prescribed  in  Accounting
                 Principles  Board Opinion No. 25,  "Accounting for Stock Issued
                 to Employees".  Compensation cost for stock options, if any, is
                 measured  as the  excess  of the  quoted  market  price  of the
                 Company's  stock  at the  date of  grant  over  the  amount  an
                 employee must pay to acquire the stock.

                 Statement of Financial  Accounting  Standards ("SFAS") No. 123.
                 "Accounting   for   Stock-Based    Compensation,"   established
                 accounting  and  disclosure  requirements  using  a  fair-value
                 method of  accounting  for  stock-based  employee  compensation
                 plans.  The Company has elected to remain on its current method
                 of  accounting  as  described   above,   and  has  adopted  the
                 disclosure requirements of SFAS No. 123.

           l)    IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
                 DISPOSED

                 The Company reviews long-lived assets and certain  identifiable
                 intangibles  for  impairment  whenever  events  or  changes  in
                 circumstances indicate that the carrying amount of an asset may
                 not be  recoverable.  Recoverability  of  assets to be held and
                 used is measured by a comparison  of the carrying  amount of an
                 asset  to  future   undiscounted  cash  flows  expected  to  be
                 generated  by the asset.  If such assets are  considered  to be
                 impaired,  the  impairment  to be recognized is measured by the
                 amount by which the carrying  amount of the assets  exceeds the
                 fair value.  Assets to be disposed of are reported at the lower
                 of the carrying amount or fair value less costs to sell.

           m)    RECENTLY ISSUED ACCOUNTING STANDARDS

                 The  Securities  and Exchange  Commission  (SEC) released Staff
                 Accounting  Bulletin  (SAB) No.  101  "Revenue  Recognition  in
                 Financial  Statements"  on  December  3, 1999,  SAB No. 101A on
                 March 24, 2000 and SAB No. 101B on June 26, 2000 and a document
                 issued on October  12,  2000  responding  to  frequently  asked
                 questions  (FAQ)  regarding  accounting  standards  related  to
                 revenue  recognition  and SAB No.  101.  There was no  material
                 impact on the 2001 financial  position or results of operations
                 for the year ended June 30, 2001 as a result of SAB No. 101.

                 In June 2001, the Financial  Accounting  Standards Board issued
                 Statements of Financial  Accounting Standards No. 141 "Business
                 Combinations",  and No.  142  "Goodwill  and  other  Intangible
                 Assets",  effective for fiscal years  beginning  after December
                 15,  2001.  Under  the new  rules,  goodwill  will no longer be
                 amortized  but will be  subject to annual  impairment  tests in
                 accordance with the Statements.  Other  intangible  assets will
                 continue to be amortized  over their useful lives.  The Company
                 has not yet determined what the effect of these Statements will
                 have on the future financial  position and results of operation
                 of the Company.

                                      F-10
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 Note 1:    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

           n)    ADVERTISING COSTS

                 Advertising costs are expensed as they are incurred. The amount
                 charged to expense  during fiscal 2001,  2000 and 1999 was $0.8
                 million, $1.4 million and $0.3 million, respectively.

           o)    RECLASSIFICATIONS

                 Certain  reclassifications  have  been  made  to  prior  years'
                 financial   statement   amounts   to   conform   to  the   2001
                 presentation.

  Note 2:  ACQUISITIONS

           LITE BITES BUSINESS

           On January 21, l999, the Company  acquired  substantially  all of the
           assets and assumed certain of the  liabilities of Optimum  Lifestyle,
           Inc. ("OLI") relating to the business of developing,  producing,  and
           marketing  dietary  supplements,  primarily  nutrition bars which are
           marketed  under  the  trademark  "Lite-Bites"  through  the QVC  Inc.
           television  network (the "Lite Bites  Business").  These products are
           manufactured  to proprietary  specifications  under  agreements  with
           third party manufacturers. The purchase price paid by the Company was
           $6.1  million  in cash,  including  related  transaction  costs,  and
           1,304,347 shares of restricted Common Stock of the Company, valued at
           $1.4 million. In connection with the acquisition, liabilities assumed
           were as follows (in thousands):

                        Fair value of assets acquired            $  7,617
                        Cash paid, including transaction costs     (6,088)
                        Restricted common stock issued             (1,437)
                                                                 --------
                        Liabilities assumed                      $     92
                                                                 ========

           Additional  contingent  payments are made to the former owners of OLI
           depending  primarily  on  sales  levels  of the Lite  Bites  Business
           achieved  during the five year period  following  closing  and/or the
           availability  of Lite Bites  products  through  certain  distribution
           channels in the future as follows:  a maximum of $3.0 million in cash
           and/or  Nutrition 21 common stock, at the option of the former owners
           of OLI, payable $1.0 million on each of the first three anniversaries
           of the  acquisition;  $3.0  million  in  newly  issued  Nutrition  21
           preferred stock, payable $1.5 million,  subject to adjustment for the
           achievement   of  net  sales  levels,   on  each  of  the  first  two
           anniversaries  of the  acquisition,  in  newly  issued  Nutrition  21
           preferred  stock;  and a  single  payment  of $1.0  million  in cash,
           subject to achieving  certain  sales levels in new markets,  prior to
           the fifth  anniversary  of the  acquisition.  During fiscal 2001, the
           Company, in satisfaction of the contingent payment requirement,  paid
           $1.0  million in cash and issued 941 shares of its Series G Preferred
           Stock,  which  resulted in an  increase in goodwill of $1.9  million.
           During fiscal 2000, the Company,  in  satisfaction  of the contingent
           payment requirement, paid $0.4 million in cash, issued 200,000 shares
           of its Common  Stock and issued 828 shares of its Series G  Preferred
           Stock.  As result,  goodwill was  increased by $1.8 million in fiscal
           2000. At June 30, 2001,  the Company has  outstanding  on its balance
           sheet a current  liability  of $0.4  million  in  respect of the 2001
           contingent cash payments.

           The  acquisition was accounted for under the purchase  method.  Based
           upon the allocation of purchase price,  the  transaction  resulted in
           $6.1 million in identifiable intangible assets,  primarily trademarks
           and non-compete agreements, and $1.5 million of goodwill. The Company
           is  amortizing  the goodwill over fifteen  years and  amortizing  the
           identifiable  intangible  assets over their  useful  economic  lives,
           which range from 3 to 15 years.  During the year ended June 30, 2001,
           the  Company  recorded  approximately  $0.8  million in  amortization
           expense related to the goodwill and other intangible assets described
           above.

                                      F-11
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  Note 2:  ACQUISITIONS, CONTINUED

           NUTRITION 21

           On August 11,  l997,  the Company  purchased  Nutrition  21 for $10.0
           million in cash plus 500,000 shares of restricted Common Stock of the
           Company.

           In  connection  with the  acquisition,  liabilities  assumed  were as
           follows (in thousands):

                         Fair value of assets acquired       $  11,645
                         Cash purchase price                   (10,000)
                         Common stock issued                    (1,188)
                                                             ---------
                         Liabilities assumed                 $     457
                                                             =========

           The related  purchase  agreement also provides for annual  contingent
           payments to the former  owners of  Nutrition  21 for each of the four
           years after the closing of $2.5  million,  but subject to  adjustment
           for  the  achievement  of  net  sales  levels  of  certain   products
           (contingent consideration clause), and royalties of 1.5% on net sales
           of products  recommended for certain patented uses. At June 30, 2001,
           the Company  recorded on its balance  sheet a current  liability  and
           additional  goodwill  of $1.3  million in  respect of the  contingent
           payment due in September  2001. On September  30, 2000 and 1999,  the
           Company  made cash  payments to the former  owners of Nutrition 21 of
           approximately  $3.6  million and $3.5  million,  respectively,  which
           increased   goodwill,   patents  and   trademarks.   These   payments
           represented  the full  amount of the  contingent  payment due for the
           12-month periods September through August of each respective year.

           The  following  represents  the pro  forma  consolidated  results  of
           operations  as if the  Company and the Lite Bites  Business  had been
           combined for the year ended June 30, 1999.  The pro forma  results of
           operations  reflect amounts  adjusted to their accounting basis as if
           the acquisition had occurred at the beginning of the period.  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 date. The pro forma
           information  for the year  ended  June  30,  1999 is as  follows  (in
           thousands, except for per share amounts):

                                                                      1999
                                                                      ----
                      Revenues                                      $30,208
                      Net income                                      5,116
                      Basic earnings per share                         0.19
                      Diluted earnings per share                       0.18

Note 3:  INVENTORIES

                 The  components of inventories at June 30, 2001 and 2000 are as
                 follows (in thousands):

                                                 2001              2000
                                                 ----              ----

                      Raw materials            $  471           $   493
                      Finished goods              851               889
                                               ------           -------

                      Total inventories        $1,322           $ 1,382
                                               ======           =======

                                      F-12

<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4:  FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of cash and cash  equivalents  and  accounts  receivable
         approximate  carrying  amounts  due to the  short  maturities  of these
         instruments.

         The fair value of long-term debt  approximates  its carrying  value, as
         there is no difference between the stated interest rate on the debt and
         the current  market rate of interest  available to the Company for debt
         with the same maturities.

         Financial   instruments  that   potentially   subject  the  Company  to
         significant  concentrations of credit risk consist  principally of cash
         and cash  equivalents and accounts  receivable.  The Company places its
         cash primarily in market interest rate accounts,  overnight investments
         and  commercial  paper.  The  Company  had $0.4  million  in  overnight
         investments and $5.0 million  invested in commercial  paper at June 30,
         2001.  At June 30,  2000,  the  Company had $2.5  million in  overnight
         investments and $6.0 million invested in commercial paper.

         The Company sells its products to customers in the Americas and Europe.
         The Company  performs  ongoing  credit  evaluations  of its  customer's
         financial conditions and limits the amount of credit extended as deemed
         appropriate,   but  generally  requires  no  collateral.   The  Company
         maintains  reserves  for credit  losses and, to date,  such losses have
         been within management's expectations.

         One customer  accounted for  approximately  29% of net sales and 33% of
         accounts receivable in fiscal 2001.

Note 5:  RELATED PARTY TRANSACTIONS

         On September 17, l998, the Company commenced a strategic  alliance with
         American Home Products  Corporation  ("AHP") for retail distribution of
         the Company's  proprietary nutrition products. As part of the alliance,
         AHP's  Whitehall-Robins  Healthcare  Division  was granted an exclusive
         license to sell the Company's  Cardia(R)  Salt in retail markets in the
         United  States and received a first  negotiation  option for  exclusive
         rights  and  licenses  for  additional  nutrition  products  for retail
         distribution in the United States.  The Company  retained the exclusive
         rights to market its products in both direct  response  and  ingredient
         channels.  On October 8, l998,  the Company  received a  non-refundable
         payment of $1.0 million for the rights  granted to AHP. Also on October
         8,  l998,  AHP paid  $1.15  per  share or a total of $4.0  million  for
         3,478,261 shares of the Company's Common Stock. For fiscal years ending
         2001, 2000 and 1999,  respectively,  the Company received approximately
         $0.5 million in license fees from AHP.

         A former officer's  employment with the Company terminated on September
         29,  2000.  Effective  as of such  date,  the  Company  entered  into a
         consulting  agreement.  The  agreement  is for the period of October 1,
         2000 through  June 30,  2004,  and provides for payment of $206,250 for
         the period from October 1, 2000 through June 30, 2001,  and a fee at an
         annual rate of $100,000  thereafter.  All of the former officer's stock
         options  (900,000  shares)  became fully vested and became  exercisable
         until June 30,  2004.  Upon the  occurrence  of a change of control (as
         defined in the agreement),  the agreement terminates and the Company is
         required to pay to the former  officer a lump-sum  payment equal to the
         fees that  would have been paid to him over the  remaining  term of the
         agreement had the change of control not occurred.

         On  July  1,  2001  Company  licensed  its  remaining  rights  to  sell
         lysostaphin for research  purposes,  to its senior vice president,  for
         $300,000,  payable  in cash over a  three-year  period.  A  payment  of
         $100,000 has been made,  and payments of $100,000 each are due prior to
         July 1, 2002 and July 1, 2003, respectively.  The price and other terms
         of the transaction were established through arms-length negotiations.

Note 6:  PROPERTY AND EQUIPMENT, NET

         The  components  of property and  equipment,  net, at June 30, 2001 and
         2000 are as follows (in thousands):

                                                         2001          2000
                                                         ----          ----

                Furniture and fixtures                 $  496        $  454
                Machinery and equipment                   135           167
                Office equipment                          301           247
                Computer equipment                        726           683
                                                       ------        ------
                                                        1,658         1,551
                Less:  accumulated depreciation        (1,025)         (817)
                                                       ------        ------
                Property and equipment, net            $  633        $  734
                                                       ======        ======


                                      F-13
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7:  LINES OF CREDIT AND LONG-TERM DEBT

         Long-term  debt consists of the following at June 30, 2001 and 2000 (in
         thousands):

                                                              2001        2000
                                                              ----        ----

                Citizens Bank term loan                    $ 1,125     $ 2,625
                Obligations under capital leases                --          --
                                                           -------     -------
                                                             1,125       2,625
                Less:  Current portion                      (1,125)     (1,500)
                                                           -------     -------
                                                           $    --     $ 1,125
                                                           =======     =======

            On January  21,  1999,  the  Company  entered  into an  Amended  and
            Restated  Revolving  Credit  and  Term  Loan  Agreement  (the  "Loan
            Agreement")  with  Citizens  Banks  of  Massachusetts  ("Citizens");
            (successor in interest to loans originally  issued to the Company by
            State Street Bank and Trust Company),  which Loan Agreement  amended
            and restated a prior  agreement  with  Citizens.  Certain  financial
            covenants of the Loan Agreement were further amended effective as of
            June 30,  2000.  The Loan  Agreement is for a $5.5 million term loan
            and a $4.0 revolving  credit  facility for the purposes of acquiring
            the Lite Bites Business and for general  corporate  purposes.  Loans
            from Citizens bear interest at the prime rate plus 1% (7.75% at June
            30,  2001) and are due  February  1,  2002.  The  Company  is making
            monthly  payments of principal of $0.1 million plus  interest on the
            loan.  There was no  outstanding  balance on the  revolving  line of
            credit at June 30, 2001. At June 30, 2001,  the  availability  under
            the  revolving  credit  facility,  based on the  Company's  accounts
            receivables and inventory, was $3.3 million.

Note 8:  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         The  following  items are  included  in  accounts  payable  and accrued
         expenses at June 30, 2001 and 2000 (in thousands):

                                                                2001       2000
                                                                ----       ----
                  Accounts payable                            $1,179    $ 1,652
                  Consulting and professional fees payable       204        296
                  Royalty fees                                   112        407
                  Accrued compensation and benefits              983        902
                  Taxes payable                                  475         67
                  Series E Preferred Stock fee                    --        250
                  Other accrued expenses                         418        465
                                                              ------    -------
                                                              $3,371    $ 4,039
                                                              ======    =======

Note 9:   REDEEMABLE PREFERRED STOCK

          On December 10, l998,  the Company  issued 1,500 shares of  non-voting
          Series E Preferred Stock ("E Preferred") with a par value of $0.01 per
          share.  On that date,  the  Company's  outstanding  Series C Preferred
          Stock of 222 shares and  accrued  dividends  thereon of $542  thousand
          were  exchanged for 1,500 shares of E Preferred  with a face amount of
          $1,500, $1.0 million in cash and the issuance of 324,689 shares of the
          Company's Common Stock. As a result of this exchange transaction,  the
          Company  recorded a one-time  incremental  preferred  dividend of $242
          thousand,  representing the excess of the consideration exchanged over
          the carrying value of the then  outstanding C Preferred.  In addition,
          the agreement  provides for a payment of at least $250 thousand on the
          second  anniversary of the agreement.  The total amount of the payment
          is subject to increases  based on increases  in the  Company's  equity
          securities. The E Preferred has a conversion price of $1.25 per share.
          The  fixed  conversion  rate is  subject  to  adjustments  in  certain
          circumstances.  In  addition  each  holder of E  Preferred,  may under
          certain  circumstances,  redeem all or a portion of such shares at the
          greater of 125% of the  conversion  amount  ($1,000  per share) or the
          product of the  conversion  rate ($800 per share) and the closing sale
          price  of the  Common  Stock on the date  immediately  preceding  such
          redemption. The E Preferred bears dividends at a rate of 10% per annum
          payable in cash or, at the option of the Company,  in shares of Common
          Stock.  The E Preferred is subject to  conversion  at any time, at the
          option of the holder,  and is subject to  mandatory  conversion  after
          three  years.  During  fiscal  2001,  285  shares of the  Company's  E
          Preferred  plus accrued  dividends on these shares were converted into
          231,136 shares of Common Stock.  During fiscal 2000, 297 shares of the
          Company's E Preferred  plus  accrued  dividends  on these  shares were
          converted into 243,546 shares of Common Stock. During fiscal 1999, 727
          shares of the  Company's E Preferred  plus accrued  dividends on these
          shares were converted into 591,812 shares of common stock.  There were
          no redemptions of E preferred to date.

                                      F-14
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9:   REDEEMABLE PREFERRED STOCK, CONTINUED

          On January  27,  l999,  the  Company  issued 575 shares of  non-voting
          Series F Preferred Stock ("F Preferred") with a par value of $0.01 per
          share.  On that date, the Company's then  outstanding  5,750 shares of
          Series D Preferred Stock ("D Preferred") and accrued dividends thereon
          of $59 thousand were  exchanged  for 575 shares of F Preferred  with a
          face amount of $575  thousand,  78,166 shares of the Company's  common
          stock and the resetting of the exercise price of the 5,000  previously
          issued warrants of the Company,  issued in connection with D Preferred
          from $2.72 to $1.25.  As a result of this  exchange  transaction,  the
          Company  recorded a one-time  incremental  preferred  dividend  of $81
          thousand,  representing the excess of the consideration exchanged over
          the  carrying  value  of  the  then  outstanding  D  Preferred.  The F
          Preferred  has a  conversion  price  of $1.25  per  share.  The  fixed
          conversion rate is subject to adjustments in certain circumstances. In
          addition, each holder of F Preferred, may under certain circumstances,
          redeem all or a portion of such  shares at the  greater of 125% of the
          conversion   amount   ($1,000   per  share)  or  the  product  of  the
          conversation  rate ($800 per share) and the closing  sale price of the
          common stock on the date  immediately  preceding such  redemption.  In
          addition,  if the average of the closing bid price of the common stock
          for all trading days during a calendar month is less than $1.875, each
          holder of F  Preferred  shares may redeem up to 10% of the face amount
          of the F  Preferred  at  150% of the  conversion  amount  ($1,000  per
          share).  The F Preferred  bears  dividends  at a rate of 10% per annum
          payable in cash, or at the option of the Company,  in shares of Common
          Stock.  The F Preferred  is subject to  conversion  at any time at the
          option of the holders,  and is subject to mandatory  conversion  after
          three years.  During  fiscal year 2001,  116 shares of the Company's F
          Preferred  plus accrued  dividends  on these shares were  redeemed for
          $0.2  million.  During  fiscal  1999,  232 shares of the  Company's  F
          Preferred  plus accrued  dividends  on these shares were  redeemed for
          $0.4 million.  There were no  conversions  of F preferred  into Common
          Stock in fiscal year 2001, 2000 or 1999.

Note 10:  STOCKHOLDERS' EQUITY

(3)      SERIES G CONVERTIBLE PREFERRED STOCK

               In  January  1999,  the  Company  created a  non-voting  Series G
               Convertible  Preferred Stock ("G Preferred")  with a par value of
               $0.01 per share. The G Preferred bears dividends of $50 per share
               per annum.  The G Preferred is  convertible  into common stock at
               the average  closing price of the Common Stock during the 10 days
               immediately preceding  conversion.  The G preferred is subject to
               mandatory conversion after three years from the date of issuance.
               On  February  12,  2001,  the  Company  issued  941  shares  of G
               Preferred,  and converted 663 shares of G Preferred  into 845,663
               shares of the Company's  Common Stock.  On January 22, 2000,  the
               Company issued 828 shares of G Preferred.  On March 21, 2000, 165
               shares of G Preferred  were  converted  into 26,067 shares of the
               Company's Common Stock.

          b)   WARRANTS

               The  Company,  from time to time,  issues  warrants  to  purchase
               Common Stock to non-employees for services rendered. Warrants are
               granted to purchase  the  Company's  Common  Stock with  exercise
               prices set at fair market  value on the date of grant.  The terms
               of  the  warrants  vary  depending  on  the  circumstances,   but
               generally terminate in three to five years.

         The Company had  outstanding  warrants  for the  purchase of its common
         stock as follows:

                                                   Number of    Exercise price
                                                   Warrants       Per Share
                                                   --------     --------------

                  Outstanding at June 30, 1998     1,305,685      $1.18-$6.75
                  Issued                             100,000      $1.38-$1.84
                                                  ----------

                  Outstanding at June 30, 1999     1,405,685      $1.18-$6.75
                  Issued                             647,460      $1.80-$3.65
                  Exercised                         (556,759)     $1.80-$4.84
                  Cancelled                         (147,460)     $1.18-$4.13
                                                  ----------

                  Outstanding at June 30, 2000     1,348,926      $1.25-$6.75
                  Issued                              50,000      $0.89
                  Exercised                           (8,265)     $2.72
                  Cancelled                         (258,524)     $1.25-$6.75
                                                  ----------

                  Outstanding at June 30, 2001     1,132,137      $0.89-$6.30
                                                  ==========


                                      F-15

<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10:  STOCKHOLDERS' EQUITY, CONTINUED

         At June 30, 2001,  1,132,137  shares were issuable upon exercise of the
         above warrants.  The warrants expire between 2001 and 2006.  Certain of
         the warrants include anti-dilution clauses.

         Warrants outstanding and exercisable at June 30, 2001, are as follows:

<TABLE>
<CAPTION>
                                                    Warrants Outstanding                  Warrants Exercisable
                                          --------------------------------------     ------------------------------
                                                          Weighted
                                                           Average     Weighted                         Weighted
                                                          Remaining     Average                          Average
                     Range of                Number      Contractual   Exercise        Number           Exercise
                  Exercise Prices          Outstanding      Life         Price       Exercisable          Price
                  ---------------          -----------   -----------   --------      -----------        --------
<S>                <C>                     <C>              <C>         <C>             <C>              <C>
                   $0.89 - $1.84             150,000        4.77        $1.30            70,000          $1.56
                   $2.25 - $2.72             494,781        0.92        $2.29           494,781          $2.29
                   $2.78 - $6.30             487,356        3.19        $3.64           382,356          $3.63
                                           ---------                                    -------
                                           1,132,137                                    947,137
                                           =========                                    =======
</TABLE>

               On August 13,  1999,  the  Company  issued in  connection  with a
               strategic  alliance  agreement  with  QVC,  420,000  warrants  to
               purchase  Common  Stock with  vesting  at various  dates and with
               exercise  prices  subject  to  change  based on the  terms of the
               agreement.

               The Company  recorded  compensation  expense  associated with the
               issuance  of  warrants  to  third  parties  of $8  thousand,  $80
               thousand and $70  thousand  during  fiscal  years 2001,  2000 and
               1999, respectively.

         c)    STOCK BASED COMPENSATION

               On April 10,  1986,  the  Company  adopted a  Nonqualified  Stock
               Option Plan  whereby  options to purchase  250,000  shares of the
               Company's   common  stock  may  be  granted  to  consultants  and
               Scientific Advisory Board members.

               The Company  adopted four Stock Option  Plans  ("Plans")  whereby
               options to  purchase  an  aggregate  of  6,250,000  shares of the
               Company's  common  stock may be granted to  officers,  directors,
               employees,  consultants  and others who  render  services  to the
               Company.  The  exercise  price per share for the options  granted
               under  the  Plans  may not be less  than  the  fair  value of the
               Company's Common Stock on the date of grant. The options issuable
               pursuant to the Plans expire between 1999 and 2009. Approximately
               2,100,000 options remain available for grant under the Plans.

               A summary of stock option activity related to the Company's stock
               option plans is as follows:

                                                   Number of      Exercise price
                                                   Options          Per Share
                                                 -----------     --------------

                  Outstanding at June 30, 1998    2,787,345      $1.56  - $6.00
                  Issued                            620,470      $0.75  - $2.31
                  Cancelled                        (454,030)     $0.75  - $5.63
                                                 ----------

                  Outstanding at June 30, 1999    2,953,785      $0.75  - $6.00
                  Issued                            446,500      $2.03  - $7.56
                  Exercised                        (398,194)     $0.84  - $3.25
                  Cancelled                        (352,700)     $0.93  - $6.00
                                                 ----------

                  Outstanding at June 30, 2000    2,649,391      $0.75  - $7.56
                  Issued                          1,280,889      $0.81  - $2.63
                  Exercised                               -       -
                  Cancelled                        (978,181)     $0.75  - $5.00
                                                 ----------

                  Outstanding at June 30, 2001    2,952,099      $0.81  - $7.56
                                                 ==========

               Each of these  options is entitled to one share of common  stock.
               Stock  options  generally  vest  ratably over five years from the
               date of grant  and  expire  within  five  years  from the date of
               vesting.

                                      F-16
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10:  STOCKHOLDERS' EQUITY, CONTINUED

               Options  outstanding  and  exercisable  at June  30,  2001 are as
               follows:

<TABLE>
<CAPTION>
                                                     Options Outstanding                Options Exercisable
                                           -------------------------------------      ------------------------
                                                          Weighted
                                                           Average      Weighted                    Weighted
                                                          Remaining      Average                     Average
                     Range of                Number      Contractual    Exercise      Number        Exercise
                   Exercise Prices         Outstanding      Life         Price      Exercisable      Price
                   ---------------         -----------   -----------    --------    -----------    -----------

<S>                <C>                     <C>               <C>         <C>          <C>             <C>
                   $0.91  - $1.19            815,899         6.88        $1.01        341,829         $0.99
                   $1.31  - $1.94            932,500         4.75        $1.74        568,300         $1.87
                   $1.97  - $2.94            528,700         3.66        $2.41        425,500         $2.38
                   $3.00  - $7.56            675,000         3.29        $3.53        608,700         $3.50
                                           ---------                                ---------
                                           2,952,099                                1,944,329
                                           =========                                =========
</TABLE>

               The per  share  weighted-average  fair  value  of  stock  options
               granted  during fiscal 2001,  2000 and 1999 was $0.20,  $0.45 and
               $1.33, respectively, on the date of grant using the Black Scholes
               option-pricing   model   with  the   following   weighted-average
               assumptions:

                                              2001       2000            1999
                                              ----       ----            ----

                  Risk-free interest rate     5.2%        5.6%            5.0%
                  Expected life-years         2.5         2.5             2.5
                  Expected volatility        45.8%       45.6%           46.1%
                  Expected dividend yield     --           --             --

               The Company  applies APB  Opinion  No. 25 in  accounting  for its
               Plans and, accordingly,  no compensation cost has been recognized
               in the financial statements for its employee stock options, which
               have an  exercise  price  equal to the fair value of the stock on
               the date of the grant.  Had the Company  determined  compensation
               cost  based on the fair  value at the  grant  date for its  stock
               options  under SFAS No. 123, the  Company's net income would have
               been  reduced  to the  pro  forma  amounts  indicated  below  (in
               thousands):

                                                  2001          2000       1999
                                                  ----          ----       ----

                  Net income

                    As reported                  $1,065        $6,490     $5,865
                    Pro forma                    $  633        $6,257     $4,963

                  Basic earnings per share
                    As reported                   $0.03         $0.21      $0.20
                    Pro forma                     $0.02         $0.20      $0.16

                  Diluted earnings per share
                    As reported                   $0.03         $0.20      $0.19
                    Pro forma                     $0.02         $0.19      $0.16

               The effects of applying SFAS No. 123 in this pro forma disclosure
               are not  necessarily  indicative  of future  amounts  because the
               calculation   does  not  take   into   consideration   pro  forma
               compensation expense related to grants made prior to 1995.


                                      F-17
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11:  EARNINGS PER SHARE

          Basic and  diluted  earnings  per share for the years  ended  June 30,
          2001, 2000 and 1999 are as follows (in thousands, except share and per
          share amounts):

<TABLE>
<CAPTION>
                                                                              Year ended June 30,
                                                                     2001             2000           1999
                                                                     ----             ----           ----
<S>                                                            <C>              <C>            <C>
          Net income                                              $ 1,065          $ 6,490        $ 5,865
          Preferred stock dividends                                  (256)             (98)          (641)
                                                                      --                --             --
                                                                  -------          -------        -------
          Net income available
             to common stockholders                                 $ 809          $ 6,392        $ 5,224
                                                                    =====          =======        =======

          Weighted average number of common shares             31,781,403       30,741,861     26,481,880
                                                               ==========       ==========     ==========

                  Basic earnings per share                     $     0.03       $     0.21       $   0.20
                                                               ==========       ==========       ========


                                                                             Year ended June 30,
                                                                    2001              2000           1999
                                                                    ----              ----           ----
          Net income available to
            common stockholders                                     $ 809          $ 6,392        $ 5,224
          Interest on AZWELL, Inc. note, net                           --               --             33
          Preferred stock dividends                                    --               98             94
                                                                  -------          -------        -------
          Net income available to common
            stockholders after giving effect to dilution            $ 809          $ 6,490        $ 5,351
                                                                    =====          =======        =======
          Weighted average number of common
            shares                                             31,781,403       30,741,861     26,481,880
          Plus incremental dilutive shares from
            assumed conversions:
             Preferred stock                                           --          785,004        752,110
             Stock options and warrants                            98,211        1,019,333         34,838
             5% Promissory Note                                        --               --        485,999
                                                               ----------       ----------     ----------
          Weighted average number of common
            shares and equivalents                             31,879,614       32,546,198     27,754,827
                                                               ==========       ==========     ==========

          Diluted earnings per share                           $     0.03       $     0.20       $   0.19
                                                               ==========       ==========       ========
</TABLE>

         Diluted  earnings per share for the year ended June 30, 2001,  does not
         reflect the incremental  shares for the assumed conversion of preferred
         stock  (833,313  shares),  as the  effect  of such  inclusion  would be
         anti-dilutive.

Note 12: RESTRUCTURING AND OTHER CHARGES

         The  Company  recorded  $2.4  million  for   restructuring   and  other
         non-recurring charges, relating to its Nutritional Products segment, in
         the second quarter of fiscal 2001. A $1.6 million  restructuring charge
         was recorded as part of the Company's initiative to reduce costs and to
         create a more  flexible  and  efficient  organization.  Included in the
         restructuring  charge were $0.7  million of cash  termination  benefits
         associated with the separation of twenty employees. All of the affected
         employees  left their  positions  with the Company as of June 30, 2001.
         All of the termination  benefits were paid. This cash outlay was funded
         through  cash  from  operations.  Approximately  $0.9  million  of  the
         restructuring  charge relates to the Company's  decision to discontinue
         its efforts to launch NO YO, a consumer  weight loss  product  intended
         for the retail  channel  and to  consolidate  certain of the  Company's
         facilities.  At June 30, 2001, all restructuring charges accrued during
         the fiscal year 2001 had been paid.

                                      F-18
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12: RESTRUCTURING AND OTHER CHARGES, CONTINUED

         Other  charges  of $0.7  million  include a  non-cash  write off of the
         carrying   value  of  the   website   development   costs   related  to
         NutritionU.com,  the  Company's  online  nutrition  education  internet
         company.  The  Company  believes  that  since  sufficient   uncertainty
         surrounds  the ability of the Company to find  strategic  partners  for
         NutritionU.com,  there  will be no  substantive  future  benefit  to be
         derived from the website development costs. In addition,  other charges
         include $0.1 million for the write off of the remaining  carrying value
         of a license fee for one of its products.

Note 13: OTHER INCOME

         During the fiscal year 2001, the Company  successfully  settled several
         patent infringement claims related to chromium picolinate.  The Company
         recorded  $2.3 million as other income as a result of the  settlements.
         At June 30, 2001,  cash  proceeds of $0.8 million from the  settlements
         remain to be collected. In addition, certain of the settlements include
         agreements  to  purchase  future  chromium  picolinate  needs  from the
         Company.

Note 14: SEGMENT REPORTING

         Effective in fiscal 1999,  the Company  adopted FASB  Statement No. 131
         "Disclosures  about Segments of an Enterprise and Related  Information"
         which  established  revised  standards for reporting  information about
         operating  segments.  Pursuant  to  Statement  No. 131,  the  Company's
         reporting   segments  are  nutritional   products  and   pharmaceutical
         products.


         A summary of business  data for the Company's  reportable  segments for
         the fiscal years 2001, 2000, and 1999 follows.

         Information by business segment (in thousands):

                                             2001          2000         1999
                                             ----          ----         ----
         REVENUES

         Nutritional Products             $ 21,127      $ 32,224      $ 27,356
         Pharmaceutical Products             2,125           590           945
                                          --------      --------      --------
                                          $ 23,252      $ 32,814      $ 28,301
                                          ========      ========      ========
         OPERATING (LOSS) INCOME

         Nutritional Products             $ (2,924)     $  6,978      $  6,608
         Pharmaceutical Products             1,921            63          (139)
                                          --------      --------      --------
                                          $ (1,003)     $  7,041      $  6,469
                                          --------      --------      --------
         DEPRECIATION AND AMORTIZATION

         Nutritional Products             $  3,216      $  3,918      $  2,658
         Pharmaceutical Products               143           151           149
                                          --------      --------      --------
                                          $  3,359      $  4,069      $  2,807
                                          ========      ========      ========
         SEGMENT ASSETS

         Nutritional Products             $ 37,698      $ 39,479      $ 32,427
         Pharmaceutical Products             1,189         1,606         2,114
                                          --------      --------      --------
                                          $ 38,887      $ 41,085      $ 34,541
                                          ========      ========      ========
         CAPITAL EXPENDITURES

         Nutritional Products             $  5,013      $  4,740      $  4,335
         Pharmaceutical Products                --            --            --
                                          --------      --------      --------
                                          $  5,013      $  4,740      $  4,335
                                          ========      ========      ========

         Information by geographic segment (in thousands):

                                      F-19

<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14: SEGMENT REPORTING, CONTINUED

         Geographic information about the Company's revenues,  which is based on
         the location of the buying organization, is presented below:

                                                2001        2000         1999
                                                ----        ----         ----
         REVENUES

         United States                       $ 21,526    $ 31,533      $ 28,301
         United Kingdom                         1,726       1,281            --
                                             --------    --------      --------
                                             $ 23,252    $ 32,814      $ 28,301
                                             ========    ========      ========
         PROPERTY AND EQUIPMENT, NET

         United States                       $    633    $    734      $  1,066
         United Kingdom                            --          --            --
                                             --------    --------      --------
                                             $    633    $    734      $  1,066
                                             ========    ========      ========

         One nutritional  product segment customer  accounted for  approximately
         29% of the segment revenue in fiscal 2001.

         Presented below is a reconciliation of total business segment operating
          income to consolidated income before income taxes:

                                                2001        2000         1999
                                                ----        ----         ----

               Total segment operating
                 (loss) income               $ (1,003)   $  7,041      $  6,469
               Other, net                       2,403          37           122
                                             --------    --------      --------
               Income before income taxes    $  1,400    $  7,004      $  6,347
                                             ========    ========      ========

Note 15: PENSION PLAN

         Eligible  employees of the Company are entitled to  participate  in the
         Burns Philp Inc.  Retirement  Plan, a defined  benefit pension plan, as
         long as Burn Philp  maintains the Pension Plan and owns at least 20% of
         the Company's  outstanding  Common Stock.  Burns Philp  currently holds
         approximately 24% of the Company's outstanding Common Stock.

         During fiscal 2001,  2000, and 1999, the Company made  contributions to
         the Burns Philp & Company Inc.  Retirement Plan of $100 thousand,  $104
         thousand and $96 thousand, respectively.

Note 16:  INCOME TAXES

         Income before income taxes for the years ended June 30, 2001,  2000 and
1999 is as follows (in thousands):

                                                2001        2000         1999
                                                ----        ----         ----
                  Domestic income              $1,400      $7,004        $6,347
                  Foreign income                   --          --            --
                                               ------      ------        ------
                  Income before income taxes   $1,400      $7,004        $6,347
                                               ======      ======        ======


         Provisions for income taxes for the years ended June 30, 2001, 2000 and
1999 consist of the following (in thousands):

                                                2001        2000         1999
                                                ----        ----         ----
                  Current                        $633       $ 523         $ 482
                  Deferred                       (298)         --            --
                                                 ----       -----         -----
                                                 $335       $ 523         $ 482
                                                 ====       =====         =====

                                      F-20

<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 16:  INCOME TAXES, CONTINUED

          Income tax expense  attributed  to pre-tax  income  differed  from the
          amounts  computed by  applying  the US federal  statutory  tax rate to
          pre-tax income as a result of the following (in thousands):

<TABLE>
<CAPTION>
                                                               2001         2000       1999
                                                               ----         ----       ----
<S>                                                          <C>          <C>            <C>
         Income taxes at U.S. statutory rate                   $476        $2,381     $ 2,171

          Increase/(reduction) in
             income taxes resulting from:

             Change in valuation allowance                     (263)           --          --
             Utilization of operating loss carryforward          --        (2,316)     (2,070)
               Federal alternative minimum tax                                            148
              State taxes, net of federal benefit                26           420         233
              Other items                                        96         --             --
                                                             ------       -------        ----

                                                             $  335       $   523        $482
                                                             ======       =======        ====
</TABLE>

          The tax effect of temporary differences that give rise to deferred tax
          assets  and  deferred  tax  liabilities  at June 30,  2001 and 2000 is
          presented below (in thousands):

<TABLE>
<CAPTION>
          Deferred tax assets:                                           2001          2000
                                                                         ----          -----
<S>                                                                      <C>          <C>
                    Net operating loss carry forwards                    $597         $ 769
                    AMT tax credit                                         --           176
                    R&D credit                                             --           236
                    Accrued expenses                                      289           100
                    Allowance for doubtful accounts                        18            54
                    Partnership basis                                     879           970
                    Inventory reserve                                      12            54
                    Property and equipment                                 --             4
                                                                       ------        ------
          Total gross deferred tax assets                               1,795         2,363
          Less valuation allowance                                     (1,360)       (1,623)
                                                                       ------        ------
          Net deferred tax assets                                      $  435        $  740
                                                                       ======        ======
          Deferred tax liabilities:

                    Property and equipment                                 --            --
                    Intangible assets, principally
                      due to amounts capitalized for
                      financial reporting purposes                        137           740
                                                                       ------        ------
          Net deferred tax liabilities                                    137           740
                                                                       ------        ------

          Total deferred tax assets, net of valuation allowance        $  298        $   --
                                                                       ======        ======

          Deferred tax assets are included in prepaid expense and other current assets
</TABLE>

At June 30, 2001, the Company has available,  for state income tax purposes, net
operating loss carry forwards of approximately $10.0 million expiring in varying
amounts through 2015.  Ultimate  utilization of such net operating losses may be
significantly curtailed if a significant change in ownership of the Company were
to occur. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.

                                      F-21
<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17: COMMITMENTS AND CONTINGENT LIABILITIES

         In  October  1995,  the  Company  entered  into  an  exclusive  license
         agreement  whereby  the  Company  received a license to sell a patented
         salt alternative in the United States.  During the term of the License,
         the  Company  agreed to pay a royalty  of 4.5% of net sales of the salt
         alternative but not less than the minimum of $0.5 million per year. The
         Company may terminate  the License upon 60 days prior  written  notice.
         The Company is  required to make  royalty  payments  quarterly  through
         2007. In connection with this agreement,  the Company  recorded royalty
         expense of $0.5 million for each fiscal year ended June 30, 2001,  2000
         and 1999,  respectively.  In  addition,  the Company  has an  exclusive
         license  from the  USDA  for the  duration  of a  patent  that  covered
         chromium  picolinate and its uses. In connection  with this  agreement,
         the Company recorded royalty expense of $46 thousand;  $0.7 million and
         $0.6 million for the fiscal  years ended June 30, 2001,  2000 and 1999,
         respectively.  These royalty  amounts are included in selling,  general
         and administrative expenses in the statement of operations.

         The Company has entered  into various  research and license  agreements
         with  certain   universities  to  supplement  the  Company's   research
         activities and to obtain for the Company rights to certain  technology.
         The agreements  generally  require the Company to fund the research and
         to pay royalties based upon a percentage of product sales.

         The Company leases certain office space in the United States. The lease
         expires in the year 2006.  Payments under this lease were approximately
         $0.6 million in fiscal 2001,  $0.7 million in fiscal 2000, $0.4 million
         in fiscal 1999. Future non-cancelable minimum payments under this lease
         are as follows (in thousands):

                               YEAR                AMOUNT
                               ----                ------
                              2002                 $  589
                              2003                    589
                              2004                    589
                              2005                    589
                              2006                    418
                                                   ------
                              Total                $2,774
                                                   ======

Note 18:         SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
             Supplemental disclosure of cash flow information (in               2001          2000         1999
               thousands):                                                      ----          ----         ----
<S>                                                                            <C>           <C>         <C>
                   Cash paid for interest                                      $  243        $  390      $  337
                   Cash paid for income taxes                                     146           382         217
             Supplemental schedule of non-cash financing activities:
                   Common stock issued for Nutrition 21 acquisition               --             --       1,118
                   Obligation for purchase of property & equipment                152           181         208
                   Obligation for N21 contingent payment                        1,938         3,143       2,855
                   Obligation for Lite Bites contingent payment                   970           441         438
                   Obligation related to Series C redemption                       --            --         250
                   Conversion of long-term debt to common stock                    --            --       1,000
                   Issuance of common stock for Series C redemption                --            --         345
                   Issuance of common stock for Series D redemption                --            --         105
                   Issuance of common stock for Series E conversion               237           304         592
                   Issuance of common stock for Series G conversion               663           121          --
                   Issuance of  Series G preferred stock for
                       Optimum Lifestyle, Inc. contingent payment.                941           828          --
</TABLE>

                                      F-22

<PAGE>

                       NUTRITION 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19: RISKS AND UNCERTAINTIES

         The Company  buys  certain of its  inventories  from single  suppliers.
         Management believes that other suppliers could provide similar products
         at  comparable  terms.  As a result,  management  believes  a change in
         suppliers  would not disrupt  on-going  operations and would not affect
         operating results adversely.

Note 20: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                        First       Second         Third      Fourth
            In Thousands, Except Per Share Data        Quarter      Quarter       Quarter   Quarter (A)
            -----------------------------------        -------      -------       -------   -----------

            Fiscal Year 2001
            ----------------

<S>                                                    <C>           <C>          <C>        <C>
            Revenues                                   $ 6,903       $ 4,610      $ 6,409    $ 5,330
            Gross Profit                                 5,471         3,653        4,579      3,926
            Income (loss) Before Income Taxes                9        (2,393)       2,820        964
            Net Income (loss)                                6        (1,914)       2,258        715
            Net (loss) Income per common share:
               Basic                                      (0.0)        (0.06)        0.07       0.02
               Diluted                                    (0.0)        (0.06)        0.07       0.02


            Fiscal Year 2000
            ----------------

            Revenues                                   $ 8,424       $ 9,825      $ 7,771    $ 6,794
            Gross Profit                                 6,894         8,340        6,400      5,400
            Income Before Income Taxes                   2,169         2,933        1,706        196
            Net Income                                   2,004         2,713        1,578        195
            Net Income per common share:
               Basic                                      0.07          0.09         0.05       0.00
               Diluted                                    0.06          0.09         0.05       0.00
</TABLE>


         (a) The fourth  quarter of fiscal year 2001  includes a reversal of $82
         thousand  attributable to a restructuring charge incurred in the second
         quarter of fiscal 2001.

                                      F-23
<PAGE>

                                                                     SCHEDULE II

                       NUTRITION 21, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                Additions
                                                     ---------------------------------
                                       Balance                              Charged to                      Balance
                                      Beginning        Charged to              Other                        End of
Accounts                              of Period      Cost and Expense        Accounts      Deductions       Period
--------                              ---------      ----------------        --------      ----------       ------

<S>                                    <C>                    <C>                <C>       <C>              <C>
($ in thousands)

Year ended June 30, 2001

Allowance for Doubtful Accounts        $  134                  1                 --          $(90)          $   45
Deferred Tax Valuation Allowance       $1,623                 --                 --         ($263)          $1,360

Year ended June 30, 2000

Allowance for Doubtful Accounts        $  242                 --                 --          $(108)         $  134
Deferred Tax Valuation Allowance       $4,638                 --                 --        $(3,015)         $1,623


Year ended June 30, 1999

Allowance for Doubtful Accounts        $  377                 --                 --          $(135)         $  242
Deferred Tax Valuation Allowance       $5,159                 --                 --          $(521)         $4,638
</TABLE>



</TEXT>
</DOCUMENT>
