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   
      March 31, 1999   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
May 12, 1999:

                      Common Stock, No Par Value, 9,163,717


<PAGE>


Bion Environmental Technologies, Inc.                     Form 10-QSB
                                                          March 31, 1999




                                INDEX



PART I     FINANCIAL INFORMATION                      PAGE NO.


ITEM 1     FINANCIAL STATEMENTS

           Consolidated Balance Sheets:
                June 30, 1998 and
                March 31, 1999.................        F2

          Consolidated Statements of Operations:
                For the Nine Month Periods Ended
                March 31, 1998 and
                March 31, 1999.................        F3

          Consolidated Statements of Operations:
                For the Three Month Periods Ended
                March 31, 1998 and
                March 31, 1999.................        F4

          Consolidated Statements of Cash Flows:
                For the Nine Month Periods Ended
                March 31, 1998 and
                March 31, 1999.................        F5-F6

          Consolidated Statement of Changes in
          Stockholders Equity for the Period
          June 30, 1998 through March 31, 1999.        F7-F9

          Notes to Consolidated Financial
          Statements..........................         F10-F14


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



PART II   OTHER INFORMATION

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




<PAGE>



                        FINANCIAL INFORMATION


PART I

ITEM 1.  FINANCIAL STATEMENTS


                                       F1
<PAGE>


                      BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                              March 31,         June 30,
                                                               1999               1998   
                                                          -------------     -------------
                                                            (Unaudited)         (Audited)

           Assets
<S>                                                        <C>              <C>
Current assets
 Cash and cash equivalents ...........................     $     62,734      $     19,104
 Accounts receivable(net of allowance of $2,000)10,606           13,986
 Contract receivable(net of allowance of $30,000) ....              902            22,902
 Work in progress (net of allowance of $30,000).......          394,408           389,712
                                                           ------------      ------------
   Total current assets ..............................          468,650           445,704
                                                           ------------      ------------
Property and equipment
 Computers and equipment .............................          303,927           298,782
 Accumulated depreciation ............................         (131,364)          (91,727)
                                                                172,563           207,055
Other assets
 Patents, net ........................................           40,642            43,066
 Deferred long-term contract costs ...................           71,333            71,333
 Deposits and other ..................................           12,695            13,044
                                                           ------------      ------------
    Total other assets ...............................          124,670           127,443
                                                           ------------      ------------

Total assets .........................................     $    765,883      $    780,202
                                                           ============      ============
           Liabilities and Stockholders' (deficit)

Current liabilities
 Accounts payable ....................................     $    367,160      $    241,384
 Accounts payable - related party ....................           22,990            20,324
 Note payable ........................................          180,000              --
 Notes payable - stockholders ........................          341,171            89,171
 Capital lease obligations ...........................           34,583            67,137
 Accrued expenses ....................................           17,134            24,368
 Accrued interest - notes payable ....................           15,279              --
 Accrued payroll .....................................          482,499           284,250
                                                           ------------      ------------
    Total current liabilities ........................        1,460,816           726,634

Long-term liabilities
 Note payable - stockholder ..........................          240,000           210,000
 Accrued interest - note payable .....................           43,370              --
 Capital lease obligations ...........................           62,738            83,127
 Deferred contract revenue ...........................          151,000           151,000
                                                           ------------      ------------
     Total liabilities ...............................        1,957,924         1,170,761

Commitments and contingencies

Stockholders' (deficit)
 Common stock, no par value, 100,000,000
  shares authorized, 9,163,717
  (March 31, 1998) and 8,764,827
  (June 30, 1998) shares issued and
  outstanding ........................................       12,034,019        10,863,469
 Common stock subscribed .............................           51,500            21,500
 Accumulated deficit .................................      (13,277,560)      (11,275,528)
                                                           ------------      ------------
     Total stockholders' (deficit) ...................       (1,192,041)         (390,559)
                                                           ------------      ------------

Total liabilities and stockholders'
 (deficit) ...........................................     $    765,883      $    780,202
                                                           ============      ============

</TABLE>


                 See Notes to Consolidated Financial Statements

                                       F2

<PAGE>




                      BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations

                                             Nine Months Ended
                                                  March 31   
                                        ---------------------------
                                            1999            1998   
                                        -----------      ----------
                                         (Unaudited)     (Unaudited)

Sales .............................     $   116,805      $   357,916

Cost of Sales .....................         274,183          409,222
                                        -----------      -----------

     Gross profit (loss) ..........        (157,378)         (51,306)

General and administrative expenses       1,602,591        1,258,494
Research and development ..........         183,171          168,244
                                        -----------      -----------

Loss from operations ..............      (1,943,140)      (1,478,044)

Other income (expense)
 Interest expense .................         (59,569)         (71,483)
 Loss on sale of assets ...........            (239)
 Other income (expense), net ......             677            2,454
                                        -----------      -----------


Net (loss) ........................     $(2,002,032)     $(1,547,312)
                                        ===========      ===========

Basic (Loss) per weighted average
 share of common stock ............     $     (0.22)     $     (0.28)
                                        ===========      ===========


Weighted common shares outstanding        8,976,796        5,447,590
                                        ===========      ===========

                See notes to consolidated financial statements.

                                       F3

<PAGE>


                      BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations



                                                    Three Months Ended
                                                         March 31     
                                               ---------------------------
                                                  1999             1998   
                                               -----------      ----------

                                                (Unaudited)     (Unaudited)

Sales ....................................     $    12,881      $   217,168

Cost of Sales ............................          63,435          128,229
                                               -----------      -----------

      Gross profit (loss) ................         (50,554)          88,939

General and administrative expenses ......         686,660          483,060
Research and development .................          60,863           58,389
                                               -----------      -----------

Loss from operations .....................        (798,077)        (452,510)

Other income (expense)
 Interest expense ........................         (24,066)         (24,668)
 Other income (expense), net .............             617              333
                                               -----------      -----------


Net (loss) ...............................     $  (821,526)     $  (476,845)
                                               ===========      ===========

Basic (Loss) per weighted average share of
 common stock ............................     $     (0.09)     $     (0.06)
                                               ===========      ===========


Weighted common shares outstanding .......       9,144,820        8,611,744
                                               ===========      ===========

                See notes to consolidated financial statements.

                                       F4

<PAGE>

                      BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                           Nine Months Ended
                                                                March 31,     
                                                      ----------------------------
                                                          1999             1998    
                                                      -----------      -----------
                                                      (Unaudited)       (Unaudited)

<S>                                                   <C>              <C>
Cash flows from operating activities
 Net (loss) .....................................     $(2,002,032)     $(1,547,312)
 Adjustments to reconcile net loss to
  net cash used in operating activities -
  Depreciation and amortization .................          42,061           41,464
  Issuance of common stock for services,
   compensation and interest ....................         189,063          724,950
  Issuance of subscribed stock for services .....          34,500         (616,322)
  Change in assets and liabilities -
   Contract receivables and work in progress ....          20,684         (105,586)
   Deposits and other ...........................             349                0
   Accounts payable .............................         187,091          (11,426)
   Accrued liabilities ..........................         191,015          116,250
                                                     ------------      -----------
        Net cash used in operating activities ...      (1,337,269)      (1,397,982)

Cash flows from investing activities
 Investments in equipment .......................          (5,145)         (13,696)
 Investments in patents .........................            --             (7,707)
                                                      -----------      -----------
        Net cash (used in) provided by investing
         activities .............................          (5,145)         (21,403)

Cash flows from financing activities
 Payments on notes payable ......................          (8,000)        (133,000)
 Proceeds from notes payable ....................         545,000           55,000
 Proceeds from sale of stock/warrant issuances ..         809,424        1,294,115
 Proceeds from exercise of options ..............          92,563             --
 Payments on capital lease obligations ..........         (52,943)         (47,966)
 Proceeds from the sale of assets, net of
  selling expenses ..............................            --            262,000
                                                     ------------      -----------
        Net cash provided by financing activities       1,386,044        1,430,149

Net increase in cash and cash equivalents .......          43,630           10,764

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

Cash and cash equivalents at end of period ......     $    62,734      $    19,996
                                                      ===========      ===========

</TABLE>

                See notes to consolidated financial statements.

                                       F5

Footnote:
 Supplemental  disclosure of cash flow information Cash paid for interest was
 $12,603 (1999) and $9,457 (1998).


<PAGE>


Continued from previous page.



                      BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows


Supplemental disclosure of non-cash financing activities

     For the nine months ended March 31, 1999 - Converted $4,500 of common stock
     subscribed  into 1,300 shares of common stock.  Converted  $77,170 of notes
     payable and interest into 12,862 shares of common stock.

     For the nine months ended March 31, 1998 -

          Declared and accrued dividends of $4,653 for preferred stock Series B.
          Converted  $605,822 of common stock  subscribed into 189,893 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.  

          Issued  4,351,348  shares of restricted  stock and  2,832,909  Class Z
          warrants at $15.00 per share in an exchange transaction.

                See notes to consolidated financial statements.

                                       F6
<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>


                See notes to consolidated financial statements.

                                       F8
<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>
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>

                See notes to consolidated financial statements.

                                      F-10
<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>

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 ...           84,488     $    270,000             --                --        $    270,000

Issuance of common stock for services           56,287     $    165,443             --                --        $    165,443

Exercise of  stock options ..........            2,500     $     10,063             --                --        $     10,063

Net (loss) for the period ended
 March 31, 1999 .....................             --               --               --        ($   821,526)     ($   821,526)

Balances at March 31, 1999 ..........        9,163,717     $ 12,034,019     $     51,500      ($13,277,560)     ($ 1,192,041)


                See notes to consolidated financial statements.

                                      F11

</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 March 31,  1999,  the Company has  incurred  accumulated  losses  totaling
$13,277,560,  resulting in an accumulated  stockholders'  deficit of $1,192,041.
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:

                                       March 31,         June 30,
                                         1999              1998 
                                      ----------       -----------
     Costs incurred on contracts      $2,044,961       $1,927,813
     Estimated (losses)                 (598,902)        (548,450)
                                      -----------      -----------
                                       1,446,059        1,379,363
     Less billings to date            (1,131,318)      (1,069,318)
                                      -----------      -----------
                                      $  314,741       $  310,045 
                                      ===========      ===========

Note 4 - Capital Structure
--------------------------

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

Common Stock
------------

As of May 12, 1999 the Company had  9,163,717  shares of Common Stock issued and
outstanding and 14,321 shares of subscribed stock.

                                      F13


<PAGE>


Options and Warrants
--------------------

As of May 12, 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:

                                         Vesting Date   Expires
                                         -----------    -------
     Director ($1.72)         10,000        Vested      8/19/02
              ($2.27)         10,000        Vested      8/19/02
              ($3.23)         10,000        Vested     11/17/03
                             -------
       Total Director         30,000


     Employee ($1.25)          3,000        Vested      6/26/99
              ($2.00)          3,250        Vested      7/22/99
              ($3.00)         25,000        Vested     12/31/02
              ($3.38)          1,000        Vested      1/28/01
              ($4.00)         13,288        Vested     12/31/01
              ($4.00)          1,440        Vested     03/03/00
              ($4.00)            834        Vested     10/31/99
              ($4.00)         17,500        Vested       8/1/00
              ($4.00)          1,560        Vested     03/03/00
              ($4.00)         20,746        Vested     12/31/02
              ($4.00)            917        Vested     03/18/00
              ($4.00)            934        6/1/99+    12/31/02
              ($4.00)            934        9/1/99+    12/31/02
              ($4.00)         26,124       4/30/00+    12/31/02
              ($4.00)         26,124       4/30/01+    12/31/02
              ($4.00)         26,124       4/30/02+    12/31/02
              ($4.13)          1,000        Vested      8/31/00
              ($4.50)          1,000        Vested     12/31/00
              ($6.00)          1,440        Vested     03/03/00
              ($6.00)         15,817        Vested     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)         14,595      11/19/99+    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        Vested      5/31/00
              ($8.00)         10,000        Vested     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)          7,076       9/15/99+    12/31/01
              ($8.00)         14,595      11/19/00+    12/31/00
              ($8.00)          1,400        3/4/01+    12/31/02

                                   F14


<PAGE>


              ($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
              ($8.00)         19,040       4/30/00+    12/31/02
              ($8.00)         19,040       4/30/01+    12/31/02
              ($8.00)         19,040       4/30/02+    12/31/02
             ($10.00)         10,000        Vested     12/31/01
             ($12.50)         10,000       9/15/99+    12/31/01
             ($15.00)         10,000       9/15/99+    12/31/01
             ($15.00)         31,001       4/30/00+    12/31/02
             ($15.00)         31,001       4/30/01+    12/31/02
             ($15.00)         31,001       4/30/02+    12/31/02
                             -------
       Total Employee        435,730

       Total Director
         and Employee        465,730
                             -------
                             -------

           +Non-vested employee options equal 306,938

      Warrants outstanding as of May 12, 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
       exercisable 3/01/99 through 12/31/02:   25,000
                                               ------
                       Total $3.00 warrants    41,330


      $4.00 warrants:
       exercisable 6/5/97 through 6/30/99:     35,000  
       exercisable 11/2/98 through 12/31/02:   16,667 
       exercisable 12/1/98 through 12/31/02:   16,667
       exercisable 11/1/99 through 12/31/02:   16,667+
       exercisable 12/1/99 through 12/31/02    16,667+ 
       exercisable 4/30/00 through 12/31/02:   26,124+ 
       exercisable 4/30/01 through 12/31/02:   26,124+
       exercisable 4/30/02 through 12/31/02:   26,124+
                                               ------
                       Total $4.00 warrants   180,040

                                 F15
<PAGE>



      $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 2/1/97 through 12/31/01:    10,000
       exercisable 4/21/97 through 4/20/02:     4,172
       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
                                              -------
                      Total $6.00 warrants    167,922

      $7.00 warrants:
       exercisable 7/1/98 through 6/30/99:    750,593
                                              -------
                      Total $7.00 warrants    750,593

      $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 
       exercisable 11/1/00 through 12/31/02:   16,667+
       exercisable 12/1/00 through 12/31/02:   16,667+
       exercisable 4/30/00 through 12/31/02:   19,040+
       exercisable 4/30/01 through 12/31/02:   19,040+ 
       exercisable 4/30/02 through 12/31/02:   19,040+
                                              -------
                      Total $8.00 warrants    100,454

      $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: 3,800,311
       exercisable 4/30/00 through 12/31/02:   31,001+
       exercisable  4/30/01 through 12/31/02:  31,001+
       exercisable 4/30/02 through 12/31/02:   31,001+
                                            ---------
                      Total $15.00 warrants 3,903,314
                                            ---------

Total of all warrants currently outstanding 5,386,153
                                            ---------
                                            ---------


      +Non-vested employee warrants equal 295,163

Note 5 - Subsequent Events
--------------------------

On  April  15,  1999  the   Company   revised  the  March  15,  1999  note  with
LoTayLingKyur,  Inc.("LTLK").  The revised note has identical  terms except that
the  conversion  (if any) to common  stock of the  Company  will be at $2.00 per
share, and 1 Z warrant will be issued for each $1.00 of principal of the revised
note. As of May 10, 1999 the principal amount of the March 15, 1999 note and the
revised  note was  $163,00  and  $583,000,  respectively.  (See 8-K dated  March
15,1999.)

On April 21, 1999 the Company entered into a marketing and promotional  services
agreement with The Augustine Equity Fund Inc.

On April 30,  1999 the  Company  issued  awards to fifteen  employees  under the
Company's  Fiscal Year 1994 Incentive  Plan.  The awards are as follows:  58,371
options with an exercise price of $4.00 per share, 47,121 with an exercise price
of $8.00 per share,  and 83,004  options  with an  exercise  price of $15.00 per
share.  One-third of each class of options will vest  twelve,  twenty four,  and
thirty six months  from  issuance  and will  expire on December  31,  2002.  The
Company also issued warrants to the above fifteen employees to purchase legended
and restricted stock as follows: 58,371 warrants with an exercise price of $4.00
per share, 47,121 warrants with an exercise price of $8.00 per share, and 83,004
warrants  with an exercise  price of $15.00 per share.  One-third  of each class
will vest on April 30, 2000, one-third on April 30, 2001, and one-third on April
30, 2002. All of the warrants will expire on December 31, 2002.

On April  30,  1999 the  following  options  and  warrants  were  issued  to the
Company's  Chief  Financial  Officer:  20,001  options with an exercise price of
$4.00 per share,  9,999 options with an exercise  price of $8.00 per share,  and
9,999  options with an exercise  price of $15.00 per share under the Fiscal Year
1994 Incentive  Plan.  The Company also issued 20,001  warrants with an exercise
price of $4.00 per share,  9,999  warrants  with an exercise  price of $8.00 per
share,  and  9,999  warrants  with an  exercise  price of  $15.00  per share for
legended  and  restricted  common  stock.  The  options and  warrants  will vest
one-third (April 30, 2000), one-third (April 30, 2001), and one-third (April 30,
2002) and will expire on December 31, 2002.

On April 30, 1999 the Company  issued 33,334  warrants with an exercise price of
$4.00 per share and 33,334 warrants with an exercise price of $8.00 per share to
two employees as part of their  employment  agreements.  The $4.00 warrants will
vest  equally on  November 1, 1999 and  December 1, 1999 and the $8.00  warrants
will vest on November 1, 2000 and December 1, 2000.  All of the warrants  expire
on December 31, 2002.



                                   F16

<PAGE>


                BION ENVIRONMENTAL TECHNOLOGIES, INC.
                          AND SUBSIDIARIES



                                  

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 $13,277,560 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 operations.  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 March 31, 1999 was 0.32 : 1.0 as compared to
0.61 : 1.0 as of June 30, 1998.  Cash as of March 31, 1999  increased to $62,734
as compared to $19,104 as of June 30, 1998.

During the nine months ended March 31, 1999, the Company borrowed  $252,000 from
four shareholders at 1% interest per month.

As of March 31, 1999 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 nine months  ended  March 31,  1999 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.


                                      3
<PAGE>


During the nine months  ended March 31,  1999 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 vested 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 nine month  period ended March 31, 1999,  the Company  issued  16,667
warrants to an employee  with an  exercise  price of $4.00 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.

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 N.A., in
Denver,  Colorado as its prime rate. Principal and interest are due on or before
January 12, 2000.

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 1/25/99 - 12/31/99).

During the nine months ended March 31, 1999, the Company authorized the issuance
of 25,000 options under the 1994 Incentive  Stock Plan and 25,000 warrants at an
exercise  price of $3.00 per share  (exercisable  from 3/1/99 - 12/31/02)  to M.
Duane Stutzman, the Company's Chief Financial Officer.


                                      4
<PAGE>


Effective  March 15,  1999 the  Company  entered  into a note ("the  Note") with
LoTayLingKyur, Inc. ("LTLK") whereby LTLK (a shareholder) will from time to time
provide cash to the Company.  The Note will accrue interest at 1% per month with
both  principal  and  interest  due in full on December  31,  1999.  The Note is
convertible, in whole or in part, into shares of common stock at $2.50 per share
at any time  prior to payment  of the  principal  and  interest.  As  additional
consideration  for making the Note,  the  Company  will issue (1) Z warrant  (to
purchase one share of the Company's  common stock at a price of $15.00 per share
for a 24 month  period  commencing  January 1, 2000) for each $1.25 of principal
amount of the Note (no Z warrants will be issued for interest accumulated on the
principal  amount of this Note. As of March 31, 1999,  $130,000 of principal was
outstanding on the Note. (See 8-K dated March 15, 1999.)

For the nine months ended March 31, 1999 the Company  issued  310,404  shares of
common stock for cash ($809,424),  12,862 shares of common stock as payment of a
note and  interest  ($77,170),  61,824  shares  of  common  stock  for  services
($186,893),  and converted  1,300 shares of subscribed  stock to 1,300 shares of
common  stock  valued at $4,500.  All of the above is  legended  and  restricted
common stock. The Company also issued 12,500 shares of free trading common stock
for the  exercise of options  ($92,563).  The Company has  increased  subscribed
stock by $30,000 for legended and restricted common stock awarded but not issued
to certain employees as additional compensation.

Results of Operations
---------------------

Comparison  of the Nine Months Ended March 31, 1999 with Nine Months Ended March
31, 1998

Revenue  in the nine  months  ended  March 31,  1999 was  $116,805  compared  to
$357,916  for the  corresponding  nine  month  period  in 1998,  a  decrease  of
$241,111.  Contract  costs  were  lower  ($135,039)  during  the same nine month
period. Reduced sales and contract costs were were mainly due to the significant
negative  impact that lower hog prices have had on the  Company's  system  sales
effort. The Company believes this impact will be temporary.

General and  administrative  expenses increased by $344,097 over the same period
in the prior year due to higher  consulting  expenses  ($256,000)  and  investor
relations expenses ($47,000). In the nine months ended March 31,1998 the Company
cancelled a consulting  agreement  that  resulted in a credit of  $231,000.  The
effect of that credit results in most of the consulting fee increase between the
two periods.

The Company  recorded  $59,569 in interest  expense on its notes to shareholders
and capital equipment leases and $183,171 in research and development  costs. As
a result of the above, the Company recorded a net loss of $2,002,032 in the nine
month period ended March 31, 1999,  compared to a net loss of $1,547,312 for the
nine month period ended March 31, 1998.

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

Comparison  of the Three  Months  Ended March 31, 1999 with Three  Months  Ended
March 31, 1998


                                        5
<PAGE>


Revenue  in the three  months  ended  March 31,  1999 was  $12,881  compared  to
$217,168  for the  corresponding  three  month  period in 1998,  a  decrease  of
$204,287.  Contract  costs were lower in the 1999 three month  period by $64,794
due to decreased  expenses  associated with BionSoil  processing and the reduced
work related to system design and construction overview. The reduced revenue and
system design and construction overview contact costs are attributable mainly to
the lower hog  prices  which  the  Company  believes  are  temporary.  The above
resulted  in a gross  loss for the  period  ended  March 31,  1999 of $50,554 as
compared to a gross profit of $88,939 for the same three month period in 1998.

General and administrative  expenses increased by $203,600 due to an increase in
compensation expenses ($218,000).

The  Company  recorded  $24,066 in  interest  expense on its notes  payable  and
$60,863 in research and development costs. As a result of the above, the Company
recorded a net loss of $821,526 in the three month  period ended March 31, 1999,
compared to a net loss of $476,845  for the three month  period  ended March 31,
1998.

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

Year 2000 Issue
--------------

     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.

                                      6
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------

The discussion below contains forward-looking  statements (denoted with asterisk
(*) at the end of each such  statement)  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 endnotes set forth below (denoted in [] and referenced at pages 23
to 29) 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
$12,000,000  equity has been  invested in the  Company  through the close of the
fiscal quarter ended March 31, 1999. As of that date, the Company had a negative
net worth of  $1,192,041,  cumulative  losses of  $13,277,560,  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,  if ever,  Bion NMS  sales and  sales of  BionSoil  and
BionSoil products are sufficient to fund operations.

However,  management believes that the additional  information presented in this
section is necessary to give the reader a better  understanding of the Company's
development and its goals for the future.


      Business Development
      --------------------

The  Company   provides   services,   systems,   and  products  that  solve  the
environmental  problems  caused  by waste  and  wastewater,  and in  appropriate
situations,  recycle treated wastes into high value horticultural  products that
produce superior plant growth performance.  The Company's prototype Bion systems
and initial  system  sales were for both  BionSoil  and  non-BionSoil  producing
treatment  applications.  The Company's  primary focus was placed  originally on
research and technology  development of  "first-of-a-kind"  wastewater treatment
systems.  This focus existed from  September  20, 1989 (when Bion  Technologies,
Inc. was  incorporated)  to June 30,  1993.  In 1993,  the Company  shifted this
original emphasis to BionSoil producing systems (Bion NMS).

                                     7

<PAGE>

The Company's focus has been twofold following its redirection.  First,  primary
focus is on the  development  and  application  of the Bion NMS for large animal
raising  facilities,  specifically  large dairy and swine  facilities.  Bion NMS
activities  generally  involve  sales,  design,  installation,   operation,  and
material  harvesting.  Second,  the Company is placing an  increasing  amount of
attention  on  BionSoil  development,  production,  and  sales as the  number of
systems in operation  increases.  BionSoil  development efforts include testing,
processing, blending, packaging, marketing, distribution, and sales. In addition
to this two-fold focus,  the Company  anticipates  emphasizing  food processing,
municipal, and industrial wastewater treatment in the future.*

      The BionAnimal
      --------------

The Company's  method for tracking the sale and operation of Bion NMS systems as
well as the production of BionSoil is based on a Company defined  standard unit,
the BionAnimal, which relates BionSoil production to confined animal weight. The
Company  estimates that each BionAnimal will yield  approximately one cubic yard
of  processed  BionSoil  per year.* The product is produced  when all manure and
urine  produced by one  BionAnimal  is  processed  in a Bion NMS,  collected  as
BionSolids, [1] and subsequently converted into BionSoil.*

The  following  table  identifies  BionAnimal  equivalents  for various types of
animals in full-confinement installations.[2]

                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)

The Company  experienced  strong  growth in fiscal year 1998  signing  contracts
covering  approximately  650,000  BionAnimals  (see the  Company's  June 30,1998
10-QSB).  This growth  exceeded the  Company's  internal  goals by more that 100
percent.  The Company has added an  additional  325,000  BionAnimals  during the
first  three  quarters  of fiscal  year  1999,  approximately  40 percent of the
Company's  initial  internal  goal for the year (see the  following  section for
design, construction, and operation status of these contracts).

                                      8

<PAGE>

      The Hog Market Impact
      ---------------------

The Company's system sales growth experienced a significant negative impact as a
result of the extended deep depression in hog prices,  which impact began toward
the end of the second  quarter of fiscal  year 1999.  The  decline in hog prices
started in 1998.  Prices  reached a low of $9.00 per hundred weight in December,
1998,  down from $43.00 per hundred  weight in December  1997.  These  depressed
prices  are  below the  break-even  point for hog  growers.  The price  drop and
resulting  hog  industry  losses have  caused hog  producers  to reduce  general
expenditures and curtail their expansion  plans.  This industry change has had a
significant  negative impact on the Company's plans to sign additional contracts
within the hog industry and has caused some growers to put many of the Company's
existing system contracts on temporary hold.

Additionally,  the Company has experienced an adverse impact in selected regions
due to changes in regulatory  positions.  Colorado voters passed an amendment in
November 1998  (Amendment 14) that places  significant  constraints on large hog
farms in the state.  The subsequent rule making process (which is the subject of
threatened  litigation  by some hog growers)  completely  stopped the  Company's
progress  on its  contract  for  systems  for  350,000  hogs on farms in Eastern
Colorado.  It will not be possible for work to resume on this contract,  nor for
the Company to acquire additional contracts in Colorado, until this situation is
resolved.*  The Company  faces a similar slow down of new  contract  activity in
North Carolina as the result of a moratorium on  Construction of new or expanded
hog farms (retrofits of waste handling systems on existing farms are proceeding)
which may be extended.  The subsequent  impact on the Company's  business is not
yet clear.

Hog  prices,   however,  have  recovered  slowly  and  have  trended  upward  to
approximately  $37.00 by early  April.  Management  believes  that over the next
several quarters this  strengthening in hog prices will continue and will result
in more  contracts  being signed and work resuming (or  commencing)  on existing
contracts that have been slowed or put on hold.*

The  delayed  sales  expansion  in  connection  with  the  fall  in  hog  prices
contributed  to a  significantly  slower growth pace during the second and third
quarters of fiscal year 1999.  Management  believes  that this will  continue to
impact  the  Company's  growth for  subsequent  quarters  until hog prices  have
reached more normal levels.*

                                      9

<PAGE>

The Company  initiated a program to hire two vice president level  executives in
the  quarter  ended  June 30,  1998:  (1) a Vice  President,  System  Sales  and
Marketing,  and (2) a Vice  President,  BionSoil.  Hiring these  executives took
longer than  anticipated.  As a result,  the Vice  President of System Sales and
Marketing  joined the Company in  November  and the Vice  President  of BionSoil
joined the Company in December.  This delay, combined with the impact of low hog
prices, contributed to the significant slowdown in the Company's growth.

The  Company  believes  that the  impact of low hog  prices  and  delayed  sales
expansion,  however, will be short term.* The Company has increased its focus on
expanding its presence in the dairy farm system markets to counter the reduction
in hog system  sales.  To support  this shift,  as well as to gain access to the
large western  United States  market,  the Company has recently  added a Western
Regional  Sales  Director  and a North  Western  District  Sales  Manager to its
operations.  This recent  expansion in  conjunction  with  increasing hog prices
should  assist the  Company in  accelerating  its system  sales pace to meet its
sales  projections.*  Management,   however,  has  also  reevaluated  the  goals
established  in the Company's  Form 10-KSB,  dated June 30, 1998 and Form 10-QSB
dated December 31, 1998 and made the necessary  changes to reflect these events.
(See Management's Goals below.)


      Bion NMS
      --------

Through  March  31,  1999,  the  Company  has the  following  Bion NMS waste and
wastewater treatment systems in various stages of operations,  construction, and
design:

     |X| 3 Food Processing  wastewater  treatment systems;  
     |X| 1 Storm Water Run-off system; 
     |X| 13 Dairy Bion NMS; and 
     |X| 64 Swine Bion NMS [3]

The animal Bion NMS systems are  designed to contain  approximately  1.1 million
BionAnimals when in full operation.

                                     10

<PAGE>

      Bion NMS Markets
      ----------------

There are over 107 million  cattle and calves,  61 million hogs and in excess of
1.6  billion  fowl on farms in the  United  States  according  to the 1997  U.S.
Department of Agriculture  Census (the most recent census numbers available from
the United States  Department of Agriculture).  These animals if converted based
on  the  Company  defined  BionAnimal  unit,  yield  approximately  560  million
BionAnimals.  However,  economics  related to installation and operation of Bion
NMS systems require a minimum farm size for Bion NMS application; therefore, not
all of these animals are  candidates for Bion NMS systems.  Management  believes
that the total number of BionAnimals  on larger farms that meet the  appropriate
criteria is approximately  210 million.[4]  Based on this review,  these animals
are  believed  by  the  Company  to  be  the  potential  candidates  for  system
installation in the United States.

The trend to consolidate  livestock  operations  into larger more efficient farm
units is accelerating.  The number of large farms is, therefore,  increasing.[5]
Based on the 1997 Agricultural  census data, there were 210 million  BionAnimals
on larger farms in the U.S compared to 140 million in 1992. The increase is most
evident  in dairy and hog farms.  The number of cows on dairies  with over 1,000
cows increased from 937,000 to 1,600,000 between 1992 and 1997 and the number of
hogs on farms with over 5,000 hogs rose from 9,764,000 to 24,578,000 in the same
period.  This trend is  anticipated  to continue  over the next several years as
growers realize the economies of scale in facility and production costs.*

      Bion NMS Economics
      ------------------

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) revenue from
the sale of BionSoil and  BionSoil-based  products  produced  from the systems.*
BionSoil  sales will  commence  approximately  nine to fifteen  months after the
initial start-up of BionSoil production systems installed on large dairy, swine,
poultry farms or feedlots.*  Further,  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 endnote 17,  below).*  Revenues  from the sale of BionSoil have been
minimal to date; however,  the first significant  commercial sales are projected
for spring of 1999.*

                                       11
<PAGE>

The Company may receive multiple design,  permit and construction  fees for Bion
NMS installations.*  These fees are paid to the Company by 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.

The Company has lost money on system design,  permitting  support,  construction
oversight,  and initial system operation to date.  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.
The Company is working to establish  pricing for its contracts  that  management
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
      --------

Management   anticipates  that  BionSoil,   Inc.  will  purchase  the  harvested
BionSolids from Bion Technologies,  Inc. as Bion NMS systems are brought on-line
and BionSolids are  harvested.[6]*  These BionSolids will then be processed into
BionSoil products for sale to customers.* Some farms may be paid fees as royalty
for the  BionSolids  harvested  from their  sites.* 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.
Many of  these  costs  may be  substantially  reduced  or  eliminated  with  the
construction  and operation of a Bion NMS and the farm may, in some cases,  also
receive cash payments from the sale of the BionSolids by the Company.*

                                     12
<PAGE>

       BionSoil Markets
       ----------------

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,  as well as initial  market sector  analysis.*
Battelle  calculated  that the demand for compost and  compost-like  products in
selected  areas of the U.S.  alone is  projected  to be in excess of one billion
cubic  yards  per  year.[7]*  This  includes  products  ranging  from  manure to
composted  organic  wastes to  manufactured  potting soils and soil enhancers in
selected areas of the U.S.  alone.* This demand is categorized in nine different
application segments:

     |X|   landscapers,
     |X|   delivered topsoil,
     |X|   bagged retail,
     |X|   nurseries,  
     |X|   landfill final cover, 
     |X|   surface mine reclamation, 
     |X|   sod production, 
     |X|   silvaculture, and 
     |X|   agriculture.

The Company will target these segments in addition to:

     |X|   state and  municipal  park and  transportation  departments,  
     |X|   public and private golf courses, 
     |X|   athletic fields, 
     |X|   home gardeners, 
     |X|   reforestation projects for timber and mining  companies,  
     |X|   the U.S. Park  Service,  and 
     |X|   others.

The Company is  currently  in the process of analyzing  initial  target  markets
within these segments, including container and field nursery products, landscape
applications, greenhouse propagation, and others.[8]

                                     13
<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.  The blended  product was
subsequently  sold in bulk  quantities  or  bagged in both 20 pound and 40 pound
bags and sold. The bagged blended  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.  This  pricing  resulted  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 BionSoil,
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.* The Company is continuing a market test program for
the spring season of 1999 in western New York.

A significant  portion of the material  harvested  from many systems in the last
year was devoted to both  university and private  studies  intended to determine
physical  characteristics,  blends,  and  growth  results  achievable  by  using
BionSoil  in many  different  applications.[9]  The  Company is  continuing  and
aggressively expanding these test programs during the current fiscal year.*

      BionSoil Economics
      ------------------

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.*  This belief is 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.* [All
prices  quoted  within  this  Form  10-QSB  are  wholesale  only  and may not be
representative of actual retail prices.] 

                                       14

<PAGE>

Additionally,  the  Company  has  estimated  costs  for the  various  levels  of
processing  required to sell BionSoil products 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  potential  gross   margin[10]  from  BionSoil  sales  has  been
calculated for a series of potential  price  points[11]  from the contract terms
and estimated  costs of production and sales and the implied  processing  levels
required to achieve the products to be sold at these price  points.[12]* Table 2
below presents this  information for five selected  possible price points.* This
table reflects  estimates based on the Company's limited experience to date with
the harvesting and processing of BionSoil and BionSoil  products.  (See endnotes
11 and 12, below).*



                           Table 2*
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 2 above is
equivalent  to the annual  gross margin  contribution  of each  BionAnimal  in a
system that is fully  on-line and  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 and 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 2 (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.  These  calculated  gross
margins,  which are equivalent to gross margins per BionAnimal,  are anticipated
to  repeat  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 3 for each potential price
point in Table 2.[13]*

                                     15
<PAGE>

                              Table 3*
           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*

This NPV  analysis  is useful  because it provides  an  indication  of the value
management believes should be applied to the number of BionAnimals  contained in
each contract for a Bion NMS system.


      Geographic Expansion
      --------------------

The activities of the Company to design,  permit,  oversee the  installation of,
and  operate  its Bion NMS  systems in the  various  geographic  areas where the
Company is conducting its business to date have established its credibility with
federal, state, and local regulators,  as well as environmental and agricultural
professionals.  This  credibility will assist the Company in its efforts to gain
significant  market  penetration  into  new  geographic  areas.*  The  Company's
geographic  expansion has been limited by financial  and  personnel  constraints
(which continue to exist).  Major geographic expansion is now possible given the
heightened  awareness  surrounding  the  major  manure  treatment  and  disposal
problems facing the animal raising industry[14] and the current proliferation of
state and national  legislation  being  considered.*  Management  believes  that
geographic expansion is essential to the Company's ability to achieve successful
operations in the future.*

The Company has recently expanded its sales operations into California,  Oregon,
Washington,  Idaho,  and Arizona.  California  was  selected as the  appropriate
location for the next expansion office because it has the largest  concentration
of dairy cows on large farms in the United  States and is having  problems  with
nutrients  leaching into  groundwater  and storm water  runoff,  as well as land
application and stockpiling 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.* The Company is currently evaluating expansion opportunities
in many other areas throughout the United States.

                                      16
<PAGE>

The staffing,  servicing, and marketing costs associated with expansion into new
geographic  regions is believed by the Company to be not less than  $500,000 per
region,  and may exceed  $1,500,000.*  These costs include  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).*  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. [15]

The Company has not capitalized any of these  expenditures on the balance sheet;
all have been  recorded as expense  items on the income  statement.  The Company
believes,  however,  that the money  invested in these  efforts has created what
might be called "good will," "marketing," and/or "regulatory" value. This belief
is  based  on  experience  to  date  in  the  regions  where  system  sales  and
installation  activity have been focused.  Management  believes that achieving a
greater rate of  geographic  expansion  will require  expenditures  greater than
those expensed for previous  expansion.*  Similar cash resources and amounts
will be expensed and not capitalized as the Company continues its expansion into
new areas in the future.*


      Technology Expansion
      --------------------

The Company has seven  issued  patents[16]  that 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
technology  expansion into the cattle feedlot and poultry  raising  businesses.*
The  technology  will  need to be  adapted  to treat  waste  that has  different
characteristics  and farming  operations  that have different  waste  collection
techniques.*

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.

                                       17
<PAGE>

Just as there are additional  expenses  associated  with  geographic  expansion,
there are also  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 Goals
      ------------------

           BionAnimal Goals
           ----------------

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.* To  support  this  goal,  the  Company  set an  initial  goal of  300,000
BionAnimals  under  contract by the end of 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).*

The Company  significantly  exceeded this goal. 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 significantly delayed. (See the discussion following table 4 and endnote
3, below).*

                                    18
<PAGE>

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.* The
targets also include quantities of BionSoil available for sale, following the up
to 24 month lag for system design, permitting, construction and start-up.[17]*

                                    Table 4*
                           Management July 1998 Goals*
                           ---------------------------
                         BionAnimal/Contracts and BionSoil*
                        ----------------------------------
                             (all numbers in thousands)*

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

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.  (See  management's
discussion in the Company's  Form 10-KSB for the fiscal year ended June 30, 1998
and Forms  10-QSB for the fiscal  quarters  ended  September 30 and December 31,
1998.)

                                        19

<PAGE>

Additionally,  as discussed above, prices in the hog market have been in a major
depression  over the last twelve months.  This depression has not only generally
halted expansion in the hog industry, but has also forced some growers to reduce
or eliminate  their herds and others to put all expansion or retrofits of manure
handling  systems  on  hold.  This  price  depression  coupled  with  voter  and
legislative  actions in Colorado and North Carolina (see "The Hog Market Impact"
section,  above)  along  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.  (See
the Company's  10-QSB for fiscal quarter ending December 31,  1998).Based on the
Company's  experience in the fiscal  quarter ended March 31, 1999, the continued
uncertainty over the final outcome of various  legislative actions and continued
low hog prices,  the Company has  further  adjusted  its short term goals.  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 4A*
                                   Revised Goals*
                                   -------------
                          BionAnimal/Contracts and BionSoil*
                          ---------------------------------
                             (all numbers in thousands)*
                             Fiscal Years Ended June 30*
                             ---------------------------
                       1999*       2000*      2001*       2002* 
                      ------      -------    -------     -------
Number of BionAnimals
added during fiscal
year*                    500*       800*      1,250*      1,800*
Cumulative number of
BionAnimals under
Contract*              1,250*      2,050*     3,300*      5,100*
BionSoil available for
 sale (cubic yards)[18]*  11*        130*     1,200*      2,100*


These revised goals will only be realized if all of the factors and  assumptions
listed following Table 4, 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  and  resume
expansion and facility upgrades.*

The percent of total market  penetration  which these targets  represent is very
modest.  The Company's  systems sales  program has achieved  (through  March 31,
1999)  approximately a 0.52% market  penetration.* 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  that its goals  resulting in
these market penetrations are realistic goals if the assumptions set forth above
are  accurate.*  No  assurance  can be given  however,  that these goals will be
achieved.

                                       20
<PAGE>

      Financial Goals
      ---------------

Based on these goals for BionAnimal addition and BionSoil production, management
has  established the following  revised  financial  performance  targets for the
Company  for  fiscal   years  1999   through  2002  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  endnotes  thereto.*
Please  carefully review the risks and  uncertainties  presented above and below
and in the endnotes in  conjunction  with the Company  goals  summarized in this
Table 5.[19] (See also endnotes 20, 21, and 22, below).

                                       Table 5*
                                  Performance Goals*
                    (Based on BionAnimals under contract and BionSoil
                    available for Sale as described in Table 4A above)*
                                (all numbers in thousands)*
                               Fiscal Years (ended June 30)*

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

Number of BionAnimals
added during fiscal
year*                    500*        800*     1,250*      1,800*

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

BionSoil available
for sale*                 11*        130*     1,200*      2,100*

Gross Revenue[20]*      $400*     $7,570*   $52,423*    $98,096*

Gross Margin[21]*        $11*     $3,210*   $22,278*    $44,441*

Pre-Tax Earnings[22]*$(3,000)*      $300*   $17,178*    $35,991*

(These revised goals were established and originally  presented in the Company's
Form 10-QSB for fiscal quarter ending December 31, 1998.)

The targets presented in Table 5 above reflect the revised information presented
in Table 4A. As a result,  revenues,  margins and earnings  projected  are lower
than those shown in Table 5 as presented in the Company's Form 10-KSB dated June
30, 1998 and the revised  information shown in the Company's Form 10-QSB for the
quarter ended  December 31, 1998. As discussed  above and in the endnotes,  this
fiscal year 1999  reduction  is based on the impact the Company is  experiencing
from the continuing low hog prices and the continued  uncertainty over the final
outcome of various legislative actions.

The goals  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.*  This is 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  $74,000,000 in those later years, even if there are no additional
Bion NMS system sales thereafter.*

                                        21

<PAGE>

While these goals 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 the first quarter of fiscal 1999 (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, regulatory uncertainty in certain states 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 has also recruited and filled 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.*

The  potential  return  based on the  Company's  growth goals is apparent if the
Company is  successful  in  achieving  its  targets  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.*

              #   #   #   #   #   #   #   #   #   #   #

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.

                                       22

<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.

The Company's  ability to  successfully  confront even the currently  identified
challenges which lie ahead in meeting its stated goals is far from certain as it
has never operated at a profit and has a negative net worth at the present time.
The Company may, and likely will, face additional challenges,  which have not as
yet even  been  identified.  If 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. If 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. The Company's operations are not
currently  profitable;   therefore,  readers  are  further  cautioned  that  the
Company's  continued  existence is uncertain 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.

                                       23


<PAGE>


Notes to Management's Discussion and Analysis or Plan of 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, which is different for each category of animal.

3 Five of these 64 systems are presently in operations.  The remaining 56 are in
various stages of design, permitting,  and construction.  Two major factors have
contributed  to the delays in bringing new hog systems on line: (1) the decrease
in hog prices and (2) state regulatory  developments  with water and air quality
issues  surrounding hog farms.  Despite these factors and resulting delays,  all
parties  have  indicated  to the Company that they intend to build and use these
systems.

4 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

                                      24

<PAGE>

5 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.

6  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
test market referenced below.

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.

7 The Company is utilizing  information obtained from a Battelle Institute study
conducted for the Solid Waste Composting  Council.  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.                        ---------------------

                                       25
<PAGE>


8 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 120 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.

9 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.*

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.

                                       26
<PAGE>

10 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.

11 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.

12 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  2  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 2.*

13 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.

14 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.

                                      27
<PAGE>

15 During  February  1994 the  Company  opened an  office in  Smithfield,  North
Carolina  (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 three  additional
Bion NMS that have come on line.  Management  estimates that, to date, in excess
of $1,400,000 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. *

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

17 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 related to environmental regulations associated
with  Colorado's  approving  Amendment 14 in the November 1998 election that may
delay the beginning of these activities.

                                         28

<PAGE>

18 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.  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.  The Company  estimates  that 5000 cubic
yards will be carried forward into fiscal year 2000.

19  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.

20 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%*

                                        29

<PAGE>

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

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.*

21 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.)*

                                      30

<PAGE>

d.)  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.*

e.)  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*

22 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*


                                      31
<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 nine month period ended March 31,
     1999 without registering the securities under the Securities Act.:

          249,962 shares of restricted and legended  Common Stock to ten private
          investors  and nine  existing  shareholders  in  privately  negotiated
          transactions for an aggregate amount of $817,359.

          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.

          42,440  shares  of  restricted  and  legended  Common  Stock  to three
          employees  in  lieu  of cash  for  services  rendered  valued  at,  in
          aggregate, $127,916.

          10,249 shares of restricted and legended Common Stock to a shareholder
          for rent and services valued in aggregate at $32,175.

          10,535  shares  of  restricted  and  legended  Common  Stock  to three
          consultants  in lieu of cash  for  services  rendered  valued  at,  in
          aggregate, $31,602.


                                          32
<PAGE>


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.

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.
          (a)  Exhibits:
                10.1  +Form of  promissory  note (the  "Note")  between
                Bion    Environmental     Technologies,     Inc.    and
                LoTayLingKyur, Inc.
                10.2  +Form of  second  promissory  note  (the  "second
                note") between Bion  Environmental  Technologies,  Inc.
                and LoTayLingKyur, Inc.
                27 Financial Data Schedule
          (b)  Reports on Form 8-K:
                Form 8-K (dated March 15, 1999)
                   reporting on items 5 & 7.


     +Incorporated by reference to 8-K filed March 15, 1999.


                                      33

<PAGE>


                BION ENVIRONMENTAL TECHNOLOGIES, INC.
                          AND SUBSIDIARIES






                              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:    May 12, 1999  

                                       34