UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                  FORM 10-Q

[X] Quarterly report pursuant section 13 or 15(d) of the Securities
    Exchange Act of 1934

    For the quarterly period ended December 31, 2008

[ ] Transition report pursuant section 13 or 15(d) of the Securities
    Exchange Act of 1934

    For the transition period from ____________ to ____________

                      Commission File Number: 000-19333

                       BION ENVIRONMENTAL TECHNOLOGIES, INC.
           (Exact name of registrant as specified in its charter)

           Colorado                               84-1176672
(State or Other Jurisdiction          (I.R.S. Employer Identification No.)
     of Incorporation)

          Box 566/1774 Summitview Way, Crestone, Colorado 81131
                   (Address of Principal Executive Offices)

                                 212-758-6622
                (Registrant's Telephone Number, Including Area Code)

                                 Not Applicable
                (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  [X] Yes  [ ]  No

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).  Yes  [ ] No [X]

              APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  NOT APPLICABLE

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.  On February 10, 2009, there
were 11,637,974 Common Shares issued and 10,933,665 Common Shares
outstanding.

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of "large accelerated filer," "accelerated
filed" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):

     Large accelerated filer [ ]       Accelerated filer         [ ]
     Non-accelerated filer   [ ]       Smaller reporting company [X]



                       BION ENVIRONMENTAL TECHNOLOGIES, INC.
                                  FORM 10-Q

                              TABLE OF CONTENTS

                                                                       Page

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated financial statements (unaudited):

           Balance sheets ............................................    3

           Statements of operations ..................................    4

           Statements of changes in stockholders' deficit ............    5

           Statements of cash flows ..................................    6

           Notes to unaudited consolidated financial statements ...... 7-24

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations ..................................   25

Item 3.   Quantitative and Qualitative Disclosures about Market Risk..   38

Item 4.   Controls and Procedures ....................................   38


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings ..........................................   39

Item 1A.  Risk Factors................................................   39

Item 2.   Unregistered Sales of Equity Securities and Use of
          Proceeds ...................................................   39

Item 3.   Defaults Upon Senior Securities ............................   39

Item 4.   Submission of Matters to a Vote of Security Holders ........   39

Item 5.   Other Information ..........................................   39

Item 6.   Exhibits ...................................................   40

          Signatures .................................................   41




                                       2




                       PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

              BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                               December 31,      June 30,
                                                   2008            2008
                                               ------------    ------------
                                                (unaudited)

                                   ASSETS

Current assets:
  Cash and cash equivalents                    $     36,966    $    478,899
  Prepaid rent and expenses                           6,135           9,130
  Deposits and other receivables                     11,957          12,068
                                               ------------    ------------
     Total current assets                            55,058         500,097

Restricted cash (Note 9)                             85,973         128,443
Property and equipment, net (Note 4)                 51,140          59,504
                                               ------------    ------------
     Total assets                              $    192,171    $    688,044
                                               ============    ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
  Accounts payable and accrued expenses        $    543,738    $    567,811
  Accrued payable - affiliate (Note 11)              41,647          41,647
  Notes payable - affiliates (Note 6)               167,495            -
  Deferred compensation (Note 7)                    241,076          25,000
                                               ------------    ------------
     Total current liabilities                      993,956         634,458
                                               ------------    ------------
Convertible promissory notes - affiliates
  (Note 5)                                             -            784,122
Deferred rent (Note 9)                               72,738          71,865
                                               ------------    ------------
     Total liabilities                            1,066,694       1,490,445
                                               ------------    ------------
Minority interest (Note 3)                          127,388         117,692
                                               ------------    ------------

Stockholders' deficit (Note 8):
  Preferred stock, $.01 par value, 10,000
   shares authorized, no shares issued and
   outstanding                                         -               -
  Common stock, no par value, 100,000,000
   shares authorized, 11,226,658 and 11,070,658
   shares issued, respectively, 10,522,349 and
   10,366,349 outstanding, respectively                -               -
  Additional paid-in capital                     73,476,577      73,422,195
  Accumulated deficit                           (74,478,488)    (74,342,288)
                                               ------------    ------------
     Total stockholders' deficit                 (1,001,911)       (920,093)
                                               ------------    ------------
     Total liabilities and stockholders'
       deficit                                 $    192,171    $    688,044
                                               ============    ============

See notes to unaudited consolidated financial statements.

                                      3




           BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
           THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007
                                 (UNAUDITED)



<TABLE>
<CAPTION>
                                             Three months ended            Six months ended
                                               December 31,                   December 31,
                                           2008           2007            2008           2007
                                        -----------    -----------    -----------    -----------
<S>                                     <C>            <C>            <C>            <C>

Revenue                                 $      -       $      -       $      -       $      -

Operating expenses:
 General and administrative (including
  stock-based compensation  (Note 8))       158,567        154,731        788,242        308,587
 Research and development (including
  stock-based compensation (Note 8))         70,630        544,700        346,970        671,668
                                        -----------    -----------    -----------    -----------
     Total operating expenses               229,197        699,431      1,135,212        980,255
                                        -----------    -----------    -----------    -----------
Loss from operations                       (229,197)      (699,431)    (1,135,212)      (980,255)
                                        -----------    -----------    -----------    -----------
Other expense (income):
 Interest expense                            15,609         51,229         27,557        103,619
 Interest income                               (617)       (10,444)        (2,081)       (15,369)
 Minority interest (Note 3)                  (4,198)        53,348          9,696        126,865
 Forfeiture of deferred compensation
  (Note 5)                                 (959,184)          -          (959,184)          -
 Other, net                                 (75,000)          -           (75,000)    (1,258,195)
                                        -----------    -----------    -----------    -----------
                                         (1,023,390)        94,133       (999,012)    (1,043,080)
                                        -----------    -----------    -----------    -----------
Net income (loss)                       $   794,193    $  (793,564)   $  (136,200)   $    62,825
                                        ===========    ===========    ===========    ===========
Net income (loss) per basic common
 share                                  $      0.08    $     (0.10)   $     (0.01)   $      0.01
                                        ===========    ===========    ===========    ===========
Net income (loss) per diluted common
 share                                  $      0.08    $     (0.10)   $     (0.01)   $      0.01
                                        ===========    ===========    ===========    ===========
Weighted-average number of common
 shares outstanding,
  Basic                                  10,418,914      8,021,789     10,392,632      7,976,993
                                        ===========    ===========    ===========    ===========
  Diluted                                10,432,149      8,021,789     10,392,632      7,976,993
                                        ===========    ===========    ===========    ===========

</TABLE>




     See notes to unaudited consolidated financial statements.




                                     4


           BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
         CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                    SIX MONTHS ENDED DECEMBER 31, 2008
                               (UNAUDITED)



<TABLE>
<CAPTION>
                                                                               Total
                            Common Stock      Additional      Accumulated   stockholders'
                          Shares    Amount  paid-in capital    deficit        deficit
                        ----------  ------  ---------------  -------------  --------------
<S>                     <C>         <C>     <C>              <C>            <C>

Balances, July 1, 2008  11,070,658  $  -      $73,422,195    $(74,342,288)   $  (920,093)

 Vesting and remeasure-
  ment of options for
  services (Note 8)           -        -          (62,618)           -           (62,618)
 Issuance of common
  stock for services        16,000     -           12,000            -            12,000
 Sale of common stock      140,000     -          105,000            -           105,000
 Net loss                     -        -             -           (136,200)      (136,200)
                        ----------  ------    -----------    ------------    -----------
Balances, December 31,
  2008                  11,226,658  $  -      $73,476,577    $(74,478,488)   $(1,001,911)
                        ==========  ======    ===========    ============    ===========

</TABLE>













     See notes to unaudited consolidated financial statements.


















                                    5




          BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                 SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007
                              (UNAUDITED)

                                                         2008        2007
                                                       ---------   ---------
CASH FLOWS FROM OPERATING ACTIVITIES
 Net (loss) income                                     $(136,200)  $  62,825
 Adjustments to reconcile net (loss) income to
  net cash used in operating activities:
   Depreciation expense                                    8,364       8,066
   Accrued interest on convertible notes and debt         27,557     103,619
   Stock-based compensation                              (50,618)    294,821
   Forfeiture of deferred compensation                  (959,184)        -
   Decrease in fair value of convertible notes              -       (598,960)
   Minority interest                                       9,696     126,865
   Decrease in prepaid rent and expenses                   2,995      17,187
   Decrease (increase) in deposits and other
    receivables                                              111      (7,085)
   Decrease in accounts payable and accrued expenses     (24,073)    (29,091)
   Increase in deferred rent                                 873       3,128
   Increase in deferred compensation                     366,076     366,780
                                                       ---------   ---------
     Net cash (used) provided in operating activities   (754,403)    348,155
                                                       ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES
 Decrease in restricted cash                              42,470        -
 Proceeds from refund of property and equipment             -          5,258
 Purchase of property and equipment                         -         (3,078)
                                                       ---------   ---------
     Net cash provided by investing activities            42,470       2,180
                                                       ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES
 Proceeds from sale of common stock                      105,000        -
 Proceeds from notes payable - affiliates                165,000        -
                                                       ---------   ---------
     Net cash provided by financing activities           270,000        -
                                                       ---------   ---------
Net (decrease) increase in cash and cash equivalents    (441,933)    350,335

Cash and cash equivalents at beginning of year           478,899     373,109
                                                       ---------   ---------
Cash and cash equivalents at end of year               $  36,966   $ 723,444
                                                       =========   =========
Supplemental disclosure of cash flow information:
 Cash paid for interest and income taxes               $    -      $    -

Non-cash investing and financing transactions:
 Exchange/conversion of debt to common stock                -        538,509



See notes to unaudited consolidated financial statements.

                                      6



             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

1.   ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS:

     Organization and nature of business:

     Bion Environmental Technologies, Inc. ("Bion" or "We" or the "Company")
was incorporated in 1987 in the State of Colorado.  Bion's patented and
proprietary technology provides a comprehensive environmental solution to a
significant source of pollution in US agriculture, Confined Animal Feeding
Operations ("CAFO's"). Bion's technology produces substantial reductions of
both nutrient releases to water and air emissions from livestock waste
streams based upon our research to date. Because Bion's technology reduces
the harmful emissions from a CAFO on which it is utilized, the CAFO can
increase its herd concentration while lowering or maintaining its level of
nutrient releases and atmospheric emissions.

     Bion's technology produces business opportunities in two broad areas: 1)
retrofit and environmental remediation of existing CAFOs (described below)
and 2) development of "closed loop" Integrated Projects (defined below).

     We believe that Bion's technology platform allows the integration of
large-scale CAFO's and their end-product users, renewable energy production
from the CAFO waste stream, on site utilization of the renewable energy
generated and biofuel/ethanol production in an environmentally and
economically sustainable manner while reducing the aggregate capital expense
and operating costs for the entire integrated complex ("Integrated Projects"
or "Projects"). In the context of Integrated Projects, Bion's waste treatment
process, in addition to mitigating polluting releases, generates renewable
energy from portions of the CAFO waste stream which renewable energy can be
utilized by integrated ethanol plants, CAFO end-product processors (including
cheese, ice cream and /or bottling plants in the case of dairy CAFOs and/or
slaughter and/or processing facilities in the context of beef CAFOs) and/or
other users as a natural gas replacement.

     Since 2002, the Company has focused on completing development of its
technology platform and business model. As such, we elected not to pursue
near term revenue opportunities such as retrofitting existing CAFO's with our
waste management solutions, because such efforts would have diverted scarce
management and financial resources and negatively impacted our ability to
complete: 1) re-development of our technology for environmentally sound
treatment of CAFO waste streams and 2) development of our integrated
technology platform in support of large-scale sustainable Integrated
Projects.

     Since the beginning of calendar year 2008, with the substantial
completion of the technology/business model development process, Bion has
begun to simultaneously pursue both retrofit/remediation and Integrated
Projects opportunities.


                                      7


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

1.   ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
     (CONTINUED):

     Organization and nature of business (continued):

     On September 27, 2008, the Company executed an agreement with Kreider
Farms (and its affiliated entities) (collectively "Kreider") to design,
construct and operate, through its wholly-owned subsidiary, Bion Services
Group, Inc. ("Bion Services"), a Bion system to treat the waste of the
milking dairy cows (milkers, dry cows and heifers) at the Kreider Dairy,
located in Mannheim, Pennsylvania. In addition, the agreement provides for an
integrated renewable energy facility that will provide energy for Bion's
waste treatment facility through the combustion of the cellulose captured in
the Bion process. The system will be owned and operated by Bion through a new
entity to be formed and initially 100% owned by Bion Services, in which
Kreider will have the option to purchase a minority interest.  Upon
completion of final design work and resolution of all building, zoning and
other related pre-construction matters, it will be necessary to raise
substantial capital (equity and/or debt) to construct and operate the Kreider
system, which may be difficult to do on reasonable terms due to the current
unsettled condition of the capital markets. Upon successful construction and
operation of the system, the Company anticipates that it will receive revenue
from the sale of nutrient (and other) environmental credits related to the
Kreider system and through sales of renewable energy generated at the Kreider
system.

     On January 28, 2009 the Board of the Pennsylvania Infrastructure
Investment Authority approved a $7.8 million loan to Bion PA 1, LLC, a
wholly-owned subsidiary of the Company, for the initial stage of Bion's
Kreider Farms project. The Company anticipates that it will be able to
complete the steps required to finalize this loan and commence this project
during the current fiscal year.

     Going concern and management's plans:

     The consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred net losses
of approximately $1,779,000 and $2,549,000 during the years ended June 30,
2008 and 2007, respectively, and net loss of approximately  $136,000 for the
six months ended December 31, 2008.  At December 31, 2008, the Company has a
working capital deficiency and a stockholders' deficit of approximately
$939,000 and $1,002,000, respectively.  These factors raise substantial doubt
about the Company's ability to continue as a going concern.  The accompanying
consolidated financial statements do not include any adjustments relating to
the recoverability or classification of assets or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern.  The following paragraphs describe management's
plans with regard to these conditions.

     The Company continues to explore sources of additional financing to
satisfy its current operating requirements.

                                      8


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

1.   ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
     (CONTINUED):

     Going concern and management's plans (continued):

     The Company currently faces a severe working capital shortage and it is
not currently generating any revenues. The Company will need to obtain
additional capital to fund its operations and technology development, to
satisfy existing creditors and to develop Projects. The Company anticipates
that it will seek to raise from $3,000,000 to $50,000,000 (debt and equity)
during the next twelve months.  There is no assurance, especially in the
extremely unsettled capital markets that presently exist, that the Company
will be able to obtain the funds that it needs to stay in business, complete
its technology development or to successfully develop its business.

     There can be no assurance that funds required during the next twelve
months or thereafter will be generated from operations or that those funds
will be available from external sources such as debt or equity financings or
other potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders.   All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.

2.   SIGNIFICANT ACCOUNTING POLICIES:

     Principles of consolidation:

     The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Bion Integrated Projects Group,
Inc. (formerly Bion Dairy Corporation ("Projects Group"), Bion Technologies,
Inc., BionSoil, Inc., Bion Services Group, Inc., and its majority owned
subsidiary, Centerpoint Corporation ("Centerpoint") (Note 3).  All
significant intercompany accounts and transactions have been eliminated in
consolidation.

     The accompanying consolidated financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission.  The consolidated financial statements reflect all
adjustments (consisting of only normal recurring entries) that, in the
opinion of management, are necessary to present fairly the financial position
at December 31, 2008 and the results of operations and cash flows of the
Company for the three and six months ended December 31, 2008 and 2007.
Operating results for the three and six months ended December 31, 2008 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 2009.

                                      9


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     Principles of consolidation (continued):

     The unaudited consolidated financial statements should be read in
conjunction with the Company's audited financial statements and footnotes
thereto included in its Annual Report on Form 10-KSB for the year ended June
30, 2008.

     Earnings (loss) per share:

     Basic earnings (loss) per share amounts are calculated using the
weighted average number of shares of common stock outstanding during the
period.  Diluted earnings (loss) per share assumes the conversion, exercise
or issuance of all potential common stock instruments, such as options or
warrants, unless the effect is to reduce the loss or increase earnings per
share.  The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the three months
ended December 31, 2008 (a reconciliation of the numerators and denominators
of the basic and diluted earnings per share for the six months ended December
31, 2008 are not included as they are anti-dilutive):

                                                      Average
Three months ended December 31, 2008      Income      Shares      EPS
-------------------------------------     --------   ----------  -----

Net income - basic                        $794,193   10,418,914  $0.08
Effect of dilutive securities:
  Stock options and warrants                  -          13,235    -
                                          ----------------------------
Net income - diluted                      $794,193   10,432,149  $0.08
                                          ============================

     The following potential shares of common stock and their effect on net
income were excluded from the diluted EPS calculations because their effect
would have been anti-dilutive:

     a) The 8% convertible promissory note-affiliate convertible into 67,731
        common shares.
     b) The convertible accrued payable-affiliate of $41,647 convertible into
        55,529 common shares.










                                       10


            BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
             NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                     SIX MONTHS ENDED DECEMBER 31, 2008

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     Recent accounting pronouncements:

     During October 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair
Value Measurements ("SFAS 157").  This statement does not require any new
fair value measurements but provides guidance on how to measure fair value
and clarifies the definition of fair value under accounting principles
generally accepted in the United States of America.  The statement also
requires new disclosures about the extent to which fair value measurements in
financial statements are based on quoted market prices, market-corroborated
inputs, or unobservable inputs that are based on management's judgments and
estimates.  This statement was effective for the Company on July 1, 2008 for
all financial assets and liabilities.  In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, Effective Dates of FASB Statement No. 157 (the
"FSP").  The FSP amends SFAS 157 to delay its effective date for non-
financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually).  For items within its scope,
the FSP defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years.  As it
relates to financial assets and liabilities, the adoption of SFAS 157 did not
have an impact on the Company's consolidated financial statements.  The
Company is still in the process of evaluating the impact that SFAS 157 will
have on its non-financial assets and liabilities.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115 ("SFAS 159").  This statement permits entities to
choose to measure eligible items at fair value at specified election dates.
SFAS 159 was effective for the Company on July 1, 2008.  The Company did not
apply the fair value option to any of its outstanding instruments, and
therefore, SFAS 159 did not have an impact on the consolidated financial
statements.

     In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the

                                      11


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     Recent accounting pronouncements (continued):

acquisition date is on or after July 1, 2009 for the Company.  The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.

     In December 2007, the FASB issued SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary (minority interest)
is an ownership interest in the consolidated entity that should be reported
as equity in the consolidated financial statements and separate from the
parent company's equity. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated statement of operations,
of the amounts of consolidated net income attributable to the parent and to
the non-controlling interest. This statement is effective for the Company on
July 1, 2009.  The Company is currently evaluating the effect the adoption of
this statement may have on its consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133 ("SFAS 161").  SFAS 161 changes the disclosure requirements
for derivative instruments and hedging activities by requiring that the
objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation.  The statement is effective for
the Company on January 1, 2009.  The Company does not expect that the
adoption of SFAS 161 will have an impact on its consolidated financial
statements.

3.   MINORITY INTEREST OF CENTERPOINT CORPORATION:

     In January 2002, Bion purchased a 57.7% majority interest in Centerpoint
from a third party.  On April 30, 2008, Centerpoint received and cancelled
126,000 shares of its previously outstanding common stock in connection with
a litigation settlement, which increased Bion's ownership from 57.7% to
58.9%.

     During the three and six months ended December 31, 2008 and 2007,
Centerpoint had (losses) earnings of approximately $(10,200) and $126,100,
and $23,600 and $(695,000), respectively.   Centerpoint's minority interest
holders have a minority interest of $127,388 as of December 31, 2008.

                                     12


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

4.   PROPERTY AND EQUIPMENT:

     Property and equipment consists of the following as of December 31,
2008:


     Research and development equipment            $ 305,266
     Leasehold improvements                           31,336
     Furniture                                        28,932
     Computers and office equipment                   31,680
                                                   ---------
                                                     397,214
     Less accumulated depreciation                  (346,074)
                                                   ---------
                                                   $  51,140
                                                   =========

     Depreciation expense was $4,077 and $4,046 for the three months ended
December 31, 2008 and 2007, respectively, and $8,364 and $8,066 for the six
months ended December 31, 2008 and 2007, respectively.

5.   CONVERTIBLE PROMISSORY NOTES:

     In March and April 2007, the Company sold $800,000 of its Convertible
Notes (the "Notes") for cash proceeds. In addition the Company issued Notes
to affiliates totaling $986,521 in exchange for promissory notes with
convertible features and deferred compensation (Note 7).  The Notes were
convertible into shares of the Company's common stock at the price     of
$4.00 per share until maturity on July 1, 2008, or at the election of the
Note holders, and accrue interest at 6% per annum.  The  Note holders also
had the option to exchange the Notes, plus interest, for securities
substantially identical to securities the Company sells in any offering prior
to the completion of an offering in which the Company raises less than
$3,000,000.  The Company had the right to require the Notes (principal plus
interest) be converted into its common shares at the lesser of $4.00 per
share or the price of an offering in which the Company raises $3,000,000 or
more.

     On May 31, 2008 all of the non-affiliate Note holders converted their
Notes totaling $856,737 including accrued interest into 428,369 restricted
common shares of the Company.  Also on May 31, 2008, Notes held by affiliates
totaling $650,427 including accrued interest were converted into 325,214
common shares of the Company. These Notes were converted at a price of $2.00
per share, the price at which the Company sold common stock during the same
period.




                                    13


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

5.   CONVERTIBLE PROMISSORY NOTES (CONTINUED):

     On June 18, 2008 the remaining affiliated holder of the outstanding
Notes increased the principal of his Note, maturing on July 1, 2013, by
$375,000 to $784,122, which represented the potential deferred compensation
subject to forfeiture through June 30, 2008. The holder, Salvatore Zizza,
Chairman of Projects Group, agreed to add his future compensation from the
Company to his Note as it accrues.  As of December 31, 2008, the total
principal and interest on the Note totaled $959,184.   Pursuant to an
agreement dated December 19, 2008, (the "Zizza Agreement" see Note 10), Mr.
Zizza agreed to no longer provide services to the Company effective December
31, 2008.  In conjunction with the Zizza Agreement, Mr. Zizza's Note was
returned to the Company on December 31, 2008 and it was cancelled, which
resulted in the Company's recognition of income due to forfeiture of deferred
compensation of $959,184.  The deferred compensation underlying the
convertible note had not yet vested at the date the Note was cancelled.  In
addition, the Note was subject to certain risks of forfeiture and/or
cancellation.

     The Notes accrued interest of $13,172 and $27,520 for the three months
ended December 31, 2008 and 2007, respectively and $25,062 and $54,636 for
the six months ended December 31, 2008 and 2007, respectively.

6.   PROMISSORY NOTES PAYABLE - AFFILIATES:

     During September 2008, Mr. Zizza and Dominic Bassani, Vice-President -
Special Projects and Strategic Planning for the Projects Group, loaned the
Company $50,000 each under separate promissory notes.  Under the terms of the
promissory notes, which allow for additional monies to be loaned, the notes
bear interest at 8% per annum and were payable on or before February 1, 2009.
Pursuant to the Zizza Agreement, the terms of his promissory note were
amended in December 2008 to allow for Mr. Zizza to convert the interest and
principal of his note, in whole or in part, into shares of the Company's
restricted common stock at a price of $0.75 per share, which was equal to the
fair value.

     During October 2008, a major shareholder loaned the Company $65,000
under a promissory note.  Under the terms of the promissory note, which
allows for additional monies to be loaned, the note bears interest at 8% per
annum and is payable on or before March 1, 2009.  In January 2009, an
agreement was reached whereby the maturity of the $65,000 promissory note was
extended to June 30, 2009 in consideration of a) at the election by the note
holder, the ability to convert the principal and interest into the Company's
restricted common stock at $0.75 per share, the fair value of the shares, at
any date prior to repayment and b) the issuance of a warrant to purchase
15,000 shares of the Company's common stock at $0.75 per share until December
31, 2018.

     The promissory notes had accrued interest expense outstanding of $2,495
as of December 31, 2008.

                                   14


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

6.   PROMISSORY NOTES - AFFILIATES (CONTINUED):

     Subsequent to December 31, 2008, the promissory note held by Mr. Bassani
was amended, under the terms of the Brightcap Agreement (see Note 10) to
allow for the conversion of the principal and interest into shares of the
Company's common stock at $0.75 per share and extended the maturity date of
the promissory notes to June 30, 2009.

7.   DEFERRED COMPENSATION:

     The Company accrued $750,000 ($150,000 to Mr. Smith, $300,000 to
Brightcap Capital Ltd. ("Brightcap") for services provided by Mr. Bassani,
and $300,000 to Mr. Zizza) as deferred compensation during each of the years
ended June 30, 2008 and 2007.  During fiscal year 2007 the Company entered
into agreements converting deferred compensation amounts totaling $975,000
into promissory notes with conversion agreements.  Accrued principal and
interest owed under the promissory notes with conversion agreements of Mr.
Smith and Brightcap were converted to Convertible Promissory Notes in March
2007 (Note 5).

     During fiscal year 2008, the Company entered into an agreement with
Brightcap converting deferred compensation of $350,000 owed as of May 31,
2008 into a promissory note with a conversion agreement.  The convertible
note plus accrued interest totaling $350,805 was exchanged for 175,403 common
shares at $2.00 per share of the Company on June 15, 2008.  In addition, the
Company entered into an extension agreement with Mr. Smith which allowed for
the conversion of deferred compensation accrued through June 30, 2008 of
$179,280 into 89,640 common shares of the Company at $2.00 per share.  Also
during fiscal year 2008, the Company mutually agreed with Mr. Zizza to
convert his deferred compensation earned through June 30, 2008 of $375,000,
and his ongoing compensation as it accrues to additional principal to his
2007 Note.

     As of December 31, 2008 the Company owed Brightcap and Mr. Smith
deferred compensation of $175,000 and $66,076, respectively.  In January 2009
the Company entered into the Smith Agreement (see Note 10), whereby Mr. Smith
converted his deferred compensation as of December 31, 2008 into 88,104
shares of the Company's restricted common stock at $0.75 per share.  The
Company also entered into the Brightcap Agreement (see Note 10), whereby the
deferred compensation of Brightcap owed as of December 31, 2008, was made
convertible until December 31, 2009 into the Company's restricted common
stock at a price of $0.75 per share at Brightcap's option.







                                    15



             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

8.   STOCKHOLDERS' EQUITY:

     Common stock:

     Holders of common stock are entitled to one vote per share on all
matters to be voted on by common stockholders.  In the event of liquidation,
dissolution or winding up of the Company, the holders of common stock are
entitled to share in all assets remaining after liabilities have been paid in
full or set aside. Common stock has no preemptive, redemption or conversion
rights.  The rights of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of any other series of
preferred stock the Company may designate in the future.

     In November 2008, the Company issued 140,000 share of the Company's
restricted common stock at $0.75 per share for cash proceeds of $105,000.

     The Company also issued 16,000 shares of the Company's restricted common
stock at $0.75 per share for services valued at $12,000 to one of its
employees.

     Warrants:

     As of December 31, 2008 the Company had the following common stock
warrants outstanding:

                             Number of   Exercise
                              Shares     Price      Expiration Date
                             ---------   --------   ---------------
     Class SVDB 1-6            800,000   $   3.00   July 31, 2013
     Class DB-1                600,000   $   1.00   January 31, 2014
     Class A 1-3               600,000   $   2.50   May 14, 2015
     Class SVMAS-1              67,500   $   3.50   December 31, 2011
     Class SVMAS-1A             40,000   $   3.50   December 31, 2011
     Class SVMAS-2              32,500   $   2.50   December 31, 2011
     Class SVMAS-3              40,000   $   2.50   September 30, 2015
     Class SVB 1-3              50,000   $   2.50   April 30, 2015
     Class SVB-4                75,000   $   2.50   April 30, 2015
     Class SVC 1-5             125,000   $   4.25   December 31, 2012
     Class SV-SEI 1-2           32,292   $   1.50   December 31, 2012
     Class SV-SEI 3-4            9,375   $   1.50   June 30, 2009
     Class C, D, E             275,000   $   2.50   April 30, 2015
     Class O                   100,000   $   3.00   December 31, 2010
     Class DM                  150,000   $   3.00   December 31, 2011
     Class MAS                  80,000   $   2.50   July 1, 2012
     Class GK                   20,000   $   2.00   March 31, 2011
     Class BW                   10,000   $   2.20   June 15, 2012
                             ---------
                             3,106,667
                             =========

                                     16


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

8.   STOCKHOLDERS' EQUITY (CONTINUED):

     Warrants (continued):

     During December 2008, 450,000 warrants were cancelled pursuant to the
terms of the Zizza Agreement (see Note 10).

     The weighted average exercise price for the outstanding warrants is
$2.47 and the weighted average remaining contractual life as of December 31,
2008 is 4.96 years.

     In January 2009, warrants to purchase 1,315,000 shares of the Company's
common stock at $0.75 per share were issued pursuant to various agreements
with Mr. Smith, Mr. Bassani and a major shareholder (see Notes 6 and 10).

     Stock options:

     Effective June 2006, the Company approved the 2006 Consolidated
Incentive Plan (the "2006 Plan"), which consolidated previously reserved
incentive stock options plans into the 2006 Plan.  On November 28, 2008, the
2006 Plan was amended to increase the maximum number of shares of the common
stock of the Company issuable pursuant to the 2006 Plan from 4,200,000 to
6,000,000 shares and increases the maximum grant of stock options to a single
employee/consultant from 500,000 to 1,000,000 options during a twelve month
period. Terms of exercise and expiration of options granted under the 2006
Plan may be established at the discretion of the Board of Directors, but no
option may be exercisable for more than ten years.

     The Company recorded compensation expense related to employee stock
options of $84,068 and $220,174 for the three months ended December 31, 2008
and 2007, respectively and $146,997 and $364,966 for the six months ended
December 31, 2008 and 2007, respectively.  The Company granted 75,000 and
145,000 options during the six months ended December 31, 2008 and 2007,
respectively.  During the six months ended December 31, 2008 and 2007,
210,000 and 45,000 options expired, respectively.

     A summary of option activity under the 2006 Plan for the six months
ended December 31, 2008 is as follows:












                                     17



             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

8.   STOCKHOLDERS' EQUITY (CONTINUED):

     Stock options (continued):

                                                     Weighted-
                                         Weighted-   Average
                                         Average     Remaining     Aggregate
                                         Exercise    Contractual   Intrinsic
                             Options     Price       Life          Value
                             ---------   --------    -----------   ---------

Outstanding at July 1, 2008  2,183,333   $   3.06       4.6        $   7,950
 Granted                        75,000       1.00
 Exercised                        -          -
 Forfeited                        -          -
 Expired                      (210,000)      3.03
Outstanding at December 31,  ---------   --------       ---        ---------
  2008                       2,048,333   $   2.99       4.6        $    -
Exercisable at December 31,  =========   ========       ===        =========
  2008                       1,617,084   $   2.94       4.6        $    -
                             =========   ========       ===        =========

     The following table presents information relating to nonvested stock
options as of December 31, 2008:

                                                  Weighted Average
                                                    Grant-Date
                                   Options          Fair Value
                                   --------       ----------------

Nonvested at July 1, 2008           562,916           $ 1.29
  Granted                            75,000              -
  Vested                           (206,667)           (1.59)
  Forfeited                            -                 -
                                   --------           ------
Nonvested at December 31, 2008      431,249           $ 1.20
                                   ========           ======

     The total fair value of stock options that vested during the six months
ended December 31, 2008 and 2007 was $233,377 and $342,800, respectively.
The intrinsic value of stock options exercised during the six months ended
December 31, 2008 and 2007 was $0 as there were no options      exercised
during these periods.  As of December 31, 2008 the Company had $289,780 of
unrecognized compensation cost related to stock options that will be recorded
over a weighted average period 1.5 years.





                                     18



             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

8.   STOCKHOLDERS' EQUITY (CONTINUED):

     Stock options (continued):

     The Company has issued options to non-employees to purchase shares of
the Company's common stock in exchange for services.  As of December 31,
2008, non-employee options represented 595,833 of the 2,048,333 options
outstanding under the 2006 Plan.  Of the 595,833 non-employee options
outstanding, 92,500 were fully vested and contained no service conditions as
of December 31, 2008. These non-employee options were valued using the Black-
Scholes option-pricing model.  The fully vested options have been fully
amortized on the straight-line method and resulted in no expense for the six
months ended December 31, 2008 and 2007.

     The remaining 503,333 non-employee options outstanding include service
conditions and have graded vesting schedules through November 30, 2009.  As
of December 31, 2008, 312,500 of these options included service conditions
that were fully vested.  Generally for these agreements, the measurement date
of the services occurs when the options vest.  In accordance with Emerging
Issues Task Force ("EITF") Issue No. 96-18, recognition of compensation cost
for reporting periods prior to the measurement date is based on the then
current fair value of the options as of each of the interim reporting dates.
Any subsequent change in fair value is recorded on the measurement date.
The fair value of these options was determined using the Black-Scholes
option-pricing model, using the following assumptions at December 31, 2008; a
dividend yield of zero, risk-free interest rates of 1.71% to 2.25%,
volatility of 151% to 153% and an expected life of 6.3 to 9.5 years.
Consulting cost in connection with options that are not fully vested as of
December 31, 2008 is being recognized on a straight-line basis over the
requisite service period for the entire award.  Non-cash fair value
charges/(credits) of $(389,803) and $80,792 were recorded as expense during
the three months ended December 31, 2008 and 2007, respectively and
$(209,615) and $(70,146) for the six months ended December 31, 2008 and 2007,
respectively.

     Stock-based compensation charges/(credits) in operating expenses in the
Company's financial statements for the three and six months ended December
31, 2008 and 2007 are as follows:












                                   19


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

8.   STOCKHOLDERS' EQUITY (CONTINUED):

     Stock options (continued):
<TABLE>
<CAPTION>
                                      Three       Three       Six         Six
                                      months      months      months      months
                                      ended       ended       ended       ended
                                     December    December    December    December
                                     31, 2008    31, 2007    31, 2008    31, 2007
                                     ---------   ---------   ---------   ---------
<S>                                  <C>         <C>         <C>         <C>

General and administrative:
 Fair value remeasurement of
  convertible notes - affiliates     $    -      $(42,921)   $    -      $(237,383)
 Fair value remeasurement of
  options with service conditions     (389,803)      -        (275,075)       -
 Fair value of stock options
  expensed under SFAS 123(R)            76,318     150,013     114,367     228,445
                                     ---------   ---------   ---------   ---------
    Total                            $(313,485)  $ 107,092   $(160,708)  $  (8,938)
                                     =========   =========   =========   =========
Research and development:
 Fair value remeasurement of
   convertible notes - affiliates    $    -      $ (95,634)  $    -      $(361,577)
 Fair value remeasurement of
  options with service conditions         -         80,792      65,460     (70,146)
 Fair value of stock options
  expensed under SFAS 123 (R)            7,750      70,161      32,630     136,521
                                     ---------   ---------   ---------   ---------
    Total                            $   7,750   $  55,319   $  98,090   $(295,202)
                                     =========   =========   =========   =========
</TABLE>

9.   OPERATING LEASE:

     The Company entered into a non-cancellable operating lease commitment
for office space in New York, effective August 1, 2006 and expiring November
30, 2013.  In conjunction with the signing of the lease, the Company provided
the lessor with a secured letter of credit.  As of December 31, 2008 the
Company has reflected $85,973 as restricted cash related to the secured
letter of credit.  The Company's obligations under the lease are partially
guaranteed by Mr. Zizza.  The Company has entered into two separate
agreements to sub-lease approximately 32% of the Company's lease obligation
and the tenants have also agreed to reimburse the Company for leasehold
improvements and furnishings.  Because the lease contains an escalation
clause, the Company is recognizing rent under the straight-line method
resulting in an average monthly rent expense of $15,820.  The Company is also
recognizing the sub-lease rental income from its tenants under the straight-
line method, with a monthly average of $5,250.  The difference between the
straight-line method, and the actual lease payments have resulted in a
deferred rent liability of $72,738 as of December 31, 2008.   Rent expense,
net of contractual and month to month sub-lease rental income was $12,504 and
$20,053 and $25,008 and $51,234 for the three and six months ended December
31, 2008 and 2007, respectively.

                                   20


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

9.   OPERATING LEASE (CONTINUED):

     At December 31, 2008, future minimum rental payments due under non-
cancelable leases and future minimum rental payments to be received under
non-cancelable subleases are:

                               Operating lease   Sublease   Net operating
Fiscal year:                      payments       rentals    lease payments
------------                   ---------------   ---------  --------------

Six months ended June 30, 2009   $   92,520      $ 29,606     $ 62,914
2010                                191,405        61,249      130,156
2011                                198,602        63,553      135,049
2012                                212,775        68,088      144,687
2013                                225,756        72,242      153,514
Thereafter                           97,219        31,110       66,109
                                 ----------      --------     --------
Total                            $1,018,277      $325,848     $692,429
                                 ==========      ========     ========

     Effective January 1, 2009, Mr. Zizza has entered into a Master Sublease
with the Company whereby Mr. Zizza will become a subleasee and will, for a
one year initial period, make all payments pursuant to the lease and manage
the lease premises.  Rental payments from existing sub-tenants will be
deposited into a Company bank account such that Mr.  Zizza will have use of
those funds towards the monthly lease payment.  Mr. Zizza will have the
option on or before November 15, 2009 to continue the Master Sublease for the
entire period of the lease.  If Mr. Zizza fulfills his obligations under the
Master Sublease during the one year initial period, he shall receive the
funds from the next release from the Company's letter of credit approximating
$28,000.  If Mr. Zizza exercises the option to continue the Master Sublease
for the entire term of the lease, Mr. Zizza will be entitled to the balance
of funds held under the letter of credit.

10.  COMMITMENTS AND CONTINGENCIES:

     Employment and consulting agreements:

     The Company had an employment agreement with its president, Mr. Smith,
through December 31, 2007 providing $150,000 per year compensation.  On
November 7, 2007, the Company extended the employment agreement through
December 31, 2008.  On May 31, 2008, an agreement was reached whereby Mr.
Smith would continue his services as president through December 31, 2008 and
effective January 1, 2009 (or March 31, 2009 at the latest) through December
31, 2009, he would provide services to the Company in a consulting capacity
at his current compensation.  On January 11, 2009, the Company and Mr. Smith
entered into the Smith Agreement whereby Mr. Smith will continue to hold


                                   21


             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

10.  COMMITMENTS AND CONTINGENCIES (CONTINUED):

     Employment and consulting agreements (continued):

positions of Director, President and General Counsel of the Company and its
subsidiaries.  Pursuant to the Smith Agreement, Mr. Smith was granted a
$37,500 bonus in the form of a warrant (and extension of outstanding warrants
previously issued to Mr. Smith), immediately vested, to purchase 300,000
shares of the Company's common stock at $0.75 per share until December 31,
2018 and Mr. Smith shall accept pre-payment of his calendar year 2009 base
compensation of $150,000 in the form of 200,000 restricted shares of Company
common stock at a price of $0.75 per share.  In addition, Mr. Smith converted
his deferred compensation as of December 31, 2008 into shares of the
Company's common stock (See Note 7).

     Effective March 31, 2005, an agreement with Brightcap, through which the
services of Dominic Bassani, are provided, was extended through March 31,
2009.  Under the terms of the agreement, Brightcap will be paid $300,000
annually for Mr. Bassani's services.   On January 11, 2009, the Company
entered in the Brightcap Agreement, which extends Mr. Bassani's services
under the terms of the March 31, 2005 agreement for up to an additional six
months.  In addition, Mr. Bassani was granted a bonus of $125,000 in the form
of a) warrant, immediately vested, to purchase 1,000,000 shares of the
Company's common stock at $0.75 per share until December 31, 2018 and b) the
extension of all warrants previously issued to either Brightcap or Mr.
Bassani, now held by their donees, to December 31, 2018.  The Brightcap
Agreement also requires that upon the consummation of the next financing
received by the Company in excess of $1,000,000 net proceeds, the Company
will no longer defer compensation earned by Brightcap, rather it will be paid
in cash and the Brightcap Agreement grants Brightcap the right to convert its
existing deferred compensation as of December 31, 2008 of $175,000 into
233,334 shares of the Company's common stock at a price of $0.75 per share
until December 31, 2009.  The Brightcap Agreement also extends the maturity
date of Mr. Bassani's $50,000 promissory note to June 30, 2009 and allows for
the conversion of the principal and interest, in whole or in part, at the
election of Mr. Bassani, into the Company's restricted common shares at $0.75
per share.

     Effective May 1, 2005, the Company entered into a four-year
consulting/employment agreement with a former officer and director of the
Company, Salvatore Zizza.  As of January 1, 2006, the former officer and
director assumed the position of Chairman and director of Dairy, with an
annual salary of $300,000.  Pursuant to an agreement dated December 19, 2008,
Mr. Zizza will no longer provide services to the Company as of December 31,
2008 and the following terms were agreed upon: a) Mr. Zizza's 600,000
warrants shall be returned to the Company and the Company will reissue a
certificate to Mr. Zizza representing 150,000 warrants with no changes in the
terms and conditions of the original warrants, b) all options currently owned

                                   22




             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

10.  COMMITMENTS AND CONTINGENCIES (CONTINUED):

     Employment and consulting agreements (continued):

by Mr. Zizza shall vest on the existing schedule, c) the Company shall cancel
the 2007 Series AB Convertible Promissory Note owned by Mr. Zizza which
represented accrued deferred compensation from the Company (see Note 5), d)
the $50,000 promissory note owed to Mr. Zizza shall remain outstanding
however it will be amended to include the right of Mr. Zizza to convert the
principal and interest, in whole or part, into the Company's common stock at
a price of $0.75 per share at any date prior to the repayment of the Company
(see Note 6), e)  the Company's existing accrued payable of $41,647 shall
remain a valid obligation of the Company with the additional right of Mr.
Zizza to convert the accrued payable, in whole or in part, into the Company's
restricted common stock at a price of $0.75 per share (see Note 11) and f)
the Company entered into a Master Sublease as described in Note 9.

     Effective May 1, 2005, the Company entered into a four-year
consulting/employment agreement with Jeff Kapell.  Under the terms of the
agreement, Mr. Kapell provided part-time services to the Company through
March 2006.  In April 2006, Mr. Kapell was appointed Dairy's Vice President-
Renewables at a salary of $120,000 per year.  In June 2008, the employment
agreement terms were extended through July 1, 2012.  Mr. Kapell left the
employ of the Company effective November 1, 2008 by mutual agreement.  Mr.
Kapell has performed consulting services for the Company since November 2008.

     Effective September 18, 2006, the Company entered into a four-year
employment agreement with Jeremy Rowland whereby Mr. Rowland assumed the
position of Chief Operating Officer of Dairy at an annual salary of $150,000.
In June 2008, the employment agreement terms were extended through July 1,
2012. Mr. Rowland now serves as Chief Operating Officer of the Company's
Services Group subsidiary.

     Effective June 1, 2007, the Company entered into an employment
agreement, effective through August 31, 2009, with Craig Scott whereby Mr.
Scott was appointed Vice President of Capital Markets/Investor Relations at
an annual salary of $120,000.

     In May 2005 the Company declared contingent deferred stock bonuses of
690,000 shares to its key employees and consultants.  The stock bonuses of
492,500 and 197,500 shares are contingent upon the Company's stock price
exceeding $10.00 and $20.00 per share, respectively, and the grantees still
being employed by or providing services to the Company at the time the target
prices are reached.  As of December 31, 2008, 422,500 shares remain
outstanding due to the expiry of 125,000 and 62,500 shares exceeding $10.00
and $20.00 per share, respectively.

     In May 2008, the Company approved 250,000 stock options to certain
employees that will be granted upon the execution of new employment
agreements.

                                     23



             BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                      SIX MONTHS ENDED DECEMBER 31, 2008

10.  COMMITMENTS AND CONTINGENCIES (CONTINUED):

     Employment and consulting agreements (continued):

     Claims contingency:

     In May 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party,
filed a complaint against the Company in the Supreme Court of the State of
New York regarding $100,000 of the Company's convertible bridge notes
("Bridge Notes") that were issued to ACB in March 2000.  The complaint
includes a breach of contract claim asserting that the Company owes ACB
approximately $285,000 plus interest of $121,028 plus interest based on ACB's
interpretation of the terms of the Bridge Notes and subsequent amendments.
Effective June 30, 2001, the Company issued ACB 5,034 shares of common stock
in full satisfaction of the Bridge Notes based on the Company's
interpretation of the Bridge Notes, as amended. The Company has filed an
answer to the complaint denying the allegations. No activity has taken place
on this lawsuit since early 2003.  The Company believes that the ultimate
resolution of this litigation will not have a material adverse effect on the
Company, its operations or its financial condition.

11.  RELATED PARTY TRANSACTIONS:

     The Company has an accrued payable of $41,647 as of December 31, 2008,
to a company controlled by Mr. Zizza for rental of office space in 2003.
Pursuant to the Zizza Agreement, Mr. Zizza has the option to convert the
payable into common shares of the Company's stock at $0.75 per share at any
time prior to the obligation being paid by the Company.

12.  SUBSEQUENT EVENT:

     In January-February 2009, the Company issued 105,000 shares of its
restricted common stock at $0.75 per share for cash proceeds of $78,750.

     On January 28, 2009 the Board of the Pennsylvania Infrastructure
Investment Authority approved a $7.8 million loan to Bion PA 1, LLC, a
wholly-owned subsidiary of the Company, for the initial stage of Bion's
Kreider Farms project. The Company anticipates that it will be able to
complete the steps required to finalize this loan and commence this project
during the current fiscal year.










                                     24


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

     The following discussion and analysis should be read in conjunction with
the Unaudited Consolidated Financial Statements and Notes to Consolidated
Financial Statements filed herein and with the Company's Form 10-KSB for the
year ended June 30, 2008.

BUSINESS OVERVIEW

     For several years, the Company focused on completion of the development
of its second-generation technology which provides a comprehensive
environmental solution to a significant source of pollution in U.S.
agriculture, Confined Animal Feeding Operations ("CAFO's"), which development
is now substantially complete.  Currently, Bion is focused on using
applications of its patented waste management technology to pursue two main
business opportunities: 1) to develop Integrated Projects which will include
large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with
Bion waste treatment System modules processing the aggregate CAFO waste
stream from the equivalent of 40,000 or more beef and/or dairy cows (or the
waste stream equivalent of other species) while producing solids to be
utilized for renewable energy production (and potentially to be marketed as
feed and/or fertilizer), integrated with an ethanol plant capable of
producing 40 (or more) million gallons of ethanol per year and/or with CAFO
end product processors, and 2) environmental retrofit and remediation of the
waste streams of existing CAFOs in selected markets.

     The Company has commenced actively pursuing the opportunity presented by
environmental retrofit and remediation of the waste streams of existing
CAFOs. The first commercial activity in this area is the recently announced
agreement with Kreider Farms in Pennsylvania. On January 28, 2009 the Board
of the Pennsylvania Infrastructure  Investment Authority approved a $7.8
million loan to Bion PA 1, LLC, a wholly-owned subsidiary of the Company, for
the initial stage of Bion's Kreider Farms project. The Company anticipates
that it will be able to complete the steps required to finalize this loan and
commence this project during the current fiscal year.

     Additionally, we believe that Bion's technology platform allows the
integration of large-scale CAFO's and their end-product users, renewable
energy production from the CAFO waste stream, on site utilization of the
renewable energy generated and biofuel/ethanol production in an
environmentally and economically sustainable manner while reducing the
aggregate capital expense and operating costs for the entire integrated
complex ("Integrated Projects" or "Projects"). In the context of Integrated
Projects, Bion's waste treatment process, in addition to mitigating polluting
releases, generates renewable energy from portions of the CAFO waste stream
which renewable energy can be utilized by integrated ethanol plants, CAFO
end-product processors (including cheese, ice cream and /or bottling plants
in the case of dairy CAFOs and/or slaughter and/or processing facilities in
the context of beef CAFOs) and/or other users as a natural gas replacement.
Note that an integrated ethanol plant's main by-product, called distillers
grain, can be added to the feed of the animals in wet form thereby lowering

                                     25


the capital expenditures, operating, marketing and shipping costs and energy
usage of the ethanol production process. The ethanol plant thereby acts as a
feed mill for the CAFO, thus reducing the CAFO's feeding costs and generating
revenue to the ethanol plant, and also provides a market for the renewable
energy that Bion's System produces from the CAFO waste stream. Thus, such
Bion Integrated Projects can be denominated "closed loop". Bion, as developer
of and participant in Integrated Projects, anticipates that it will share in
the cost savings and revenue generated from these activities.

     Bion is currently working with local, state and federal officials and
with potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Project during the 2009 calendar
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in upstate New York (although locations in other
states are also under review). In addition, Bion intends to choose sites for
additional Projects during the remainder of calendar years 2009-2010 to
create a pipeline of Projects. Management has a 5-year development target
(through calendar year 2014) of approximately 12-25 Integrated Projects.  At
the end of the 5-year period, Bion projects that 8 or more of these
Integrated Projects will be in full operation in 3-8 states, and the balance
would be in various stages ranging from partial operation to early permitting
stage. No Integrated Project has been developed to date.

     The financial statements for the years ended June 30, 2008 and 2007 have
been prepared assuming the Company will continue as a going concern.  The
Company has incurred net losses of approximately $1,779,000 and $2,549,000
during the years ended June 30, 2008 and 2007, respectively.  At June 30,
2008, the Company had a working capital deficiency and a stockholders'
deficit of approximately $134,000 and $920,000, respectively.  The financial
statements for the three and six months ended December 31, 2008 and 2007 have
also been prepared assuming the Company will continue as a going concern.
The Company has incurred net income (loss) of approximately $794,000 and
($136,000) for the three and six month periods ended December 31, 2008,
respectively.  At December 31, 2008, the Company has a working capital
deficiency and a stockholders' deficit of approximately $939,000 and
$1,002,000, respectively.  The report of the independent registered public
accounting firm on the Company's consolidated financial statements as of and
for the year ended June 30, 2008 includes a "going concern" explanatory
paragraph which means that the accounting firm has expressed substantial
doubt about the Company's ability to continue as a going concern.
Management's plans with respect to these matters are described in this
section and in our consolidated financial statements, and this material does
not include any adjustments that might result from the outcome of this
uncertainty.  There is no guarantee that we will be able to raise the funds
or raise further capital for the operations planned in the near future.







                                    26


CRITICAL ACCOUNTING POLICIES

     Management has identified the following policies below as critical to
our business and results of operations.  Our reported results are impacted by
the application of the following accounting policies, certain of which
require management to make subjective or complex judgments.  These judgments
involve making estimates about the effect of matters that are inherently
uncertain and may significantly impact quarterly or annual results of
operations.  For all of these policies, management cautions that future
events rarely develop exactly as expected, and the best estimates routinely
require adjustment.   Specific risks associated with these critical
accounting policies are described in the paragraphs below.

Revenue Recognition

     While the Company has not recognized any operating revenues for the past
two fiscal years, the Company anticipates that future revenues will be
generated from product sales, credit sales, technology license fees, annual
waste treatment fees and/or direct ownership interests in Integrated
Projects.  The Company expects to recognize revenue from product sales when
there is persuasive evidence that an arrangement exists, when title has
passed, the price is fixed or determinable, and collection is reasonably
assured.  The Company expects that technology license fees will be generated
from the licensing of Bion's Systems.  The Company anticipates that it will
charge its customers a non-refundable up-front technology license fee, which
will be recognized over the estimated life of the customer relationship.  In
addition, any on-going technology license fees will be recognized as earned
based upon the performance requirements of the agreement. Annual waste
treatment fees will be recognized upon receipt. Revenues, if any, from the
Company's interest in Projects will be recognized when the entity in which
the Project has been developed recognizes such revenue.

Compensation Cost for Options with Service Conditions and Graded Vesting
Schedules

     The Company has issued non-employee options that include service
conditions and have graded vesting schedules.  Generally for these
arrangements, the measurement date of the services occurs when the options
vest.  In accordance with Emerging Issues Task Force Issue No. 96-18,
recognition of compensation cost for reporting periods prior to the
measurement date is based on the then current fair value of the options.
Fair value of the options is determined using a Black-Scholes option-pricing
model.  Any subsequent changes in fair value will be recorded on the
measurement date.  Compensation cost in connection with options that are not
fully vested is being recognized on a straight-line basis over the requisite
service period for the entire award.

Stock-based compensation

     On July 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"), which supersedes Accounting Principles Board
Opinion No. 25 ("APB 25"), and generally requires that share-based
compensation transactions be accounted and recognized in the statement of

                                    27


income based on their fair values.  The Company adopted SFAS 123(R)using the
modified prospective application under which all share based awards granted
on or after the adoption date and  modifications, repurchases or cancellation
of prior awards made after the adoption date shall be accounted for under
SFAS 123(R).  The modified prospective application does not require the
Company to restate prior period's financial results to reflect the adoption.

RECENT ACCOUNTING PRONOUNCEMENTS

     During October 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair
Value Measurements ("SFAS 157").  This statement does not require any new
fair value measurements but provides guidance on how to measure fair value
and clarifies the definition of fair value under accounting principles
generally accepted in the United States of America.  The statement also
requires new disclosures about the extent to which fair value measurements in
financial statements are based on quoted market prices, market-corroborated
inputs, or unobservable inputs that are based on management's judgments and
estimates.  This statement was effective for the Company on July 1, 2008 for
all financial assets and liabilities.  In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, Effective Dates of FASB Statement No. 157 (the
"FSP").  The FSP amends SFAS 157 to delay its effective date for non-
financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually).  For items within its scope,
the FSP defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years.  As it
relates to financial assets and liabilities, the adoption of SFAS 157 did not
have an impact on the Company's consolidated financial statements.  The
Company is still in the process of evaluating the impact that SFAS 157 will
have on its non-financial assets and liabilities.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115 ("SFAS 159").  This statement permits entities to
choose to measure eligible items at fair value at specified election dates.
SFAS 159 was effective for the Company on July 1, 2008.  The Company did not
apply the fair value option to any of its outstanding instruments, and
therefore, SFAS 159 did not have an impact on the consolidated financial
statements.

     In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS

                                     28



141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after July 1, 2009 for the Company.  The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.

     In December 2007, the FASB issued SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary (minority interest)
is an ownership interest in the consolidated entity that should be reported
as equity in the consolidated financial statements and separate from the
parent company's equity. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated statement of operations,
of the amounts of consolidated net income attributable to the parent and to
the non-controlling interest. This statement is effective for the Company on
July 1, 2009.  The Company is currently evaluating the effect the adoption of
this statement may have on its consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133 ("SFAS 161").  SFAS 161 changes the disclosure requirements
for derivative instruments and hedging activities by requiring that the
objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation.  The statement is effective for
the Company on January 1, 2009.  The Company does not expect that the
adoption of SFAS 161 will have an impact on its consolidated financial
statements.

THREE MONTHS ENDED DECEMBER 31, 2008 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2007

General and Administrative

     Total general and administrative expenses increased slightly from
$155,000 to $159,000 for the three months ended December 31, 2007 and 2008,
respectively.

     General and administrative expenses, excluding stock-based compensation
charges/(credits) of $(314,000) and $107,000 for the three months ended
December 31, 2008 and 2007, respectively, were $473,000 versus $48,000 for
the three months ended December 31, 2008 and 2007, respectively.  The primary
reason for the increase in general and administrative expenses excluding
stock-based compensation during the three months ended December 31, 2008 is
due to the shift in the Company's focus from research and development to pre-
commercial and commercial business activities related to its next generation
technology applications, therefore costs of various employees and consultants
(and their activities) that were previously incurred as research and
development expense are now allocated to general and administrative expense.
Salary and payroll related taxes were $146,000 and $44,000 for the three

                                    29


months ended December 31, 2008 and 2007, respectively, and the increase is
due to the expensing of previous research and development employees to
general and administrative expense. Consulting expense increased from $7,000
to $124,000 for the three months ended December 31, 2007 and 2008,
respectively due to the Company's shift from research and development to
general and administrative described above and additional lobbying and public
relations consulting during the three months ended December 31, 2008.  Legal
costs were $24,000 and $(126,000) for the three months ended December 31,
2008 and 2007, respectively, and the increase was due to the absence of the
insurance reimbursement for fiscal year 2008 legal fees associated with the
Centerpoint litigation.  Accounting and tax costs decreased from $39,000 for
the three months ended December 31, 2007 to $8,000 during the same period in
fiscal year 2009, due to lower quarterly review costs and tax related
expenses.  The Company also incurred lower rent expense, $15,000 and $25,000
for the three months ended December 31, 2008 and 2007, respectively, due to
additional sub-tenant month to month rentals during the three months ended
December 31, 2008.

     General and administrative stock-based compensation for the three years
ended December 31, 2008 and 2007 consist of the following:

                                           Three months    Three months
                                              ended           ended
                                           December 31,    December 31,
                                              2008            2007
                                           -------------  -------------
Fair value remeasurement of
 convertible notes - affiliates              $    -          $ (43,000)
Fair value remeasurement of options
 with service conditions                      (390,000)            -
Fair value of stock options expensed
 under SFAS 123(R)                              76,000         150,000
                                             ---------       ---------
   Total                                     $(314,000)      $ 107,000
                                             =========       =========

     Stock-based compensation charges/(credits) decreased to $(314,000) for
the three months ended December 31, 2008 from $107,000 for the three months
ended December 31, 2007.  The change in stock-based compensation fair value
adjusted expense relating to the President's convertible deferred
compensation of $(43,000) is primarily due to the fact his note was converted
in December 2007, therefore no remeasurement was required for the three
months ended December 31, 2008.  For the three months ended December 31, 2008
the Company recognized expense relating to the fair value of stock options
for general and administrative employees of $76,000, compared to $150,000.
The Company also recognized as general and administrative expenses $(390,000)
for the remeasurement of options with service conditions due to the
reallocation of research and development related costs and the decrease in
the fair value of the options from approximately $2.10 per share to
approximately $0.97 per share during the three months ended December 31,
2008.

                                   30



Research and development

     Total research and development expenses have decreased $474,000 from
$545,000 to $71,000 for the three months ended December 31, 2007 and 2008,
respectively.

     Research and development expenses, excluding stock-based compensation
charges of $8,000 and $55,000 for the three months ended December 31, 2008
and 2007, respectively, were $63,000 and $490,000 for the three months ended
December 31, 2008 and 2007, respectively.  The primary reason for the
decrease in research and development expenses during the three months ended
December 31, 2008 is due to the shift in the Company's focus from research
and development to pre-commercial and commercial activities related to its
next generation technology applications, therefore costs of various employees
and consultants (and their related activities)that were previously incurred
as research and development expense are now allocated to general and
administrative expense.  Salary and payroll related taxes were $45,000 and
$176,000 for the three months ended December 31, 2008 and 2007, respectively,
and the decrease is due to the expensing of previous research and development
employees to general and administrative.  Consulting expenses also decreased
significantly, from $234,000 to $3,000 for the three months ended December
31, 2007 and 2008, respectively, due to the shift from research and
development to general and administrative.

     Research and development stock-based compensation for the three months
ended December 31, 2008 and 2007 consist of the following:

                                           Three months    Three months
                                              ended          ended
                                           December 31,   December 31,
                                              2008             2007
                                           -------------  -------------
Fair value remeasurement of convertible
 notes - affiliates                         $    -           $ (96,000)
Fair value remeasurement of options with
 service conditions                              -              81,000
Fair value of stock options expensed
 under SFAS 123 (R)                            8,000            70,000
                                            --------         ---------
   Total                                    $  8,000         $  55,000
                                            ========         =========

     Stock-based compensation charges decreased from $55,000 for the three
months ended December 31, 2007 to $8,000 for the same period in fiscal year
2009.  Stock-based compensation fair value adjusted credits of $(96,000) for
the three months ended December 31, 2007, were recorded to re-measure the
fair value of Brightcap's convertible deferred compensation.  There was no
similar charge for the three months ended December 31, 2008 as the note was
converted at May 31, 2008.  The Company recorded stock-based compensation
expense of $8,000 and $70,000 under the provisions of SFAS 123(R) for the
three months ended December 31, 2008 and 2007, respectively for options
vested to research and development employees.  The decrease is due to
expensing options issued to employees who in the prior year were deemed to be

                                     31



research and development and in the fiscal year 2009 were primarily allocated
to general and administrative.  The Company also recognized as research and
development expenses $81,000 for the remeasurement of options with service
conditions for the three months ended December 31, 2007 while no expense was
recognized for the three months ended December 31, 2008 due to the allocation
of such expenses to general and administrative expenses.

Loss from Operations

     As a result of the factors described above, the loss from operations was
$229,000 and $699,000 for the three months ended December 31, 2008 and 2007,
respectively.

Other expense and (income)

     Other expense and (income) was $(1,023,000) and $94,000 for the three
months ended December 31, 2008 and 2007, respectively.  Interest expense
decreased $35,000 from $51,000 for the three months ended December 31, 2007
to $16,000 for the three months ended December 31, 2008.  Interest expense
decreased due to the lower debt balances on the 2006 and 2007 Series A Notes
for the three months ended December 31, 2008.  For the three months ended
December 31, 2008, the Company recognized other income of $1,034,000 due to
the forfeiture of deferred compensation relating the cancellation of Mr.
Zizza's Notes of $959,000 and a $75,000 settlement with the Company's
directors and officers liability insurance providers.  For the three months
ended December 31, 2007, the Company received reimbursements for legal fees
relating to the Centerpoint litigation which resulted in a positive net
equity position for the Company's majority held subsidiary, Centerpoint,
which resulted in the recording of the $53,000 minority interest expense of
Centerpoint for the three months ended December 31, 2007 while for the three
months ended December 31, 2008 the amount was $(4,000).

Net income (loss)

     As a result of the factors described above, the net income (loss) was
794,000 and $(794,000) for the three months ended December 31, 2008 and 2007,
respectively, representing a $0.18 increase in the net earnings per basic and
net earnings per diluted common share, respectively, for the three months
ended December 31, 2008 and 2007, respectively.

SIX MONTHS ENDED DECEMBER 31, 2008 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2007

General and Administrative

     Total general and administrative expenses increased from $309,000 to
$788,000 for the six months ended December 31, 2007 and 2008, respectively.

     General and administrative expenses, excluding stock-based compensation
credits of $161,000 and $9,000 for the six months ended December 31, 2008 and
2007, respectively, were $949,000 versus $318,000 for the six months ended
December 31, 2008 and 2007, respectively.  The primary reason for the
increase in general and administrative expenses excluding stock-based
compensation during the six months ended December 31, 2008 is due to the

                                     32


shift in the Company's focus from research and development to pre-commercial
and commercial business activities related to its next generation technology
applications, therefore costs of various employees and consultants (and their
activities) that were previously incurred as research and development expense
are now allocated to general and administrative expense.  Salary and payroll
related taxes were $280,000 and $90,000 for the six months ended December 31,
2008 and 2007, respectively, and the increase is due to the expensing of
previous research and development employees to general and administrative
expense. Consulting expense increased from $33,000 to $268,000 for the six
months ended December 31, 2007 and 2008, respectively due to the Company's
shift from research and development to general and administrative described
above and additional lobbying and public relations consulting during the six
months ended December 31, 2008.  Legal costs increased $71,000 for the six
months ended December 31, 2008 due to the fact during the six months ended
December 31, 2007 insurance reimbursements for the Centerpoint litigation of
$133,000 were received.  The Company also incurred lower rent expense,
$31,000 and $56,000 for the six months ended December 31, 2008 and 2007,
respectively, due to additional sub-tenant month to month rentals during the
six months ended December 31, 2008.

     General and administrative stock-based compensation for the six years
ended December 31, 2008 and 2007 consist of the following:

                                           Six months    Six months
                                              ended        ended
                                           December 31,  December 31,
                                              2008          2007
                                           ------------  ------------
Fair value remeasurement of
 convertible notes - affiliates             $    -        $(237,000)
Fair value remeasurement of options
 with service conditions                     (275,000)         -
Fair value of stock options expensed
 under SFAS 123(R)                            114,000       228,000
                                            ---------     ---------
   Total                                    $(161,000)    $  (9,000)
                                            =========     =========

     Stock-based compensation credits decreased to $161,000 for the six
months ended December 31, 2008 from $9,000 for the six months ended December
31, 2007.  The change in stock-based compensation fair value adjusted expense
relating to the President's convertible deferred compensation of $(237,000)
is primarily due to the fact his note was converted in December 2007,
therefore no remeasurement was required for the six months ended December 31,
2008.  For the six ended December 31, 2008 the Company recognized expense
relating to the fair value of stock options for general and administrative
employees of $114,000, compared to $228,000 for the six months ended December
31, 2007.  The Company also recognized as general and administrative expenses
$(275,000) for the remeasurement of options with service conditions due to
the reallocation of research and development related costs and the decrease
in the fair value of the options from approximately $2.06 per share to
approximately $0.97 per share during the six months ended December 31, 2008.

                                    33



Research and development

     Total research and development expenses have decreased $325,000 from
$672,000 to $347,000 for the six months ended December 31, 2007 and 2008,
respectively.

     Research and development expenses, excluding stock-based compensation
charges/(credits) of $98,000 and $(295,000) for the three six months ended
December 31, 2008 and 2007, respectively, were $249,000 and $967,000 for the
three months ended December 31, 2008 and 2007, respectively.  The primary
reason for the decrease in research and development expenses during the six
months ended December 31, 2008 is due to the shift in the Company's focus
from research and development to pre-commercial and commercial activities
related to its next generation technology applications, therefore costs of
various employees and consultants (and their related activities)that were
previously incurred as research and development expense are now allocated to
general and administrative expense.  Salary and payroll related taxes were
$147,000 and $357,000 for the six months ended December 31, 2008 and 2007,
respectively, and the decrease is due to the expensing of previous research
and development employees to general and administrative.  Consulting expenses
also decreased significantly, from $300,000 to $16,000 for the six months
ended December 30, 2007 and 2008, respectively, due to the shift from
research and development to general and administrative.

     Research and development stock-based compensation for the six months
ended December 31, 2008 and 2007 consist of the following:

                                           Six months    Six months
                                              ended         ended
                                           December 31,  December 31,
                                              2008          2007
                                           ------------  ------------
Fair value remeasurement of convertible
 notes - affiliates                         $    -        $(362,000)
Fair value remeasurement of options with
 service conditions                           65,000        (70,000)
Fair value of stock options expensed
 under SFAS 123 (R)                           33,000         137,000
                                            ---------      ---------
   Total                                    $ 98,000       $(295,000)
                                            ========       =========

     Stock-based compensation charges/(credits) increased from $(295,000) for
the six months ended December 31, 2007 to $98,000 for the same period in
fiscal year 2009.  Stock-based compensation fair value adjusted credits of
$(362,000) for the six months ended December 31, 2007, were recorded to re-
measure the fair value of Brightcap's convertible deferred compensation.
There was no similar charge for the six months ended December 31, 2008 as the
note was converted at May 31, 2008.  The Company recorded stock-based
compensation expense of $33,000 and $137,000 under the provisions of SFAS
123(R) for the six months ended December 31, 2008 and 2007, respectively for
options vested to research and development employees.  The decrease is due to

                                   34


expensing options issued to employees who in the prior year were deemed to be
research and development and in the fiscal year 2009 were primarily allocated
to general and administrative.  The Company also recognized as research and
development expenses $(70,000) for the remeasurement of options with service
conditions for the six months ended December 31, 2007 while $65,000 was
recognized for the six months ended December 31, 2008 due to the allocation
of such expenses to general and administrative expenses.

Loss from Operations

     As a result of the factors described above, the loss from operations was
$1,135,000 and $980,000 for the six months ended December 31, 2008 and 2007,
respectively.

Other expense and (income)

     Other expense and (income) was $(999,012) and $(1,044,000) for the six
months ended December 31, 2008 and 2007, respectively.  Interest expense
decreased $76,000 from $104,000 for the six months ended December 31, 2007 to
$28,000 for the six months ended December 31, 2008.  Interest expense
decreased due to the lower debt balances on the 2006 and 2007 Series A Notes
for the six months ended December 31, 2008.  For the six months ended
December 31, 2008, the Company recognized other income of $1,034,000 due to
the forfeiture of deferred compensation relating the cancellation of Mr.
Zizza's Notes of $959,000 and a $75,000 settlement with the Company's
director's and officer's liability insurance providers.  For the six months
ended December 31, 2007, the Company recognized other income of $1,258,000
due to the receipts of $828,000 from litigation settlements and $430,000 from
release of previously escrowed funds owed to Centerpoint.   The receipts of
the litigation settlement proceeds and the escrowed funds resulted in a
positive net equity position for the Company's majority held subsidiary,
Centerpoint, which resulted in the recording of the $127,000 minority
interest expense of Centerpoint for the six months ended December 31, 2007
while for the six months ended December 31, 2008 the amount was $10,000.

Net (loss) income

     As a result of the factors described above, the net (loss) income was
$(136,000) and $63,000 for the six months ended December 31, 2008 and 2007,
respectively, representing a $0.02 decrease in the net earnings per basic and
net earnings per diluted common share, respectively, for the six months ended
December 31, 2008 and 2007, respectively.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2008, the Company had cash and cash equivalents equal
to $37,000.  During the six months ended December 31, 2008, net cash used in
operating activities was $754,000, primarily consisting of cash operating
expenses.  As previously noted, the Company is currently not generating
revenue and accordingly has not generated cash flows from operations.  The
Company does not anticipate generating sufficient revenues to offset
operating and capital costs for a minimum of two to five years.  While there
are no assurances that the Company will be successful in its efforts to

                                   35


develop and construct its Projects and market its Systems, it is certain that
the Company will require significant funding from external sources. Given the
unsettled state of the current credit and capital markets, there is no
assurance the Company will be able to raise the funds it needs on reasonable
terms.

Investing Activities

     During the six months ended December 31, 2008 the Company provided
$42,000 of cash due to the release of restricted cash related to the New York
office operating lease.

Financing Activities

     During the six months ended December 31, 2008, $165,000 of cash was
provided by financing activities from short-term promissory notes -
affiliates and $105,000 of cash was provided from the sale of the Company's
restricted common stock.

     As of December 31, 2008 the Company has significant debt obligations
consisting primarily of deferred compensation of $241,000 and promissory
notes - affiliates of $167,000.  The Company has entered into an 88-month
operating lease for office space in New York City, with an average monthly
lease expense of $15,820.

Plan of Operations and Outlook

     As of December 31, 2008 the Company had cash and cash equivalents of
approximately $37,000.  Based on our operating plan, management believes that
existing cash on hand will not be sufficient to fund the Company's basic
overhead through the end of the 2009 fiscal year.

     The Company currently faces a severe working capital shortage and it is
not currently generating any revenues. The Company will need to obtain
additional capital to fund its operations and technology development, to
satisfy existing creditors and to develop Projects. The Company anticipates
that it will seek to raise from $3,000,000 to $50,000,000 (debt and equity)
during the next twelve months.  There is no assurance, especially in the
extremely unsettled capital markets that presently exist, that the Company
will be able to obtain the funds that it needs to stay in business, complete
its technology development or to successfully develop its business.

     There can be no assurance that funds required during the next twelve
months or thereafter will be generated from operations or that those funds
will be available from external sources such as debt or equity financings or
other potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders.   All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.

                                    36



     Currently, Bion is focused on using applications of its patented waste
management technology to pursue two main business opportunities: 1) to
develop Integrated Projects which will include large CAFOs, such as large
dairies, beef cattle feed lots and hog farms, with Bion waste treatment
System modules processing the aggregate CAFO waste stream from the equivalent
of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of
other species) while producing solids to be utilized for renewable energy
production (and potentially to be marketed as feed and/or fertilizer),
integrated with an ethanol plant capable of producing 40 (or more) million
gallons of ethanol per year and/or integrated with CAFO end product
processors, and 2) environmental retrofit and remediation of the waste
streams of existing CAFOs in selected markets.

    Bion is currently working with local, state and federal officials and
with potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Project during the 2009 calendar
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in upstate New York (although locations in other
states are also under review). In addition, Bion intends to choose sites for
additional Projects during the remainder of calendar years 2009-2010 to
create a pipeline of Projects. Management has a 5-year development target
(through calendar year 2014) of approximately 12-25 Integrated Projects.  At
the end of the 5-year period, Bion projects that 8 or more of these
Integrated Projects will be in full operation in 3-8 states, and the balance
would be in various stages ranging from partial operation to early permitting
stage. No Integrated Project has been developed to date.

     The Company has also commenced actively pursuing the opportunity
presented by environmental retrofit and remediation of the waste streams of
existing CAFOs in selected markets. The first commercial activity in this
area is the recently announced agreement with Kreider Farms in Pennsylvania.

CONTRACTUAL OBLIGATIONS

     We have the following material contractual obligations (in addition to
employment and consulting agreements with management and employees):

     1)  The Company executed a non-cancelable operating lease for office
space in New York City effective August 1, 2006 and extending to November 30,
2013. The average monthly rent expense under the lease is $15,820.  The
Company has provided the lessor with a letter of credit in the amount of
$85,973 in connection with the lease as of December 31, 2008.  The Company's
obligations under the lease are partially guaranteed by Salvatore Zizza,
Chairman of Bion Dairy.  The Company has entered into sub-leases with non-
affiliated parties for approximately 32% of the obligations under the lease.
Effective January 1, 2009, Mr. Zizza has entered into a Master Sublease with
the Company whereby Mr. Zizza will become a subleasee and will, for a one
year initial period, make all payments pursuant to the lease and manage the
lease premises.  Rental payments from existing sub-tenants will be deposited
into a Company bank account such that Mr.  Zizza will have use of those funds
towards the monthly lease payment.  Mr. Zizza will have the option on or
before November 15, 2009 to continue the Master Sublease for the entire

                                    37


period of the lease.  If Mr. Zizza fulfills his obligations under the Master
Sublease during the one year initial period, he shall receive the funds from
the next release from the Company's letter of credit approximating $28,000.
If Mr. Zizza exercises the option to continue the Master Sublease for the
entire term of the lease, Mr. Zizza will be entitled to the balance of funds
held under the letter of credit.

     2)  On September 27, 2008, the Company executed an agreement with
Kreider Farms (and its affiliated entities) (collectively "Kreider") to
design, construct and operate, through its wholly-owned subsidiary, Bion
Services Group, Inc. ("Bion Services"), a Bion system to treat the waste of
the dairy cows (milkers, dry cows and heifers) at the Kreider Dairy, located
in Mannheim, Pennsylvania. In addition, the agreement provides for an
integrated renewable energy facility that will provide energy for Bion's
waste treatment facility through the combustion of the cellulose captured in
the Bion process. The system will be owned and operated by Bion through a new
entity to be formed and initially 100% owned by Bion Services, in which
Kreider will have the option to purchase a minority interest. Upon completion
of final design work and resolution of all building, zoning and other related
pre-construction matters, it will be necessary to raise substantial capital
(equity and/or debt) to construct and operate the Kreider system, which may
be difficult to do on reasonable terms due to the current unsettled condition
of the capital markets. Upon successful construction and operation of the
system, the Company anticipates that it will receive revenue from the sale of
nutrient (and other) environmental credits related to the Kreider system and
through sales of renewable energy generated at the Kreider system. On January
27, 2009 the Board of the Pennsylvania Infrastructure Investment Authority
(PENNVEST) approved a $7.8 million loan to Bion for "the construction of a
livestock waste treatment facility at Kreider Farms..." for the dairy portion
of the Kreider Farms project.  Definitive agreements regarding this loan have
not yet been negotiated or executed.

OFF-BALANCE SHEET ARRANGEMENTS

     We do not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely to have a
current or future material effect on our financial condition, revenue or
expenses, results of operations, liquidity, capital expenditures or capital
resources.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Not Applicable.

ITEM 4.  CONTROLS AND PROCEDURES.

     (a)  Evaluation of Disclosure Controls and Procedures.

     The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within the required time periods. Our

                                    38


Chief Executive Officer and Principal Financial Officer has evaluated the
effectiveness of the design and operations of our disclosure controls and
procedures as of the end of the period covered by this quarterly report, and
has concluded that, as of that date, our disclosure controls and procedures
were not effective at ensuring that required information will be disclosed on
a timely basis in our reports filed under the Exchange Act, as a result of
the material weakness in internal control over financial reporting discussed
in Item 8A(T) of  our Form 10-KSB for the year ended June 30, 2008.

     (b)  Changes in Internal Control over Financial Reporting.

     No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.



                          PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     There have been no material developments in the legal proceedings
described in our Form 10-KSB since filing.

ITEM 1A.  RISK FACTORS.

     Not Applicable.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

     During the quarter ended December 31, 2008 the Company sold 140,000
shares of restricted common stock for $105,000.  The proceeds were used for
working capital purposes.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

     Not Applicable.

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

     Not applicable.

ITEM 5.  OTHER INFORMATION.

     Not Applicable










                                    39


ITEM 6.  EXHIBITS.

Exhibit No.                           Description

      10.1   Agreement between Jeff Kapell and Bion dated November 1, 2008 -
             Incorporated by reference to Exhibit 10.1 to Form 8-K dated
             October 30, 2008

      10.2   Agreement Between David Mager and Bion dated November 1, 2008 -
             Incorporated by reference to Exhibit 10.2 to Form 8-K dated
             October 30, 2008

      10.3   Promissory Note between Anthony Orphanos and Bion dated October
             30, 2008, Guaranteed by Dominic Bassani - Incorporated by
             reference to Exhibit 10.3 to Form 8-K dated October 30, 2008

      10.4   Addendum to Settlement Agreement and Release Stipulation
             from Bion, Bion Dairy and Mark Smith dated October 31,
             2008 - Incorporated by reference to Exhibit 10.4 to Form 8-K
             dated October 30, 2008

      10.5   Agreement between Salvatore Zizza and Bion effective December
             31, 2008 - Incorporated by reference to Exhibit 10.1 to
             Form 8-K dated December 31, 2008

      10.6   Amendment #3 to 2006 Consolidated Incentive Plan - Incorporated
             by reference to Exhibit 10.2 to Form 8-K dated December 31,
             2008

      10.7   Agreement Between David Mager and Bion dated November 1, 2008 -
             Incorporated by reference to Exhibit 10.2 to the Registrant's
             Form 8-K dated October 30, 2008

      10.8   Promissory Note between Anthony Orphanos and Bion dated October
             30, 2008, Guaranteed by Dominic Bassani - Incorporated by
             reference to Exhibit 10.3 to the Registrant's Form 8-K dated
             October 30, 2008

      10.9   Addendum to Settlement Agreement and Release Stipulation from
             Bion, Bion Dairy and Mark Smith dated October 31, 2008 -
             Incorporated by reference to Exhibit 10.4 to the Registrant's
             Form 8-K dated October 30, 2008

      31.1   Certification of CEO and Principal Financial Officer pursuant
             to Rule 13a-14(a) or Rule 15d-14(a) - Filed herewith
             electronically

      32.1   Certification of CEO and Principal Financial Officer pursuant
             to Section 906 of the Sarbanes-Oxley Act of 2002 -
             Filed herewith electronically



                                    40


                                 SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                   BION ENVIRONMENTAL TECHNOLOGIES, INC.



Date:   February 12, 2009          By:/s/ Mark A. Smith
                                      Mark A. Smith, President (Chief
                                      Executive Officer) and Interim Chief
                                      Financial Officer (Principal Financial
                                      and Accounting Officer)







































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