SECURITIES AND EXCHANGE COMMISSION
                       Washington, D.C.  20549
                             Form 10-QSB


(Mark One)
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED   
      December 31, 1998   OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM
      __________ TO __________


Commission file number    0-19333      


                   Bion Environmental Technologies, Inc.          
       (Exact name of registrant as specified in its charter)


           Colorado                            84-1176672          
(State or other jurisdiction of               (I.R.S. Employer
 incorporation or organization)              Identification No.)


   555 17th Street, Suite 3310
      Denver, Colorado                            80202             
    (Address of principal                     (Zip Code)
      executive offices)


                                 (303) 294-0750
              (Registrant's telephone number, including area code)



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

The number of shares outstanding of registrant's  classes of common stock, as of
February 10, 1999:

           Common Stock, No Par Value, 9,110,838


<PAGE>


Bion Environmental Technologies, Inc.           Form 10-QSB
                                                December 31, 1998




                                INDEX



PART I     FINANCIAL INFORMATION                      PAGE NO.


ITEM 1     FINANCIAL STATEMENTS

           Consolidated Balance Sheets:
                June 30, 1998 and
                December 31, 1998.................        F2

          Consolidated Statement of Operations:
                For the Six Month Periods Ended
                December 31, 1997 and
                December 31, 1998.................        F3

          Consolidated Statement of Operation:
                For the Three Month Periods Ended
                December 31, 1997 and
                December 31, 1998.................        F4

          Consolidated Statement of Cash Flows:
                For the Six Month Periods Ended
                December 31, 1997 and
                December 31, 1998.................        F5-F6

          Statement of Changes in Stockholders
          Equity for the Period June 30, 1998
          through December 31, 1998...............        F7-F8

          Notes to Financial Statements............       F9-F12


ITEM 2    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS
          OF OPERATIONS............................         3



PART II   OTHER INFORMATION

ITEM 1-6  .........................................        26




<PAGE>



                             F[PG NUMBER]


                        FINANCIAL INFORMATION


PART I

ITEM 1.  FINANCIAL STATEMENTS



<PAGE>


                  BION ENVIRONMENTAL TECHNOLOGIES, INC.
                            AND SUBSIDIARIES




             See Notes to Consolidated Financial Statements

                             F[PG NUMBER]

                       Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                               December 31,         June 30,
                                                                   1998               1998    
                                                               (Unaudited)          (Audited)
           Assets
<S>                                                           <C>               <C>
Current assets
 Cash and cash equivalents ...............................     $      3,446      $     19,104
 Accounts receivable .....................................           11,907            13,986
 Contract receivable(net of allowance
  of $30,000) ............................................            1,619            22,902
 Work in progress (net of allowance
  of $30,000) ............................................          388,408           389,712
                                                               ------------       -----------
      Total current assets ...............................          405,380           445,704
                                                               ------------       -----------

Property and equipment
 Computers and equipment .................................          301,751           298,782
 Accumulated depreciation ................................         (118,210)          (91,727)
                                                               ------------       -----------
                                                                    183,541           207,055

Other assets
 Patents, net ............................................           41,450            43,066
 Deferred long-term contract costs .......................           71,333            71,333
 Deposits and other ......................................           12,695            13,044
                                                               ------------       -----------
      Total other assets .................................          125,478           127,443
                                                               ------------       -----------

Total assets .............................................     $    714,399      $    780,202
                                                               ============      ============

                      Liabilities and Stockholder (Equity)
Current liabilities
 Accounts payable ........................................     $    322,638      $    241,384
 Accounts payable - related party ........................           32,264            20,324
 Notes payable - stockholders ............................          216,171            89,171
 Capital lease obligations ...............................           52,399            67,137
 Accrued expenses ........................................              384            24,368
 Accrued payroll .........................................          463,821           284,250
                                                               ------------       -----------
      Total current liabilities ..........................        1,087,677           726,634

Long-term liabilities
 Note payable - stockholder ..............................          240,000           210,000
 Capital lease obligations ...............................           63,243            83,127
 Deferred contract revenue ..............................           151,000           151,000
                                                               ------------       -----------
      Total liabilities ..................................        1,541,920         1,170,761
                                                               ------------       -----------

Commitments and contingencies

Stockholders' (deficit)
 Common stock, no par value, 100,000,000
  shares authorized, 9,019,942
  (December 31, 1998) and 8,764,827
  (June 30, 1998) shares issued and
  outstanding ............................................       11,587,013        10,863,469
 Common stock subscribed .................................           41,500            21,500
 Accumulated deficit .....................................      (12,456,034)      (11,275,528)
                                                               ------------       -----------
       Total stockholders' (deficit) .....................         (827,521)         (390,559)
                                                               ------------       -----------

Total liabilities and stockholders'
 (deficit) ...............................................     $    714,399      $    780,202
                                                               ============      ============
</TABLE>



<PAGE>


                  Consolidated Statements of Operations


                                             Six Months Ended
                                                December 31        
                                        --------------------------
                                            1998           1997   
                                        ------------    ----------

                                          (Unaudited)   (Unaudited)

Sales .............................     $   103,924      $   140,749

Cost of Sales .....................         210,748          280,992
                                        -----------      -----------

      Gross profit (loss) .........        (106,824)        (140,243)

General and administrative expenses         910,657          776,102
Research and development ..........         122,307          109,855
                                        -----------      -----------

Loss from operations ..............      (1,139,788)      (1,026,200)

Other income (expense)
      Interest expense ............         (34,995)         (46,814)
      Other income (expense), net .          (5,723)           2,547
                                        -----------      -----------


Net (loss) ........................     $(1,180,506)     $(1,070,467)
                                        ===========      ===========

Basic (Loss) per weighted
 average share of common stock ....     $     (0.13)     $     (0.28)
                                        ===========      ===========


Weighted common shares outstanding        8,892,784        3,865,514
                                        ===========      ===========



<PAGE>


                  Consolidated Statements of Operations

                                                   Three Months Ended
                                                       December 31        
                                              -----------------------------
                                                   1998             1997   
                                              ------------       ----------

                                               (Unaudited)       (Unaudited)

Sales ....................................     $    40,052      $   115,912

Cost of Sales ............................          87,907          187,423
                                               -----------      -----------

      Gross profit (loss) ................         (47,855)         (71,511)

General and administrative expenses ......         518,183          305,005
Research and development .................          55,308           57,098
                                               -----------      -----------

Loss from operations .....................        (621,346)        (433,614)

Other income (expense)
      Interest expense ...................         (19,847)         (23,910)
      Other income (expense), net ........         (13,080)             558
                                               -----------      -----------


Net (loss) ...............................     $  (654,273)     $  (456,966)
                                               ===========      ===========

Basic (Loss) per weighted average share of
 common stock ............................     $     (0.07)     $     (0.12)
                                               ===========      ===========


Weighted common shares outstanding .......       8,951,608        3,957,371
                                               ===========      ===========



<PAGE>


                  BION ENVIRONMENTAL TECHNOLOGIES, INC.
                            AND SUBSIDIARIES



                  Consolidated Statements of Cash Flows


                                                    Six Months Ended
                                                       December 31        
                                              -----------------------------
                                                   1998             1997   
                                              ------------       ----------

                                               (Unaudited)       (Unaudited)

Cash flows from operating activities
 Net (loss) ..............................     $(1,180,506)     $(1,070,467)
 Adjustments to reconcile net loss to
  net cash used in operating activities -
 Depreciation and amortization ...........          28,099           26,586
 Issuance of common stock for services,
  compensation and interest ..............          23,620           93,410
 Issuance of subscribed stock for services          23,000          (27,007)
 Change in assets and liabilities -
  Receivables and work in progress .......          24,666          (39,706)
  Prepaid expenses and other .............             349          (10,000)
  Accounts payable .......................          93,194          (36,217)
  Accrued liabilities ....................         155,587           88,441
                                               -----------      -----------
        Net cash used in operating
         activities ......................        (831,991)        (974,960)

Cash flows from investing activities
 Purchases of equipment ..................          (2,969)          (7,762)
 Investments in patents ..................            --             (7,706)
                                               -----------      -----------
        Net cash used in investing
         activities ......................          (2,969)         (15,468)

Cash flows from financing activities
 Payments on notes payable ...............          (3,000)        (133,000)
 Proceeds from notes payable .............         235,000           25,000
 Proceeds from sale of stock/warrant
  issuances ..............................         539,424          915,713
 Proceeds from exercise of options .......          82,500             --
 Payments on capital lease obligations ...         (34,622)         (31,578)
 Proceeds from the sale of assets,
  net of selling expenses ................            --            262,000
                                               -----------      -----------
         Net cash provided by financing
          activities .....................         819,302        1,038,135

Net increase (decrease) in cash
 and cash equivalents ....................         (15,658)          47,707

Cash and cash equivalents at
 beginning of period .....................          19,104            9,232
                                               -----------      -----------

Cash and cash equivalents at end of period     $     3,446      $    56,939
                                               ===========      ===========



Footnote:
    Supplemental  disclosure of cash flow information Cash paid for interest was
       $10,464 (1998) and $26,869 (1997).


<PAGE>


Continued from previous page.



Supplemental disclosure of non-cash financing activities

     For  the six months ended December 31, 1998

          Converted $3,000 of common stock  subscribed into 800 shares of common
               stock.

          Converted $77,170 of notes  payable and interest into 12,862 shares of
               common stock.

     For  the six months ended December 31, 1997

          Declared and accrued dividends of $4,653 for preferred stock Series B.

          Converted  $5,007 of common  stock  subscribed  into  1,321  shares of
               common stock.

          Converted 18,834  shares of Series B preferred  stock to 18,834 shares
               of common stock valued at $95,482.

          Issued $30,961 of common stock  (10,324  shares) as payment of accrued
               Series B preferred dividends.



<PAGE>


                      BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                AND SUBSIDIARIES



                     Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>


                                            Common Stock                 Common           
                                       -------------------------          Stock         Accumulated
                                        Shares          Amount         Subscribed         Deficit             Total
                                       ---------     ------------     ------------      -------------     -------------

<S>                                    <C>           <C>              <C>               <C>               <C>        
Balances at June 30, 1998 .....        8,764,827     $ 10,863,469     $     21,500      ($11,275,528)     ($   390,559)


Conversion of common stock
  subscriptions to common
  stock .......................              300     $      1,500     $     (1,500)             --                --


Common stock subscriptions
  for services ................             --               --       $     11,500              --        $     11,500

Issuance of common stock
  for cash ....................           97,942     $    161,674             --                --        $    161,674


Issuance of common stock
  for services ................            2,315     $     10,725             --                --        $     10,725

Exercise of stock options .....           10,000     $     82,500             --                --        $     82,500


Net (loss) for the period ended
  September 30, 1998 ..........             --               --               --        ($   526,233)     ($   526,233)
                                       ---------     -----------      ------------      -------------

Balances at
  September 30, 1998 ..........        8,875,384     $ 11,119,868     $     31,500      ($11,801,761)     ($   650,393)
                                       =========     ============     ============      =============      ============
</TABLE>


<PAGE>


                      BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                AND SUBSIDIARIES



                   Consolidated Statement of Changes in Stockholders' Equity

                     Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>


                                            Common Stock                 Common           
                                       -------------------------          Stock         Accumulated
                                        Shares          Amount         Subscribed         Deficit             Total
                                       ---------     ------------     ------------      -------------     -------------

<S>                                    <C>           <C>              <C>               <C>               <C>        

Conversion of common stock
  subscriptions to common
  stock .......................              500     $      1,500     $     (1,500)             --                --


Common stock subscriptions
  for services ................             --               --       $     11,500              --        $     11,500

Issuance of common stock
  for cash ....................          127,974     $    377,750             --                --        $    377,750


Issuance of common stock
  for services ................            3,222     $     10,725             --                --        $     10,725

Conversion of note payable and
  interest for common stock ...           12,862     $     77,170             --                --        $     77,170


Net (loss) for the period ended
  December 31, 1998 ...........             --               --               --        ($   654,273)     ($   654,273)

Balances at
  December 31, 1998 ...........        9,019,942     $ 11,587,013     $     41,500      ($12,456,034)     ($   827,521)


</TABLE>




<PAGE>


                BION ENVIRONMENTAL TECHNOLOGIES, INC.
                          AND SUBSIDIARIES

             Notes to Consolidated Financial Statements



Note 1 - Summary of Accounting Policies

The  summary  of the  significant  accounting  policies  of  Bion  Environmental
Technologies,  Inc.  ("Company") is  incorporated  by reference to the Company's
annual report on Form 10-KSB at June 30,
1998.

The  accompanying  unaudited  financial  statements and disclosures  reflect all
adjustments (all of which are normal recurring  accruals) in the ordinary course
of  business  which  in the  opinion  of  management  are  necessary  for a fair
presentation of the results of operations, financial positions, and cash flow of
the  Company.  The  results of  operations  for the  periods  indicated  are not
necessarily indicative of the results for a full year.


Note 2 - Continued Operations

The  accompanying  financial  statements  have been prepared on a going con-cern
basis  which   contemplates   the  realization  of  assets  and  liquidation  of
liabilities  in the ordinary  course of business.  The Company has not yet begun
earning significant revenue from its planned principal operations. Consequently,
as of December 31, 1998, the Company has incurred  accumulated  losses  totaling
$12,456,034, resulting in an accumulated stockholders' deficit of $827,521. Cash
flows from current  operations are not sufficient to meet the obligations of the
Company.  Management  plans  include  continuing  efforts  to obtain  additional
capital to fund operations until contract sales along with sales of BionSoil(TM)
are  sufficient to fund  operations.  There can be no assurance that the Company
will be able to successfully  attain  profitable  operations or raise sufficient
capital.


Note 3 - Cost and Estimated Earnings on Uncompleted Contracts

The  Company's  costs and estimated  earnings on  uncompleted  treatment  system
contracts consist of the following:

                                     December 31,        June 30,
                                         1998              1998   
                                     -----------       ----------

     Costs incurred on contracts      $2,023,699       $1,927,813
     Estimated (losses)                 (583,640)        (548,450)
                                      -----------      -----------
                                       1,440,059        1,379,363
     Less billings to date            (1,131,318)      (1,069,318)
                                      -----------      -----------
                                      $  308,741       $  310,045 
                                      ===========      ===========


Note 4 - Capital Structure

Because the Company has a relatively  complex  capital  structure  the following
capital structure details are set forth:






<PAGE>


Common Stock


As of February 10, 1999 the Company had 9,110,838  shares of Common Stock issued
and outstanding and 10,987 shares of subscribed stock.

Options and Warrants

As of February  10, 1999 the Company  has  outstanding  options and  warrants as
follows:

Options  outstanding under the Fiscal Year 1994 Incentive  Compensation Plan and
the Non Employee Director Compensation Plan:

Commences    Expires
     Director ($1.72)         10,000        8/20/97     8/19/02
              ($2.27)         10,000        8/20/97     8/19/02
              ($3.23)         10,000       11/18/98    11/17/03
                             -------
       Total Director         30,000

     Employee ($4.00)          1,247       10/21/97    12/31/01
              ($4.00)          1,200         2/3/98    12/31/01
              ($4.00)          8,519        9/15/97    12/31/01
              ($4.00)            834         6/2/98    12/31/01
              ($4.00)            694       12/16/97    12/31/01
              ($4.00)          1,734         8/4/98    12/31/01
              ($4.00)         17,500         8/1/97      8/1/00
              ($4.00)          1,000        3/31/98     3/31/99
              ($4.00)          1,334        8/11/98    12/31/01
              ($4.00)         16,155       11/19/98    12/31/02
              ($4.00)            917         2/2/99    12/31/02
              ($4.00)          1,400         3/4/99    12/31/02
              ($4.00)            934        3/16/99    12/31/02
              ($4.00)          1,317         4/1/99    12/31/02
              ($4.00)            934         6/1/99    12/31/02
              ($4.00)            934         9/1/99    12/31/02
              ($4.13)          1,000         9/1/98     8/31/00
              ($4.50)          1,000        12/1/98    12/31/00
              ($6.00)          1,000        3/31/98     3/31/99
              ($6.00)          8,517        9/15/98    12/31/01
              ($6.00)          5,000        9/15/97    12/31/01
              ($6.00)          1,847       10/21/98    12/31/01
              ($6.00)          1,200         2/3/99    12/31/01
              ($6.00)            693       12/16/98    12/31/01
              ($6.00)          1,733         8/4/99    12/31/01
              ($6.00)          1,333        8/11/99    12/31/01
              ($6.00)         16,155       11/19/99    12/31/02
              ($6.00)            917         2/2/00    12/31/02
              ($6.00)          1,400         3/4/00    12/31/02
              ($6.00)            934        3/16/00    12/31/02
              ($6.00)          1,317         4/1/00    12/31/02
              ($6.00)            934         6/1/00    12/31/02
              ($6.00)            934         9/1/00    12/31/02
              ($6.25)          1,000         6/1/98     5/31/00


<PAGE>


              ($6.75)          5,000        10/6/97     3/31/99
              ($7.25)         10,000        10/6/97     3/31/99
              ($8.00)         10,000        9/15/98    12/31/01
              ($8.00)          1,246       10/21/99    12/31/01
              ($8.00)          1,200         2/3/00    12/31/01
              ($8.00)            693       12/16/99    12/31/01
              ($8.00)          1,733         8/4/00    12/31/01
              ($8.00)          1,333        8/11/00    12/31/01
              ($8.00)          8,516        9/15/99    12/31/01
              ($8.00)         16,155       11/19/00    12/31/02
              ($8.00)            917         2/2/01    12/31/02
              ($8.00)          1,400         3/4/01    12/31/02
              ($8.00)            934        3/16/01    12/31/02
              ($8.00)          1,317         4/1/01    12/31/02
              ($8.00)            934         6/1/01    12/31/02
              ($8.00)            934         9/1/01    12/31/02
             ($10.00)         10,000        9/15/98    12/31/01
             ($12.50)         10,000        9/15/99    12/31/01
             ($15.00)         10,000        9/15/99    12/31/01
                             -------
       Total Employee        195,879


       Total Director
         and Employee        225,879


      Warrants outstanding as of February 10, 1999 consist of the following:

      $3.00 warrants:
       exercisable 1/22/96 through 1/21/01:    1,003
       exercisable 8/21/96 through 8/20/01:   14,500
       exercisable 9/13/96 through 9/12/01:      827
                       Total $3.00 warrants   16,330

      $3.0625 warrants:
       exercisable 11/2/98 through 12/31/02:  16,667
                    Total $3.0625 warrants    16,667

      $4.00 warrants:
       exercisable 12/1/98 through 12/31/02   16,667
       exercisable 6/5/97 through 6/30/99:    35,000
                       Total $4.00 warrants   51,667

      $5.00 warrants:
       exercisable 6/20/96 through 6/20/99:   25,000
       exercisable 8/21/96 through 8/20/01    10,000
                      Total $5.00 warrants    35,000

      $6.00 warrants:
       exercisable 6/5/97 through 6/30/00:   100,000
       exercisable 3/1/98 through 10/1/99:    50,000
       exercisable 6/9/98 through 12/31/01:    3,750
       exercisable 2/1/97 through 12/31/01:   10,000
       exercisable 4/21/97 through 4/20/02:    4,172
                      Total $6.00 warrants   167,922


<PAGE>


      $7.00 warrants:
       exercisable 7/1/98 through 6/30/99:   887,081
                      Total $7.00 warrants   887,081

      $7.50 warrants:
       exercisable 7/1/98 through 12/31/00:  187,500
                      Total $7.50 warrants   187,500

      $8.00 warrants:
       exercisable 2/1/97 through 12/31/01:   10,000
                      Total $8.00 warrants    10,000

      $10.00 warrants:
       exercisable 2/1/97 through 12/31/01:   10,000
                      Total $10.00 warrants   10,000

      $12.50 warrants:
       exercisable 2/1/97 through 12/31/01:   10,000
                      Total $12.50 warrants   10,000

      $15.00 warrants:
       exercisable 2/1/97 through 12/31/01:   10,000
       exercisable 1/1/00 through 12/31/01:3,006,911
                      Total $15.00 warrants3,016,911

Total of all warrants currently outstanding4,409,078




Note 5 - Subsequent Events

Effective  January  25, 1999 the Company  made bonus  awards to three  employees
under the 1994  Incentive  Stock Plan.  The Company  granted 2,500 options at an
exercise price of $4.00 per share,  2,500 options at an exercise price of $4.125
per  share,  and  2,500  options  at  an  exercise  price  of  $4.25  per  share
(exercisable from 1/25/98 - 12/31/99).

On January 13, 1999 the Company borrowed  $180,000 from a non related party. The
short term note will accrue  interest at two percentage  points above the annual
rate publicly announced or published from time to time by Norwest Bank Colorado,
N.A., in Denver,  Colorado as its prime rate.  Principal and interest are due on
or before January 12, 2000.


<PAGE>


                BION ENVIRONMENTAL TECHNOLOGIES, INC.
                          AND SUBSIDIARIES




                              [PG NUMBER]

ITEM 2.   MANAGEMENT'S   DISCUSSION   AND   ANALYSIS   OF   FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

The  Company  designs,  installs  and  operates  advanced  waste and  wastewater
treatment  systems.   These  systems,   which  incorporate  patented  biological
technologies,  are capable of removing solids,  nutrients and other contaminants
from  agricultural,  industrial  and  municipal  waste-water.  In addition,  the
agricultural   systems  installed  on  animal  raising   facilities   produce  a
marketable, nutrient-rich soil-like product, BionSoil(TM).

The Company  currently has systems  treating swine,  dairy,  and fruit and juice
processing waste streams in Florida,  Illinois,  New York,  North Carolina,  and
Washington.  The  Company  has  approximately  170,000  BionAnimals  in  design,
permitting,   construction   and/or   operations  with  an  additional   909,000
BionAnimals under contract. The Company is in the process of raising capital for
operations and future growth,  reviewing  strategic partners for various aspects
of the business,  continuing a research and  development  effort on both systems
applications and byproducts, and strengthening its patent coverage.

The Company has incurred  losses since inception of $12,456,034 and is currently
experiencing  liquidity  problems.  Continued  losses  without  the  infusion of
additional capital raise doubt about its ability to continue as a going concern.
Management plans include continuing efforts to obtain additional capital to fund
operations  until such time, if ever, as contract sales and the sale of BionSoil
are sufficient to fund opera-tions.  No assumptions can be made that the Company
will  be  able  to  successfully  attain  profitable   operations  and/or  raise
sufficient capital to sustain operations.

Liquidity and Capital Resources

The  Company's  current ratio as of December 31, 1998 was 0.37 : 1.0 as compared
to 0.61 : 1.0 as of June 30,  1998.  Cash as of December  31, 1998  decreased to
$3,446 as compared to $19,104 as of June 30, 1998.

During the six months ended  December 31, 1998,  the Company  borrowed  $127,000
from three shareholders at 1% interest per month.

As of December 31, 1998 the Company has drawn  $240,000  against the October 26,
1996 line-of-credit with a shareholder. (See 8-K dated December 1, 1996.)

During the six months  ended  December  31, 1998 the Company made awards to five
employees  under the 1994  Incentive  Stock  Plan.  The Company  granted  30,000
options at an  exercise  price of $3.25 per share  (exercisable  from  11/2/98 -
12/31/98). None of the options were exercised and all have expired.



<PAGE>


During the six months ended  December 31, 1998 the Company  issued awards to all
current employees (excluding the Company's officers,  directors,  and management
personnel)  under the Company's Fiscal Year 1994 Incentive Plan totalling 22,591
options  with an  exercise  price of $4.00 per  share,  22,591  options  with an
exercise price of $6.00 per share,  and 22,591 options with an exercise price of
$8.00 per share;  all of the  options  will  expire on December  31,  2002.  The
options will vest as follows:  for employees with less than one year of service,
the first third shall vest on their one year  employment  anniversary  date, the
second third shall vest on the second  anniversary date, and the last third will
vest on their third  anniversary  date. For employees with more than one year of
service,  the first third shall vest on November  19,  1998,  and the second and
last third shall vest twelve and twenty-four months thereafter respectively.

During the six month period ending  December 31, 1998, the Company issued 16,667
warrants to an employee with an exercise  price of $3.0625 per share  commencing
November  2,  1998 and  expiring  December  31,  2002.  The  Company  issued  an
additional  16,667 warrants to another  employee with an exercise price of $4.00
per share commencing  December 1, 1998 and expiring December 31, 2002. The above
warrants were issued to the two employees as compensation  per their  employment
agreements

On May 21, 1998 the Company  entered into a credit  facility  with a shareholder
for a maximum  amount not to exceed  $1,500,000.  On June 30,  1998 the  Company
converted all of the then  outstanding  debt  ($300,000 of principal and $677 of
interest)  into  50,113  shares of common  stock at $6.00 per share and  150,000
warrants at $7.50 per share  exercisable for the period  commencing July 1, 1998
and expiring  December 31, 2000. (See 8-K dated May 21, 1998.) As of November 5,
1998 the Company had  converted  the balance of the note payable  ($75,000)  and
interest ($2,170) into 12,862 shares of restricted and legended common stock and
37,500  warrants  exercisable at $7.50 per share  commencing on November 5, 1998
and expiring on December 31, 1999.

For the six months ended  December 31, 1998 the Company issued 225,916 shares of
common stock for cash ($539,424),  12,862 shares of common stock as payment of a
note  and  interest  ($77,170),  5,537  shares  of  common  stock  for  services
($21,450),  and converted 800 shares of subscribed stock to 800 shares of common
stock  valued at $3,000.  All of the above is  legended  and  restricted  common
stock.  The Company also issued 10,000  shares of free trading  common stock for
the exercise of options ($82,500). The Company has increased subscribed stock by
$10,000 for  legended  and  restricted  common  stock  awarded but not issued to
certain employees as additional compensation.

Results of Operations

Comparison  of the Six Months  Ended  December  31,  1998 with Six Months  Ended
December 31, 1997

Revenue in the six months  ended  December  31,  1998 was  $103,924  compared to
$140,749 for the  corresponding six month period in 1997, a decrease of $36,825.
Contract costs were lower  ($70,244) in the 1998 six month period due to reduced
costs associated with the BionSoil processing in New York.




<PAGE>


General  and  administrative  expenses  increased  by  $134,555 in the six month
period ended December 31, 1998 due to higher consulting  expenses ($243,000) and
investor  relations expenses  ($59,000).  $231,000 of the increase in consulting
fees was due to the cancellation of a consulting agreement and the credit issued
in the quarter ended December 31, 1997.  The increase was partially  offset by a
decrease in compensation expenses ($190,000).

The Company  recorded  $34,995 in interest  expense on its notes to shareholders
and capital equipment leases and $122,307 in research and development  costs. As
a result of the above,  the Company recorded a net loss of $1,180,506 in the six
month period ended  December 31, 1998,  compared to a net loss of $1,070,467 for
the six month period ended December 31, 1997.

The Company will need to increase sales significantly to obtain profitability.

Comparison  of the Three Months Ended  December 31, 1998 with Three Months Ended
December 31, 1997

Revenue in the three  months  ended  December  31, 1998 was $40,052  compared to
$115,912  for the  corresponding  three  month  period in 1997,  a  decrease  of
$75,860. Contract costs were lower in the 1998 three month period by $99,516 due
to the  decreased  expenses  associated  with  BionSoil  processing.  The  above
resulted in a gross loss for the period  ended  December  31, 1998 of $47,855 as
compared to a gross loss of $71,511 for the same three month period in 1997.

General and administrative  expenses increased by $213,178 due to an increase in
consulting and  professional  fees ($239,000) and investor  relations  ($45,000)
partially offset by a decrease in compensation expenses ($110,000).  $231,000 of
the  increase in  consulting  fees was due to the  cancellation  of a consulting
agreement and the credit issued in the quarter ended December 31, 1997.

The  Company  recorded  $19,847 in  interest  expense on its notes  payable  and
$55,308 in research and development costs. As a result of the above, the Company
recorded a net loss of $654,273 in the three month  period  ended  December  31,
1998,  compared  to a net loss of  $456,966  for the three  month  period  ended
December 31, 1997.

The Company will need to increase sales significantly to obtain profitability.

Year 2000 Issue



<PAGE>


The  Company  is aware of the issues  associated  with the  programming  code in
existing  computer systems as the millennium (year 2000)  approaches.  The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the rollover of the two-digit  year value to 00.
The issue is whether  computer  systems will properly  recognize  date-sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail. After a review of the Company's computer systems and associated  software,
management  does not  believe  "year  2000" will have a  material  effect on the
operations or financial condition of the Company. The Company cannot predict the
impact that "Year 2000" will have on its customers and vendors.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The discussion below contains forward-looking statements (denoted with asterisks
(*)) made in reliance  upon the  provisions  of Rule 175  promulgated  under the
Securities  Act of 1933 and  should be read in  conjunction  with the  Company's
consolidated financial statements and the Notes thereto. The footnotes set forth
below (at pages 21 to 25) are an integral part of this  discussion and should be
carefully  reviewed to properly  understand  this  section.  This  discussion is
qualified in its entirety by the risk factors discussed herein.

     (a) Plan of Operation

     General Discussion of Current and Proposed Operations

     The unaudited financial  statements contained in this Form 10-QSB show that
     over  $11,628,513  of equity has been  invested in the Company  through the
     close of the fiscal  quarter  ended  December  31,  1998.  These  financial
     statements  also show that, as of that date, the Company had a negative net
     worth of  $827,521,  cumulative  losses  of  $12,456,034,  limited  current
     revenues and substantial current operating losses. Continued losses without
     additional  outside  funding  raise  doubt about the  Company's  ability to
     continue  as  a  going  concern.   Management  plans  to  continue  raising
     additional capital to fund operations until such time, if ever, as Bion NMS
     sales along with the sales of BionSoil and BionSoil products are sufficient
     to fund operations.

     Management believes,  however, that additional  information is necessary to
     evaluate  the  Company  and its  progress  relative  to the  business it is
     pursuing,  its plans for the future,  and the associated  value the Company
     has  developed  during the last several  years.  Therefore,  the  following
     section of this Form 10-QSB is presented by management to give the reader a
     better  understanding  of the development of the business of the Company to
     date, and its goals for growth in the future.

     Business Development

     The Company's  mission is to provide  services,  systems and products which
     solve environmental problems with wastes and wastewater, and in appropriate
     situations,  recycle  wastes into high value  horticultural  products which
     produce  superior  plant  growth  performance.  The  main  emphasis  of the
     Company's business during the past two years has been on the application of
     the Bion NMS for large animal raising agricultural facilities. As a result,
     the  Company's  focus has been more  specifically  on:  first,  the  sales,
     design,   installation  oversight,   operations  management,  and  material
     harvesting  of the Bion NMS for  large  dairy and  swine  facilities;  and,
     second,   BionSoil:   the  development  efforts  associated  with  testing,
     processing,  blending,  packaging,  marketing,  distribution  and  sales of
     BionSoil and  BionSoil-based  products  which are produced  from the solids
     harvested  from the Company's Bion NMS systems.  Through  December 31, 1998
     the Company has sold, designed or has under contract a total of 81 Bion NMS
     waste or wastewater  treatment  systems.  These systems include 4 operating
     food  processing  or storm  water run off  systems,  as well as 76 Bion NMS
     BionSolids (see footnote 1, below) producing systems (13 in operation, 4 in
     construction  and 58 under  contract  in various  stages  from  preliminary
     design to  permitting)  that are  designed  to  contain  approximately  1.1
     million  BionAnimals (see definition below) when completed.  Eventually the
     Company anticipates emphasizing additional business areas including without
     limitation municipal and industrial wastewater treatment*.

     Prior  to  September  20,  1989,   (when  Bion   Technologies,   Inc.,  was
     incorporated)  through  at least  June 30,  1997,  the  Company  was in the
     technology development mode with limited sales of primarily first-of-a-kind
     wastewater and/or Bion NMS. Initial sales and installations were wastewater
     treatment  NMS (no  BionSolids  production)  until  1993 when the  emphasis
     shifted to Bion NMS (BionSolids production) applications.

     During the past two years the Company  has been  working to emerge from the
     research and development  stage and transition into the sales and marketing
     of the  Bion  NMS  systems  and the  BionSoil  products  produced  by those
     systems.   The  Company  has  focused  the  majority  of  its  efforts  and
     expenditures  in these two areas and is beginning to see positive  progress
     in both, as described  below*.  The Company's  method for tracking both the
     sale and  start-up of Bion NMS systems  and the  production  of BionSoil is
     based on a Company  defined  standard unit, the  BionAnimal,  which relates
     BionSoil  production  to confined  animal  weight.  When all the manure and
     urine   produced  by  one   BionAnimal  is  collected  as  BionSolids   and
     subsequently  converted  into  BionSoil,  the Company  estimates  that each
     BionAnimal will yield  approximately 1 cubic yard of processed BionSoil per
     year*.

     Using this definition of BionAnimal the Company has developed the following
     table relating the number of animals in full  confinement  installations to
     the number of  BionAnimal  equivalents  they  represent.  (See  footnote 2,
     below):

                               Table 1
   Animal                 Approximate Equivalent BionAnimals
One dairy cow                   10.00
One steer                       4.50
One sow                         1.35
One market hog                  0.90     (1.1 = 1)
One nursery pig                 0.225    (4.4 = 1)
One layer chicken               0.02      (50 = 1)




<PAGE>


     For fiscal year 1998 (see the  Company's  Form 10-KSB dated June 30, 1998),
     the  Company  experienced  strong  growth  and as a  result  exceeded  its'
     internal goals by more than 100%, adding approximately  650,000 BionAnimals
     under  contract.  During the first two  quarters of fiscal  year 1999,  the
     Company has added an additional 325,000  BionAnimals,  approximately 40% of
     the Company's  initial internal goal for the year (see  management's  goals
     and  targets  below).  However,  during the  second  fiscal  quarter  ended
     December  31, 1998,  and  continuing  into  January and  February  1999 the
     Company has  experienced  the impact of an extended deep  depression in hog
     prices.  During  December  1998  prices  reached a low of $9.00 per hundred
     weight,  down from  $43.00  per  hundred  weight in  December  1997.  These
     depressed  prices,   lasting  through  the  present  time,  are  below  the
     break-even  point for hog growers.  As a result of this reduction in prices
     and the commensurate  losses  accumulated by the hog industry,  commitments
     for expansion of capacity have slowed,  and growers have generally  delayed
     or deferred any  expenditures  possible pending an increase in price to the
     break-even point. This has had a significant  impact on the Company's plans
     to sign additional contracts within the hog industry and has caused growers
     to put many of the Company's  existing system  contracts on temporary hold.
     However,  hog prices have recovered slowly in January 1999 and have trended
     upward to  approximately  $25.00 per  hundred  weight by the end of January
     1999.

     Additionally,  in the last  quarter of the fiscal year ended June 30, 1998,
     the Company initiated a program to hire two vice president level executives
     (a Vice  President,  system  sales  and  marketing,  and a Vice  President,
     BionSoil). Both positions have been filled, however, the recruiting program
     took  substantially  more time  than  anticipated.  As a  result,  the Vice
     President of system sales and marketing began with the Company in November,
     and the Vice President of BionSoil began with the Company in December. This
     delay, combined with the impact of low hog prices in the market resulted in
     a  significant  slow down in the  Company's  pace of growth.  The impact of
     these two issues is anticipated to be short term.  However,  management has
     reevaluated  the goals  established in the Company's Form 10-KSB dated June
     30, 1998 and made necessary changes (see Management's  Targets, Bion System
     Sales and BionAnimals Under Contract below).

      Market Size

     Management  has  devoted  significant  effort to  defining  the size of the
     markets for both the Bion NMS and for BionSoil and BionSoil products. These
     efforts have included  formal and informal  studies,  creation of models as
     well as analysis of available statistical data.

     The  Company  has  reviewed  the  preliminary   1997  U.S.   Department  of
     Agriculture Census statistics (the most recent  information  available from
     the U.S.  Department of Agriculture)  as well as additional  state by state
     information,  in some cases current as of December  1997, and developed the
     following size estimates for the target market segments for system sales.

     The total United States animal  population,  based on data contained in the
     1997 U.S. Department of Agriculture Census statistics shows that there were
     over 107 million  cattle and calves,  61 million  hogs and in excess of 1.6
     billion  fowl on farms in the United  States.  These  numbers if  converted
     based on the Company  defined  BionAnimal  unit,  yield  approximately  560
     million BionAnimals.



<PAGE>


     However,  not all of  these  BionAnimals  are on farms  that are  potential
     candidates  for a Bion NMS  installation.  The  Company  has  analyzed  the
     economics of system  installation,  minimum  system size  requirements  and
     system operation factors related to the size of farms. Based on this review
     and further  analysis of the census data,  the Company  estimates  that the
     total number of  BionAnimals  on larger farms,  which meet the  appropriate
     criteria,  is approximately  210 million (see footnote 3, below).  Based on
     this review,  these animals are believed by the Company to be the potential
     candidates  for system  installation  in the U.S.*  Further,  the number of
     large  animal  farms is  increasing  as the move to  consolidate  livestock
     operations  into  larger more  efficient  farm units is  accelerating  (see
     footnote 4, below).  The 1992 Department of Agriculture  Census  statistics
     (which were the most current information  available to the Company prior to
     this Form 10-QSB),  showed that the total number of  BionAnimals  on larger
     farms was 140 million.  The increase in animals on larger farms seen in the
     1997 census numbers is most evident in dairy cows (where the number of cows
     on dairies with over 1,000 cows increased from 937,000 to 1,600,000 between
     1992 and 1997) and hog farms  (where  the number of hogs on farms with over
     5,000 hogs rose from 9,764,000 to 24,578,000). This trend is anticipated to
     continue  over the next several  years as growers  realize the size related
     economies in facility and production costs*.

     Management's  review of the  potential  market for  BionSoil  and  BionSoil
     products  has  included  research  by the  Battelle  Institute  in a  study
     conducted for the Solid Waste  Composting  Council (see footnote 5, below),
     as well as initial market sector  analysis*.  Battelle  calculated that the
     demand for compost and compost-like  products  (including  products ranging
     from manure to composted  organic wastes to manufactured  potting soils and
     soil  enhancers) in selected  areas of the U.S. alone is projected to be in
     excess of one billion cubic yards per year*.  This demand,  categorized  in
     nine application segments:  landscapers,  delivered topsoil, bagged retail,
     nurseries,  landfill final cover, surface mine reclamation, sod production,
     silvaculture,  and agriculture,  far exceeds  projected  supply*.  Targeted
     markets  for  BionSoil  include  these  segments  in  addition to state and
     municipal  park and  transportation  departments,  golf  courses,  athletic
     fields,  home  gardeners,  reforestation  projects  for  timber  and mining
     companies,  the U.S.  Park  Service and  others*.  The Company is currently
     analyzing  specific  market  sectors that are initial  target  market areas
     within this overall  demand  including  container  nursery  products,  golf
     course construction, the turf industry and others (see footnote 6, below)*.

      Geographic Expansion

     The activities of the Company to design,  permit,  oversee the installation
     of and  operate  its  systems in the  various  geographic  areas  where the
     Company is  conducting  its business to date have  established  credibility
     with federal,  state,  and local  regulators as well as  environmental  and
     agricultural professionals.  With the establishment of this credibility and
     recent contract discussions and negotiations,  the Company is positioned to
     attempt to gain significant  market penetration into new geographic areas*.
     To  date,  the  Company's  geographic  expansion  has been  limited  due to
     financial and personnel constraints (which continue to exist).  However, as
     a result of  heightened  awareness  about the major  manure  treatment  and
     disposal  problem  facing the animal  raising  industry  (see  footnote  7,
     below),  and  due  to the  current  proliferation  of  state  and  national
     legislation  being  considered,  management  believes that major geographic
     expansion is now possible  and is  essential  to the  Company's  ability to
     achieve successful operations in the future*.



<PAGE>


     The Company estimates that the cost associated with the required  staffing,
     servicing,  and marketing effort for expansion into new geographic regions,
     including initial sales calls, system design, regulatory approvals,  system
     installation  and  operation  through the cash-flow  break-even  point (the
     Company has not yet achieved  cash-flow  break-even  in any of its regional
     operations),  is  not  less  than  $500,000  per  region,  and  may  exceed
     $1,500,000*.  The Company's  balance sheet does not show any assets created
     by these  expenditures  as they all have been  recorded  as expense  items.
     However,  based on experience to date in the regions where system sales and
     installation  activity  have been  focused,  the Company  believes that the
     money  invested in these  efforts has  created  what might be called  "good
     will," "marketing,"  and/or  "regulatory"  value.  Management believes that
     achieving a greater rate of geographic  expansion will require expenditures
     greater than those  expensed for  previous  expansion*.  (An example of the
     accumulation  of these  expenses  can be  understood  by  reference  to the
     development  and  installation  of the Company's  initial hog farm Bion NMS
     system in North  Carolina  which is described in more detail in footnote 8,
     below).

     The  Company  is  currently  evaluating  expansion  opportunities  in  many
     geographic  areas   throughout  the  United  States.   Based  on  research,
     management  team visits,  discussions  with  regulatory  and dairy industry
     professionals,  requests  for  information  and  proposals,  and  review of
     available information,  over the past few months it has become increasingly
     evident that the state of  California  is an  appropriate  location for the
     next expansion office*.  California has the largest  concentration of dairy
     cows in the United States and is having problems with groundwater  leaching
     and stormwater  runoff, as well as land application and stock piling of the
     manure  generated on these farms*.  The Company views the next 12-18 months
     as a critical time period to become established in California and has taken
     the initial steps to implement a sales and marketing plan in that state*.

     As the Company  continues its expansion  into new areas in the future,  and
     this expansion  requires similar or greater additional cash resources to be
     spent, these cash amounts, when expended, will be expensed and not shown as
     balance sheet assets*.

      Technology Expansion

     The Company has six issued  patents (see  footnote 9, below) which  provide
     broad coverage of the  fundamental  technology that underlies the Company's
     systems and  processes.  The Company is conducting a review of its existing
     patent  position and anticipates  that additional  patent filings may occur
     based on this  review or as  further  applications  of the  technology  are
     developed.   The  Company  currently   anticipates  the  expansion  of  the
     technology into the cattle feedlot and poultry raising businesses where the
     technology  will need to be  adapted  to treat  waste  with both  different
     characteristics  and different  collection  technologies  than for existing
     dairy or swine waste systems*.



<PAGE>


     Other factors that may motivate the expansion of  technology  include,  but
     are  not  limited  to,  current  and/or  new  local,   state,  and  federal
     regulations,  proximity of potential  systems to current  online systems or
     systems under  contract and the market size of poultry,  cattle feedlot and
     other similar operations.

     Just as there are additional expenses associated with geographic expansion,
     there  also are  additional  expenses  associated  with the  adaptation  of
     existing technology for use in regions where climate,  soil, and regulatory
     conditions   are  different   from  those   experienced  in  other  already
     established  installations.  The  majority  of  such  expenses  (which  are
     investments in the Company's  future) will not show as balance sheet assets
     despite the fact that long term technological value is being created.

     The Company  estimates  that a large portion of the net loss through fiscal
     year 1995 (then shown on the  financial  statements as  approximately  $4.0
     million) was actually expended on system development and the enhancement of
     the technology and construction of prototype  systems that are the basis of
     the Company's  planned  future  expansion.  The Company has expensed all of
     these costs.

     Management's Targets, Bion NMS System Sales and BionAnimals Under Contract

     In July 1997, Company management established the primary long range goal to
     achieve a target level of 2,000,000  BionAnimals under contract by June 30,
     2000, the end of the Company's fiscal year 2000*. To support achievement of
     this  long-range  goal the  Company  established  the  addition  of 300,000
     BionAnimals  under  contract  as the sales  target  through its fiscal year
     ending June 30, 1998 which would result in the Company having contracts for
     a total of  approximately  390,000  BionAnimals  by June 30,  1998 (see the
     Company's  Form  10-KSB  for the  fiscal  year  ended  June 30,  1997 for a
     discussion of these goals)*.

     For fiscal year 1998 (which ended June 30, 1998), the Company significantly
     exceeded  its goals.  During the year,  the Company  signed  contracts  for
     systems designed to contain  approximately  650,000 BionAnimals as compared
     to its goal of adding contracts for approximately 300,000 BionAnimals. As a
     result,  the Company exceeded its target for the fiscal year ended June 30,
     1998 by over 100%.  When all the  systems  under  contract,  as of June 30,
     1998, are complete and in full  operation  they are  anticipated to produce
     approximately  750,000  cubic yards of BionSoil per year (see the Company's
     Form 10-KSB for the fiscal year ended June 30, 1998).  Normally the Company
     anticipates  this soil  production  will start within two years of contract
     signing*.  However, due to the slowing of construction expenditures brought
     on by the depressed  hog market,  many of these systems will not be on line
     within two years and therefore BionSoil production will be delayed*.

     In July 1998,  based on a review of this  performance,  and the assumptions
     detailed below,  management set the following revised  performance  targets
     for the  number  of  BionAnimals  under  contract  in each of the next four
     fiscal  years,  and,  following  the up to 24 month lag for system  design,
     permitting,  construction  and  start-up  (See  footnote  10,  below),  for
     quantities of BionSoil that were anticipated to be available to be sold*:


<PAGE>


                  Table 2 (see footnote 10, below)*
                    Management July 1998 Targets
         BionAnimal/Contracts and BionSoil (#'s in thousands)

                             Fiscal Years Ended June 30   
                        ---------------------------------------
                        1999        2000       2001        2002 
Number of BionAnimals
added during fiscal
year (in thousands)*     800*        950*     1,200*      1,400*
Cumulative number of
BionAnimals under
contract (in
thousands)*            1,550*      2,500*     3,700*      5,100*
BionSoil available
for sale (in thousands
of cubic yards)*          30*        300*     1,600*      2,600*

     As management  discussed in the  Company's  Form 10-KSB for the fiscal year
     ended June 30, 1998 and Form 10-QSB for the fiscal quarter ended  September
     30, 1998, these goals could only be realized by the Company if many factors
     and  assumptions  including but not limited to the  following  were met: a)
     that the Company will be able to secure sufficient additional funding, most
     of which will be raised through capital  investments (of which there can be
     no  guarantee);  b) that  the  Company  will  be  able  to hire  sufficient
     management personnel,  i.e. sales, engineering and operations,  in order to
     promote the growth of the Company and to properly  manage that  growth;  c)
     that continuing  regulatory  pressures on the agricultural  industries will
     lead them to install the Bion NMS or similar  technology  in order to solve
     the environmental  problems; d) that legislative and regulatory powers will
     not pass and enforce  non-science based laws that would render the Bion NMS
     obsolete  or  illegal;  e) that  the  Company  will be able to  expand  the
     application of its technology and accomplish the geographic  expansion into
     new  regions;  f) that the  pricing  and  features  of the Bion NMS and the
     services provided by the Company can be accomplished within the constraints
     of the Company's economic model; g) that the trend continues towards market
     consolidation  in the agricultural  community,  whereby the total number of
     farms decreases,  however, the number of animals produced increases; and h)
     that the Company is  successful  in  developing,  marketing and selling the
     BionSoil and  BionSoil  products  produced by the Bion NMS*.  None of these
     factors and assumptions can be guaranteed.



<PAGE>


     However,  as discussed above, prices in the hog market have been in a major
     depression  over  the  last  nine  months.  This  depression  has not  only
     generally  halted  expansion in the hog industry,  but also has forced some
     growers to reduce or eliminate their herds.  This  depression  coupled with
     the  Company's  delay in hiring  key  management  positions  has slowed the
     aggressive  growth rate that the Company had  forecasted in its Form 10-KSB
     dated June 30, 1998 and Form 10-QSB dated  September  30,  1998.  The short
     term  impact  of these two  issues  has  caused  management  to  reevaluate
     forecasts for the  remainder of fiscal year 1999 through  fiscal year 2002.
     As a result,  the following  revised  table of management  targets has been
     developed.  Note that the number of  BionAnimals  added in fiscal year 1999
     and fiscal year 2000 have been reduced.  Management believes, however, that
     the total number of BionAnimals added by June 30, 2002 will equal or exceed
     the total predicted previously*.


                              Table 2A*
                          Revised Targets*
         BionAnimal/Contracts and BionSoil (#'s in thousands)

                              Fiscal Years Ended June 30   
                        ---------------------------------------
                        1999        2000       2001        2002 
Number of BionAnimals
added during fiscal
year (in thousands)*     500*        800*     1,250*      1,800*
Cumulative number of
BionAnimals under
contract (in
thousands)*            1,250*      2,050*     3,300*      5,100*
BionSoil available
for sale (in thousands
of cubic yards)*
(See footnotes 11 &12,
 below)                   16*        130*     1,200*      2,100*

     These  revised  targets  will only be  realized  if all of the  factors and
     assumptions  listed  following  Table 2,  above,  are  met*.  Additionally,
     meeting the short term  targets  will  require that the upward trend now in
     evidence  in hog  prices  continues  until  growers  are once  more able to
     realize a profit*.

     An  examination  of the size of the target  markets  for  system  sales and
     installations and BionSoil sales (as shown above) shows that the percent of
     total market penetration,  which these targets represent,  is very modest*.
     On the basis of the assumptions  above and the analysis of market size (see
     page 9), the Company's systems sales program has achieved (through December
     31,  1998)  approximately  a  0.5%  market  penetration,  and  the  revised
     cumulative  number of BionAnimals  under contract  targets for fiscal years
     1999,  2000,  2001 and 2002 if achieved,  would  represent  approximately a
     0.6%,  1.0%,  1.6% and 2.4% market  penetration  respectively*.  Management
     believes  such  market  penetrations  represent  realistic  targets  if the
     assumptions  set  forth  above are  accurate*.  No  assurance  can be given
     however, that these targets will be achieved.

     Financial Discussion of Bion NMS and BionSoil Business*



<PAGE>


     The Company  expects to receive two distinct  revenue streams from the Bion
     NMS: 1) fees for system design, permitting,  start-up and initial operation
     (and, for certain systems, periodic management or technology fees); and, 2)
     commencing  approximately nine to fifteen months after the initial start-up
     of BionSoil  production  systems installed on large dairy,  swine,  poultry
     farms or feedlots,  revenue  from the sale of BionSoil  and  BionSoil-based
     products  produced  from the systems  [Note that  initial  system  start-up
     typically  occurs six to twelve months after a system  contract is signed*.
     Therefore,  BionSoil revenues will typically commence up to 24 months after
     a system contract is signed],  (see footnote 10, below)*. To date, revenues
     from the sale of BionSoil have been minimal (first  significant  commercial
     sales are projected for spring of 1999*).

     Bion NMS Economics 

     The Company may  receive  multiple  design,  permit and  construction,  and
     operation  oversight  fees*.  These  fees  are paid to the  Company  by the
     clients in return for services  rendered and the  licensing of a particular
     site to use the Bion NMS  technology.  Fees may also be paid to the Company
     on a regular  ongoing basis for system  oversight as well as regulatory and
     biological  testing*.  These  fees are above and  beyond  any  revenue  the
     Company may receive from the sale of BionSoil. In some cases one or more of
     these  categories  of fees may be waived or excluded  in formal  negotiated
     contract  terms for a variety of  reasons,  including  without  limitation,
     signing the first system contract in a new geographic  region,  signing the
     first  system  contract  for  a  new  application  of  the  technology,  or
     offsetting some or all of the fees against reduced or eliminated BionSolids
     royalties.

     To date the Company has lost money on system  design,  permitting  support,
     construction  oversight  and initial  system  operation.  However,  through
     installing  these systems at a loss, the Company has been able to establish
     a number of Bion NMS systems to use for test sites,  demonstrations  and to
     refine the technology.  Based on experience to date, the Company is working
     to establish  pricing for its  contracts  that the Company  believes  will,
     independent of BionSoil  revenues,  be sufficient to cover direct  expenses
     (such as system  design,  permitting  support,  construction  oversight and
     initial system operation) related to these system installations*.  However,
     there is no  assurance  that this goal will be achieved or that the Company
     will be successful in selling its systems at a price level  sufficient  for
     the Company to generate a profit.

     BionSoil Economics

     As Bion NMS systems are brought  on-line and  BionSolids are harvested (see
     footnote 13, below),  it is anticipated  that BionSoil,  Inc. will purchase
     the harvested  BionSolids from Bion  Technologies,  Inc. to process it into
     BionSoil  products for sale to  customers*.  Some farms may be paid fees as
     royalty for the  BionSolids  harvested  from their  site*.  These  payments
     potentially  represent an important  part of the strategy  developed by the
     Company  for the  successful  marketing  of Bion NMS  systems*.  Most large
     animal raising facilities have substantial  operating costs associated with
     the  disposal of manure and waste  products,  which are  generated in large
     quantities at these  facilities.  With the  construction and operation of a
     Bion NMS on a farm site, many of these costs may be  substantially  reduced
     or  eliminated,  and the farm may,  in some cases,  also  receive a revenue
     stream from the cash payments made by the Company to the farm*.



<PAGE>


     During  the  spring and summer of 1998,  the  Company  conducted  a limited
     market test of BionSoil  products through retail and commercial  outlets in
     western  New York (see the  Company's  Form 8-K dated  July 1,  1998).  The
     material for this test was New York produced dairy  BionSoil  processed and
     blended  with  Sphagnum  peat  moss at the  Company's  Hermitage,  New York
     facility.  Subsequently  the blended product was sold in bulk quantities or
     bagged in both 20 pound and 40 pound bags and sold.  The bagged product was
     sold to a limited  number of small  retail  garden  shops and  nurseries at
     wholesale  prices,  to the Company,  of $1.97 and $2.97 for 20 and 40 pound
     bags respectively (resulting in prices per cubic yard of $80.00 and $108.00
     respectively).  Bulk product was sold through similar  distribution outlets
     for prices from $15.00 to $27.95 per cubic  yard.  The test market  program
     was  conducted  with no  advertising  budget,  only limited  point-of-sales
     materials, and with no participation of any large chain retail outlets. The
     average  price per cubic yard for all blended  product sold in this limited
     test market program,  bagged and bulk combined,  was $39.37 per cubic yard.
     Therefore,  the average price  received by the Company for the  BionSolids,
     before  mixing  with  Sphagnum  peat  moss,  was  $57.08  per  cubic  yard.
     Management  believes that this test market  program  provides the Company's
     first confirmation of the market viability of BionSoil products. Management
     further  believes  that,  when product sales  efforts are supported  with a
     strong  marketing/advertising  program,  average sales prices will increase
     above $40.00 per cubic yard for the blended BionSoil product*.

     Further,  it should be noted that a  significant  portion  of the  material
     harvested  from  many  systems  in the last year has been  devoted  to both
     university   and   private   studies   intended   to   determine   physical
     characteristics,  blends,  and growth results  achievable using BionSoil in
     many different  applications (see footnotes 14 and 15, below).  The Company
     anticipates  continuing  and  aggressively  expanding  these test  programs
     during the current fiscal year*.



<PAGE>


     Based on results of the  Company's  recent  market test, a review of prices
     for soils and soil-enhancing products in various markets, and target market
     segment strategies being developed, the Company believes that BionSoil will
     sell at no less than an  average  of $20 per cubic  yard when sold in bulk,
     and will sell for  considerably  higher prices when  processed and bagged*.
     [It should be noted  that all prices  quoted  within  this Form  10-QSB are
     wholesale  only and may not be  representative  of actual  retail  prices.]
     Additionally,  based on actual costs experienced in BionSoil harvesting and
     processing to date, anticipated improvements in processing technologies and
     efficiencies, and lower per unit costs as volumes increase, the Company has
     estimated  costs for the  various  levels of  processing  required  to sell
     BionSoil  products*.  Given  the  contract  terms  and  estimated  costs of
     production and sales,  the potential  gross margin (see footnote 16, below)
     returned  to the  Company  from  BionSoil  products  sales  alone  has been
     calculated for a series of potential  price points (see footnote 17, below)
     (and the implied  processing  levels required to achieve the products to be
     sold at these  price  points  (see  footnote  18,  below))*.  Table 3 below
     presents this  information for five selected  possible price points*.  This
     table has been prepared reflecting estimates based on the Company's limited
     experience  to date with the  harvesting  and  processing  of BionSoil  and
     BionSoil products*. (See footnotes 17 and 18, below)*.

                              Table 3*
Potential BionSoil    Estimated Related   Calculated
Wholesale Price       BionSoil Expenses   Gross Margin
Per Cubic Yard*       Per Cubic Yard*     Per Cubic Yard*
   $ 20*                $ 13*             $  7*
   $ 40*                $ 22*             $ 18*
   $ 60*                $ 32*             $ 28*
   $ 80*                $ 41*             $ 39*
   $100*                $ 53*             $ 47*

     The calculated gross margin per cubic yard as presented in Table 3 above is
     equivalent to the annual gross margin  contribution of each BionAnimal in a
     system that is fully on line  producing  BionSoil  (see the  definition  of
     BionAnimal  above where one BionAnimal  produces one cubic yard of BionSoil
     per year).

     If the Company is successful in bringing targeted systems on line producing
     BionSoil  within the 24 month  start-up time frame (which cannot be assured
     and is subject to numerous and substantial  risks);  and, if the Company is
     successful  in  realizing  the various  potential  price levels and expense
     levels in columns 1 and 2 of Table 3 (which  also  cannot be assured and is
     subject to numerous and  substantial  risks as  explained  above and below)
     then column  three,  calculated  gross  margin per cubic yard,  is also the
     calculated  annual gross margin  contribution of each BionAnimal  producing
     BionSoil.  Given  that  revenue  to the  Company  from  BionSoil  sales  is
     anticipated  to begin in an  average of two years  after the  signing of an
     agreement for a Bion NMS system, these calculated gross margins,  which are
     equivalent  to gross margins per  BionAnimal,  would be  anticipated  to be
     repeated each year  thereafter for as long as the  installations  remain in
     operation  (current  system  contracts  are set for 15 years  with  renewal
     option)*.  If the net  present  value  (discounted  at 8%) of  these  gross
     margins is calculated for the normal 15-year period of a contract, assuming
     no BionSoil  revenues for the first two years, the net present value of the
     gross margin from each BionAnimal under contract would be as shown in Table
     4 for each potential price point in Table 3*. (See footnote 19, below).

                              Table 4*
            Gross Margin Net Present Value Per BionAnimal
              Calculated Annual       15 Year Net Present
              Gross Margin Per        Value Per BionAnimal
              BionAnimal*             Annual Gross Margins*
              -----------------       ---------------------
               $  7*                      $ 47*
               $ 18*                      $122*
               $ 28*                      $190*
               $ 39*                      $264*
               $ 47*                      $318*

     Management believes that this NPV analysis is useful because it provides an
     indication  of the  value  to the  Company  of the  number  of  BionAnimals
     contained in each contract for a Bion NMS system*.

      Management Financial Targets


<PAGE>


     Subject to the risks and uncertainties  included in this General Discussion
     of Current and Proposed Operations section of the Company's Form 10-QSB and
     the footnotes  thereto,  management has established  the following  revised
     financial performance targets for the Company for fiscal years 1999 through
     2002*. Please carefully review the risks and uncertainties  presented above
     and below and in the  footnotes  in  conjunction  with the Company  targets
     summarized  in this  Table 5 (see  especially  footnotes  20, 21, 22 and 23
     below).

                               Table 5*
                          Performance Targets
           (Based on BionAnimals under contract and BionSoil
          available for Sale as described in Table 2A above)*
                        (dollars in thousands)
                     Fiscal Years (ended June 30)

                          1999       2000       2001       2002 
                          ----       ----       ----      ------

Number of BionAnimals
added during fiscal
year (in thousands)*     500*        800*     1,250*      1,800*

Cumulative number of
BionAnimals under contract
(in thousands)*        1,250*      2,050*     3,300*      5,100*

BionSoil available
for sale (in thousands
of cubic yards)*          22*        130*     1,200*      2,100*

Gross Revenue
(see Footnote 21)*      $751*     $7,570*   $52,423*    $98,096*

Gross Margin
(see Footnote 22)*       $11*     $3,210*   $22,278*    $44,441*

Pre-Tax Earnings
(see Footnote 23)*   $(2,379)*      $300*   $17,178*    $35,991*

     The targets  presented  in Table 5 above  reflect  the revised  information
     presented in Table 2A. As a result, revenues projected are lower than those
     shown in Table 5 as presented in the Company's  Form 10-QSB for the quarter
     ended September 30, 1998.



<PAGE>


     Note that the targets  presented  in Table 5,  above,  for fiscal year 2002
     show 5,100,000 BionAnimals under contract but only 2,100,000 cubic yards of
     BionSoil being sold during fiscal year 2002 due to the up to 24 month delay
     between  contract signing and BionSoil  availability*.  The Company's goal,
     however,  is that  the  backlog  of  3,000,000  additional  cubic  yards of
     BionSoil will be available in subsequent  years for sale and is anticipated
     to increase the goal for gross revenue to  approximately  $220,000,000  and
     pre-tax earnings to approximately $72,000,000 in those later years, even if
     there are no additional Bion NMS system sales thereafter*.

     While  these  targets are very  aggressive,  they are  consistent  with the
     Company's  progress  in fiscal  year 1998 (the  addition  of  approximately
     650,000  BionAnimals  under  contract)  and progress in fiscal 1999 to date
     (contracts for 325,000 BionAnimals signed since July 1, 1998)*.  Throughout
     the fiscal  year 1998 and the first  quarter of the 1999 fiscal  year,  the
     Company has proven to be aggressive in setting and attaining such goals and
     targets*.  In response to the depressed hog markets and delay in the hiring
     of key  management  positions,  the Company is  reasserting  its efforts in
     order to meet or exceed its new goals and targets* The Company is expanding
     its efforts into new  geographical  and technical areas as a result,  which
     will bring beneficial results in the long term*.

     The Company has hired both a Vice  President of system sales and  marketing
     and a Vice President,  BionSoil, both key management positions necessary to
     help the Company achieve these goals. The Company is actively recruiting to
     fill other key management, technical and sales positions. Additionally, the
     Company  is  pursuing  geographical  and  technical  expansion,   strategic
     alliances in both the agricultural and financial communities, and expansion
     of its client base*.

     Even  though  the  Company  is  extremely  small  at  present,  has not yet
     developed  substantial  market  penetration,   needs  to  raise  additional
     capital,  and has  (and is  continuing  to  accrue)  losses  to  date,  the
     potential  return  based on the  Company's  growth goals is apparent if the
     Company is successful in achieving its targets.*

              #   #   #   #   #   #   #   #   #   #   #

     As the  discussion  above  includes  forward  looking  statements  made  in
     reliance upon the provisions of Rule 175  promulgated  under the Securities
     Act of 1933, readers are cautioned that,  although  management  believes it
     currently has a reasonable good faith basis for disclosing the substance of
     some of its internal  projections to the public at this time,  there can be
     no assurance  given that the Company will ever be  successful  in achieving
     any of its stated goals. The Company intends to periodically  report on its
     progress,  or lack  thereof,  in attaining  the goals set forth above.  The
     ultimate  realization  of most (if not  all) of the  Company's  goals  will
     require  significant  expenditures of funds which, as of this date, are not
     currently available to the Company.



<PAGE>


     It is currently anticipated that the selling and installation of additional
     Bion NMS systems  will  require the Company to hire  additional  personnel,
     make significant capital  expenditures and generally increase its overhead.
     Further,  the  marketing  and sale of BionSoil  products  will  require the
     implementation  of a distribution  network of wholesalers  and/or retailers
     and a  transportation  system for  delivery of the product to the  intended
     recipients, and may require permitting in some locations, none of which the
     Company  may  be  successful  in  achieving.  Additional  expenditures  for
     personnel and  equipment  will be necessary to harvest,  process,  package,
     sell and deliver the product.  The projections  stated by management assume
     that the Company will be successful  in obtaining  the  requisite  funds on
     commercially  reasonable  terms and that the other stated obstacles will be
     successfully  overcome  in the  process of making  sales of products in the
     future.

     As the Company has never  operated at a profit and has a negative net worth
     at the  present  time,  its  ability  to  successfully  confront  even  the
     currently identified challenges which lie ahead in meeting its stated goals
     is far from  certain.  It is likely that the Company  will face  additional
     challenges,  which have not as yet even been  identified.  In the event the
     Company is not able to obtain sufficient  outside funding to accomplish its
     goals within the time periods indicated, the goals would not be met. In the
     event the Company is not able to  successfully  overcome  the other  stated
     obstacles  in the process of making  future  sales  within the time periods
     indicated,  the goals would not be met. As the Company's operations are not
     currently profitable, readers are further cautioned that, if the Company is
     not successful in obtaining  outside funding in an amount sufficient for it
     to meet its  operating  expenses even at its current  level,  the Company's
     continued existence is uncertain.


<PAGE>


FOOTNOTES to General Discussion of Current and Proposed Operations

1.   BionSolids  are the solid  materials  that are  produced as a result of the
     bio-conversion  of manure and urine by the Bion Nutrient  Management System
     (NMS).  BionSolids contain a high proportion of beneficial living organisms
     (in contrast to traditional composted manure products),  only trace amounts
     of heavy metals and no human waste.

2.   The  quantities  referred to in Table 1 represent the  Company's  estimate,
     based on data from the American  Society of  Agricultural  Engineers  (ASAE
     D384.1 - 1989)  regarding  animal  waste  production  where all  wastes are
     captured,  of the quantity of BionSolids that is produced per animal in one
     year. These estimates are approximations based on the experience to date of
     the  Company  and are  subject  to change.  The ratio of animal  species to
     BionAnimal is based on the amount of BionSolids required (mixed and blended
     with  other  organic  material)  in order to produce a growth  medium  with
     comparable characteristics that yields one cubic yard of BionSoil.

3.   All  numbers  of  animals  are taken  from the 1997  Census of  Agriculture
     published by the United States Department of Agriculture.  The numbers used
     are for the animal populations of farms above a specific size as follows:
     *     Dairy cows: farms with 200 or more cows
     *     Beef cattle (steers): farms with 200 or more cattle
     *     Hogs and pigs: farms with 1,000 or more
     *     Poultry  (chickens  and turkeys)  based on layers,  broilers
           and turkeys

4.   According  to  the  1997  Census  of  Agriculture  published  by  the  U.S.
     Department of Agriculture  evidence of  consolidation of animals onto large
     farms has increased  significantly from 1992 to 1997,  continuing the trend
     seen in the 1992 Census of Agriculture.  In the hog industry,  for example:
     from 1992 to 1997 the  number of hog farms in the U.S.  decreased  42.6% to
     109,754 while the number of hogs increased 6% to 61,206,236. Further, those
     states with the largest  growth in hog  inventories  also show  substantial
     declines in the number of farms:  Colorado inventories  increased 70% while
     the number of farms declined 25%, North Carolina  inventories rose 89% with
     a decline of 31% in farm numbers, and Oklahoma  inventories  increased 550%
     with a 12% decline in number of farms.

5.   Battelle  estimated  the total U.S.  market for compost to be 1.04  billion
     cubic  yards per year.  See  "Compost:  United  States  Supply  and  Demand
     Potential" in Biomass and Bioenergy Vol.3, Nos 3-4, pp. 281-299, 1992.

6.   As an example,  study data provided by North Carolina State  University for
     the estimated  volume of potting  media used in container  nurseries in the
     United  States shows  current  demand (1998) to be in excess of 100 million
     cubic yards per year.  Further,  data on U.S. golf course  construction and
     expansion show that, as of May 1998, 13,954 holes (or the equivalent of 775
     18-hole  golf  courses)  were  under  construction,   and  11,677  (or  the
     equivalent of 649 18-hole courses) were in planning for construction.

7.   For further discussion, see, for example, the December 1997 report compiled
     by the U.S. Senate  Committee on Agriculture,  Nutrition,  and Forestry for
     Sen.  Tom  Harkin  (D -  IA)  as  well  as  "Lakes  of  animal  waste  pose
     environmental risk" published by the USA TODAY, December 30, 1997.



<PAGE>


8.   During  February  1994 the Company  opened an office in  Smithfield,  North
     Carolina (which office was subsequently  moved to Clayton,  North Carolina)
     with one full time sales employee.  Numerous contacts were made in both the
     hog raising and dairy farming  industries,  and the first  agreement (for a
     hog  system)  was signed in December  1994.  A second  full time  employee,
     required to provide design, engineering,  construction and system operation
     expertise,  was  transferred to North  Carolina in February  1995.  Adverse
     weather  conditions  during the  construction  period  resulted in a longer
     construction time than anticipated;  however,  system start-up was achieved
     in June of 1995,  and the system has been in  continuous  operation  since.
     Based on this investment of time and effort and the successful operation of
     the  system,  the  Company  has  expanded  its  efforts  in North  Carolina
     including  hiring a  horticulturist  for BionSoil  product  development and
     testing, an additional engineer,  and a manager for the region.  Currently,
     the Company has submitted proposals to a number of potential customers,  is
     engaged in discussions with several of these, has signed agreements for six
     additional system installations,  and has two additional Bion NMS that have
     come on line.  Management  estimates that, to date, in excess of $1,200,000
     has been  devoted to the effort to build the  Company's  business  in North
     Carolina.  Current  projections are that it will require,  at a minimum, an
     additional  nine to  twelve  months  before  sufficient  cash  flow will be
     generated  from  system  and  BionSoil  sales in North  Carolina  to offset
     ongoing expenses for operations conducted in that state*.

9.   Issued U.S. patents include the following  titles:  "Bioconversion  Reactor
     and System",  "Animal Waste Bioconversion  System",  "Bioconverted Nutrient
     Rich Humus",  "Phosphorous Treatment Process", and "Storm Water Remediatory
     Bioconversion  System". In addition,  the Canadian Patent Office has issued
     "Aqueous Stream Treatment Process".

10.  The time between  contract  signing and  BionSoil  revenues can be up to 24
     months broken down as follows: a.) 3-6 months for the design and permitting
     of the system;  b.) 3-6 months for the construction of the system;  c.) 1-2
     months for the system to come completely on-line,  and, d.) 8-10 months for
     the BionSolids to be produced and mature within the system.  In some cases,
     including the Company's  contracts with Crystal Springs Farms, for example,
     there are financing or other contingencies which may delay the beginning of
     these activities.

11.  There are approximately  22,000 cubic yards of BionSoil  available for sale
     in fiscal year 1999.  However,  the Company  plans on utilizing up to 6,000
     cubic yards for various growth tests,  university  studies,  and field crop
     test programs.

12.  Although the  Company's  goals project for the Company to have 1.25 million
     BionAnimals  under contract in the fiscal year 1999,  only the  BionAnimals
     that are currently in operating systems that have been harvested along with
     a limited number of the new BionAnimals  will produce BionSoil that will be
     available for sale in fiscal year 1999.

13.  BionSolid  harvests to date have been from  relatively  new systems and the
     Company  has  been  devoting  substantial  effort  to  develop  appropriate
     technology  and sites for  processing  the material for sale.  As a result,
     only small  quantities of BionSoil have been  available for sale during the
     last  twelve  months.  The  results  for a portion of these sales have been
     documented in the above referenced test market.



<PAGE>


     The current  methods for the harvest of BionSolids  and  processing it into
     BionSoil  are  being  continually   refined  and  updated.   Currently  the
     BionSolids  harvested from a dairy Bion NMS are mechanically  harvested and
     then left for initial drying at the farm. Once dried to a sufficient  level
     the  BionSolids  are  transported  to  a  BionSoil  processing  site  where
     additional  drying takes place before final processing or blending and then
     subsequently bagging or bulk storage.

     Harvesting  of the hog Bion NMS is still in the  developmental  stage  with
     multiple methods being studied in an ongoing program.  Currently,  the most
     efficient  method of harvesting  the  BionSolids is to pump the  BionSolids
     from the  system  and then  either  blend  them  directly  with an  organic
     substrate or dry them before they are processed and blended.

14.  During fiscal year 1998, the Company  initiated a BionSoil Giveaway Program
     during  which  approximately  3,000  cubic yards were given away to private
     gardeners,  local garden  centers and  university  research  centers.  This
     program was formed in order to generate feedback  regarding BionSoil and to
     raise public awareness about the product. It is anticipated that additional
     (and larger)  quantities of BionSoil will be given away in each future year
     for these and other purposes.

15.  Representatives of North Carolina State University ("NCSU"), North Carolina
     Department  of  Agriculture  ("NCDA")  and the North  Carolina  Cooperative
     Extension Service conducted an independent  on-farm research trial in 1996.
     The test compared the plant growth of four woody  ornamental  species grown
     in three  BionSoil  product  mixes to that of the same  species  grown in a
     high-grade   commercial   nursery  potting  soil  with  soluble  fertilizer
     additives.  The  performance  of the plants in the BionSoil  mixes exceeded
     that of the plants in the commercial mix in all trials.  Representatives of
     NCSU,  NCDA,  and Bion  Technologies,  Inc conducted a further  independent
     study in 1997.  The  experiment,  located at a research  facility on NCSU's
     Raleigh, North Carolina campus, compared the plant growth of four different
     species (a flowering  shrub, an annual, a woody ornamental and a perennial)
     grown in three  mix  rates of  BionSoil  with pine bark to that of the same
     species  grown  in a  standard  mix  fertilized  with a  national  brand of
     synthetic   controlled  release   fertilizer  plus  other  additives.   The
     evaluation  also evaluated the performance of the plants in all mixes under
     four  irrigation  regimes.  BionSoil  supplied  a steady  release  of plant
     nutrients  over a  three-month  period  and  proved to be a more  efficient
     source of plant  fertility  under limited water  availability  than did the
     control  fertilizer.  Representatives of NCSU conducted a series of studies
     in 1998 including  germination  studies using Impatiens,  landscape studies
     using four common  landscape  plants,  turf growth  studies and a series of
     vegetable  and  ornamental  growth  studies  performed at the Bion research
     center in Clayton,  North  Carolina.  These  study  results  support  other
     studies  performed by the Company and anecdotal  evidence  gathered through
     plant  trials  from  homeowners  and others.  The Company has an  extensive
     program of  additional  university  and company  tests  designed  and being
     implemented for the 1999 summer growing season.

16.  The Company's  gross margin (prior to deduction of G&A expenses,  interest,
     depreciation,  taxes,  etc.) per cubic yard of BionSoil is calculated  from
     the  projected  price per cubic yard  obtained from sales of bulk or bagged
     product after  deducting the amount paid to the producer,  if  appropriate,
     and the projected  costs which the Company expects to incur for harvesting,
     processing, and bagging.


<PAGE>


17.  The potential  BionSoil  prices reflect  assumptions  about the mix between
     bulk and bagged product sold. For example,  at a wholesale price of $20 per
     cubic yard the mix would be 100% bulk product with no bagged  product sold,
     while at a wholesale  price of $100 or higher per cubic yard, the mix would
     consist almost entirely of bagged product or special products.

18.  Due to the  Company's  lack of experience  and start-up  nature in the soil
     processing area,  BionSoil expenses are based on management's  estimate and
     therefore are subject to significant variation.  Actual production costs to
     date are higher  than those  shown in Table 3 due to  significant  start-up
     inefficiencies. Current expenses include but are not limited to harvesting,
     transportation,  processing,  blending and bagging of the  BionSolids  into
     BionSoil.  Management  believes,  however,  that as greater  quantities  of
     BionSoil are harvested and the processing techniques become more efficient,
     the margins may equal or exceed the projected  Gross Margins shown in Table
     3*.

19.  Management  has  changed  the  Net  Present  Value  calculation  from  that
     presented  in its Form 10-KSB  dated June 30, 1997 by lowering the discount
     rate from 10% to 8% to more accurately reflect current  conditions,  and by
     increasing  from 1.5 years to 2.0 years the time before  BionSoil  revenues
     commence after contract signing.

20.  The  following  risk  factors  should  be  considered  when  reviewing  the
     projections in these tables:  the Company has not made significant sales or
     operated  at a profit,  and the  projections  herein  represent  very large
     advances which management  believes are attainable since the Company is now
     emerging from the development  stage;  there are many difficulties that may
     be encountered by the Company (as it is a start-up),  especially in view of
     the intense competition from existing and more established companies in the
     wastewater,  waste management,  the environmental control and organic soils
     and products  businesses;  the Bion NMS system has had limited  development
     and market  acceptance is uncertain;  the Company is in direct  competition
     with consulting and engineering firms (which may be better capitalized than
     the Company) that may be capable of developing competitive technologies and
     products;  the  business  is  susceptible  to changing  technology  and the
     Company  may  not  have  adequate   patent  and   proprietary   information
     protection;  the Company  may become  subject to  unfavorable  governmental
     regulations,  and may have,  in the future,  liability  (with no  insurance
     coverage) for damage to the  environment;  and, the costs and expenses used
     for all calculations are estimates made on the basis of limited information
     available.

21.  The following assumptions (none of which are guaranteed to occur) have been
     made for the gross revenue calculations:

     a.)  that the BionSoil  available  for sale is sold in the fiscal year that
          it is available*;

     b.)  that the  percentage  of BionSoil sold in each year in bagged form for
          retail  sales  (which  the  Company  does  not  engage  in) will be as
          follows*:

                                        Fiscal year ending June 30
                                ----------------------------------------
                                1999       2000        2001         2002
     Percent bagged
     BionSoil sold*              5%*        10%*         12%*    14%*

(Management has  established  this mix although it is probable that the mix will
vary considerably over time)*.


<PAGE>


     c.)  that the average  selling price per cubic yard realized by the Company
          for each fiscal year is as indicated in the following table*:

                            Fiscal year ending June 30
                              (dollars per cubic yard)
                    1999       2000        2001         2002
                    ----       ----        ----         ----
     Selling price
     Bagged       $104.00*   $104.00*    $110.00*     $110.00*
     Bulk         $ 24.50*   $ 27.50*    $ 30.00*     $ 32.50*
     Weighted
      Average     $ 28.48    $ 35.15*    $ 39.60*     $ 43.35*

(The  selling  price   increases  shown  above  are  not  related  to  inflation
adjustments, rather they reflect the Company establishing product credibility in
its respective markets as well as further product refinements.)*

     d.)  that the average  selling  price  include  freight to the  customer of
          $7.00 per cubic yard for bagged  product  and $4.50 per cubic yard for
          bulk product*.

22.  The following assumptions (none of which are guaranteed to occur) have been
     made for the product costs for gross margin calculations:

     a.)  that the  average  product  direct  cost for  each  fiscal  year is as
          follows*:

                             Fiscal year ending June 30
                    ----------------------------------------
                    1999       2000        2001         2002
     Direct Cost
     Bagged Product $65.00*     $64.00*       $62.00*  $60.00*
     Bulk Product   $17.50*     $17.50*       $17.00*  $16.50*
     Weighted
      Average       $19.88*     $22.15*       $22.40*  $22.59*

(The reduction in direct product costs over time reflects increased efficiencies
of operation  that have been  included  based on  anticipated  product  handling
efficiencies  and  economics  of  scale  as  the  volume  of  product  processed
increases.)*

     b.)  that freight  charges for  shipments  to  customers  will be $7.00 per
          cubic  yard for bagged  product  (sold and  shipped  on  pallets  with
          approximately two cubic yards per pallet) and $4.50 per cubic yard for
          bulk product shipped via common carrier truck*.

     c.)  based on the assumptions  above the target gross margin per cubic yard
          of BionSoil (which is the same as gross margin per BionAnimal) is*:

                                       Fiscal year ending June 30 
                                ----------------------------------------
                                1999       2000        2001         2002
     Gross margin
     per cubic yard            $8.60*     $13.00*      $17.20*    $20.76*

23.  The  Company  has   developed   projections   for   selling,   general  and
     administrative  expenses based on increased  staffing levels and facilities
     required  for  attainment  of the  target  sales and  processing  levels as
     follows*:

                                      Fiscal year ending June 30
                                        (dollars in thousands)
                               1999       2000        2001         2002
                               ----       ----        ----         ----
   Selling, General
   and Administrative
   Expenses                  $2,390*     $2,910*      $5,100*     $8,450*




<PAGE>


                          OTHER INFORMATION

PART II

ITEM 1.    Legal Proceedings.

The Company knows of no material pending legal  proceedings to which the Company
(or the Subsidiary) is a party or to which any of its systems is the subject and
no such proceedings are known to the Company.

ITEM 2.    Changes in Securities.

(c)  The following  securities  were sold in the six month period ended December
     31, 1998 without registering the securities under the Securities Act.:

     168,348  shares of  restricted  and  legended  Common  Stock to ten private
     investors  and  seven  existing   shareholders   in  privately   negotiated
     transactions for an aggregate amount of $568,875.

     8,000 shares of restricted and legended  Common Stock to one investor under
     the terms of a 1992 agreement  granting such investor a preemptive right to
     acquire such shares for an aggregate amount of $24,000.

     12,862  shares of  restricted  and  legended  Common  Stock to an  existing
     shareholder as payment of a note payable and interest valued at $77,170.

     800 shares of restricted and legended  Common Stock to one employee in lieu
     of cash for services rendered valued at, in aggregate, $3,000.

     5,537 shares of restricted and legended  Common Stock to a shareholder  for
     rent and services valued in aggregate at $21,450.

     The shares of the Company's  Common Stock which were issued pursuant to the
     transactions  set forth above were issued in reliance  upon the  exemptions
     from  registration  afforded by Sections 3(b), 4(2), or other provisions of
     the  Securities  Act of 1933, as amended.  Each of the persons to whom such
     securities  were  issued made an informed  investment  decision  based upon
     negotiation  with the Company and was provided  with  appropriate  offering
     documents and access to material  information  regarding  the Company.  The
     Company  believes  that  such  persons  had  knowledge  and  experience  in
     financial  and business  matters such that they were capable of  evaluating
     the merits and risks of the  acquisition  of the Company's  Common Stock in
     connection with these  transactions.  All  certificates  representing  such
     common shares bear an appropriate  legend  restricting the transfer of such
     securities,  except  in  accordance  with the  Securities  Act of 1933,  as
     amended, and stop transfer instructions have been provided to the Company's
     transfer agent in accordance therewith.


<PAGE>


ITEM 3.    Defaults Upon Senior Securities.  None

ITEM 4.    Submission of Matters to a Vote of Security Holders.  None

ITEM 5.    Other Information.  None

ITEM 6.    Exhibits and Reports on Form 8-K.  None.












<PAGE>





                              SIGNATURE




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


                     Bion Environmental Technologies, Inc.




                          /s/ M. Duane Stutzman          
                     M. Duane Stutzman, Chief Financial
                        Officer




Dated:    February 15, 1999