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-K for the year ended June 30, 2012.

BUSINESS OVERVIEW

For several years, the Company focused on completion of the development of the next generation of its technology which provides a comprehensive environmental solution to a significant source of pollution in U.S. agriculture, large scale livestock facilities known as Confined Animal Feeding Operations ("CAFO's"). The re-development process is now substantially complete and the initial commercial system, based on our updated technology, has been constructed and placed in full commercial operation. Currently, Bion is focused on using applications of its patented waste management technology to pursue two main business opportunities:
1) installation of Bion systems to retrofit and environmentally remediate existing CAFOs in selected markets where: a) government policy supports such efforts (such as the Chesapeake Bay watershed and/or states and watersheds facing EPA 'total maximum daily load' ("TMDL') issues, and/or b) where CAFO's need our technology to obtain permits to expand or develop without negative environmental consequences; and 2) development of 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 recovering cellulosic biomass (to be utilized for renewable energy production) and nutrient rich solids (that can potentially to be marketed as feed and/or fertilizer), integrated with an ethanol plant capable of producing 40 million gallons (or more) of ethanol per year and/or with CAFO end product processors. The Company has been pursuing these opportunities within the United States during the later stages of technology re-development and has recently begun activities to pursue such opportunities internationally.

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 an agreement with Kreider Farms ("KF") in Pennsylvania to design, construct and operate a Bion system to treat KF's dairy and poultry waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority ("Pennvest") approved a $7.75 million loan to Bion PA 1, LLC ("PA-1"), a wholly-owned subsidiary of the Company, for the initial stage of Bion's Kreider Farms project. After substantial unanticipated delays, on August 12, 2010 the Company received a permit for construction of the Phase 1 Kreider system. Construction activities commenced during November 2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. Bion finished the construction of the Phase 1 Kreider System and entered a period of system 'operational shakedown' during May 2011. The Phase 1 Kreider System reached full, stabilized operation by the end of the 2012 fiscal year. During 2011 the Pennsylvania Department of Environmental Protection ("PADEP") re-certified the nutrient credits for this project. The PADEP issued final permits for the Kreider System (including the credit verification plan) on August 1, 2012 on which date the Company deemed that the Kreider System was 'placed in service'. As a result, Bion can now commence generating and verifying nutrient reduction credits for sale during the 2013 fiscal year while continuing to utilize the system to test improvements and add-ons. Additionally, the Kreider System has met the 'technology guaranty' standards which were incorporated in the Pennvest financing documents and the Pennvest Loan is now solely an obligation of PA-1. Based on the limited development of the depth and breadth of the Pennsylvania nutrient reduction credit market to date, Pennvest and PA-1 have recently commenced preliminary discussions regarding the Pennvest Loan.

The Company continues its development work related to the second phase of the Kreider project ('Phase 2 Kreider Project') which involves production of renewable energy from the waste of KF's poultry operations and the cellulosic solids recovered by the Phase 1 Kreider System. During May 2011 the PADEP certified the Phase 2 Kreider Project for 559,457 nutrient credits under the old EPA's Chesapeake Bay model. The Company anticipates that this project will be certified for between 1.5-2 million nutrient reduction credits pursuant to the recently amended EPA Chesapeake Bay model. The Company intends to have the Phase 2 Kreider Project operational during the 2014 fiscal year, and hopes to enter into agreements related to sales of the credits for future delivery (under long term contracts) during the 2013 calendar year subject to verification by the PADEP. Liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth to date which has negatively impacted Bion's business plans and has resulted in challenges to monetizing the nutrient reduction credits created by Bion's existing Kreider project and proposed projects. A significant portion of Bion's work with public and private stakeholders is related to policy and regulatory steps which will increase the depth and breadth of funding mechanisms for technology-based, verifiable agricultural nutrient reductions.

The Company has commenced activities related to marketing and potential use of its technology in relation to expansion and/or development of CAFO's in the Midwest (and elsewhere). Bion considers this to be a large potential market for the Company's growth over the next 18-36 months. It is anticipated that such activities will accelerate now that the Company has received final permits for the initial KF System (and as its credits are verified). Now that final permitting and verification plan approval has been completed at the Kreider System, the Company intends to seek to advance commercial sales in additional areas which face deadlines to meet EPA TMDL requirements.

A significant portion of Bion's activities concern efforts with private and public stakeholders (at local and state level) in Pennsylvania and other Chesapeake Bay states and at the federal level (EPA (and other executive departments) and Congress) to establish appropriate public policies which will create regulations and funding mechanisms that foster installation of the low cost environmental solutions that Bion (and others) can provide through clean-up of agricultural waste streams. The Company anticipates that such activities will expand into additional states as TMDL requirements are extended by the EPA over the next two years.

Additionally, we believe that Bion's technology platform will allow the integration of large-scale CAFO's and their end-product users, renewable energy production from the CAFO waste stream, and 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 and increasing revenue and profitability 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, will generate renewable energy from cellulosic portions of the CAFO waste stream which renewable energy can be utilized by integrated facilities including 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 replacement for fossil fuel usage. In addition 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 the capital expenditures, operating, marketing and shipping costs and energy usage of the ethanol production process. In such cases, the ethanol plant would act as a feed mill for the integrated CAFO, thereby reducing the CAFO's feeding costs as well as generating revenue to the ethanol plant, and would also provide a market for the renewable energy that Bion's System produces from the CAFO waste stream. And, in some cases the nutrient rich liquid effluent from the Bion system modules may be directly utilized for greenhouse and/or hydroponic agriculture. Accordingly, 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 the revenues generated from these activities.

Bion is currently working with local, state and federal officials with regard to regulatory and legislative initiatives, and with such parties and potential industry participants to evaluate sites in multiple states. The Company believes that its initial Integrated Project will most likely be located and developed (possibly in stages) in Pennsylvania and anticipates optioning land for such a Project during the current calendar year or soon thereafter. Note that locations in other states are also under review and the initial Integrated Project could be developed elsewhere. It is possible that the Company will develop one or more Integrated Projects as joint ventures specifically targeted to meet the growing animal protein demand outside of the United States (including without limitation Asia, Europe and/or the Middle East). Bion intends to choose sites for additional Projects during the calendar years 2013-2015 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2019) of approximately 10-24 Integrated Projects.
At the end of that period, Bion projects that 5 or more of these Integrated Projects will be in full operation in 3-5 states (or other locations), 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's audited financial statements for the years ended June 30, 2012 and 2011 have been prepared assuming the Company will continue as a going concern.
The Company has incurred net losses of approximately $6,465,000 and $6,998,000 during the years ended June 30, 2012 and 2011, respectively. At June 30, 2012, the Company had a working capital deficit and a stockholders' deficit of approximately $345,000 and $858,000, 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, 2012 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. The Company has incurred net losses of approximately $1,181,000 and $3,634,000 for the three and six months ended December 31, 2012, respectively.
At December 31, 2012 the Company has a working capital deficit and a stockholder's deficit of approximately $762,000 and $1,938,000, respectively.
Management's plans with respect to these matters are described in this section and in our consolidated financial statements (and notes thereto), and this material does not include any adjustments that might result from the outcome of this uncertainty. However, there is no guarantee that we will be able to raise sufficient funds or further capital for the operations planned in the near future.

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 it will commence generation of revenues during the 2013 fiscal year. Revenues will be generated from the sale of nutrient reduction credits, product sales, technology license fees, annual waste treatment fees and/or direct ownership interests in Integrated Projects.
The Company expects to recognize revenue from the sale of nutrient credits and products 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.

Stock-based compensation

The Company follows the provisions of Accounting Standards Codification ("ASC") 718, which generally requires that share-based compensation transactions be accounted and recognized in the statement of income based upon their grant date fair values.

Derivative Financial Instruments:

Pursuant to ASC Topic 815 "Derivatives and Hedging" ("Topic 815"), the Company reviews all financial instruments for the existence of features which may require fair value accounting and a related mark-to-market adjustment at each reporting period end. Once determined, the Company assesses these instruments as derivative liabilities. The fair value of these instruments is adjusted to reflect the fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.

Warrants:

The Company has issued warrants to purchase common shares of the Company.
Warrants are valued using a fair value based method, whereby the fair value of the warrant is determined at the warrant issue date using a market-based option valuation model based on factors including an evaluation of the Company's value as of the date of the issuance, consideration of the Company's limited liquid resources and business prospects, the market price of the Company's stock in its mostly inactive public market and the historical valuations and purchases of the Company's warrants. When warrants are issued in combination with debt or equity securities, the warrants are valued and accounted for based on the relative fair value of the warrants in relation to the total value assigned to the debt or equity securities and warrants combined.

THREE MONTHS ENDED DECEMBER 31, 2012 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2011

General and Administrative

Total general and administrative expenses were $1,072,000 and $1,026,000 for the three months ended December 31, 2012 and 2011, respectively.

General and administrative expenses, excluding stock-based compensation charges of $130,000 and $344,000, were $942,000 and $682,000 for the three months ended December 31, 2012 and 2011, respectively, representing a $260,000 increase. The primary reason for the increase is due to the increase in depreciation expense from $4,000 for the three months ended December 31, 2011 to $247,000 for the three months ended December 31, 2012. Kreider 1 was placed in service on August 1, 2012 and its components are being depreciated over their estimated useful lives. Salaries and related payroll tax expenses increased to $315,000 for the three months ended December 31, 2012 from $239,000 for the three months ended December 31, 2011, primarily due to the fact that during the three months ended December 31, 2011, certain salaries were being capitalized as part of Kreider 1.

General and administrative stock-based compensation for the three months ended December 31, 2012 and 2011 consists of the following:

                                                     Three months    Three months
                                                         ended           ended
                                                     December 31,    December 31,
                                                         2012            2011
 General and administrative:
  Fair value of stock issued to an employee          $  25,000       $  25,000
  Fair value of stock options expensed under ASC 718   105,000         319,000
    Total                                             $130,000        $344,000

Stock-based compensation charges decreased to $130,000 from $344,000 for the three months ended December 31, 2012 and 2011, respectively. Compensation expense relating to stock options was $105,000 and $319,000 during the three months ended December 31, 2012 and 2011, respectively, and the decrease is due to more options vesting during the three months ended December 31, 2011.

Research and Development

Total research and development expenses were $38,000 and $28,000 for the three months ended December 31, 2012 and 2011, respectively.

Research and development expenses, excluding stock-based compensation charges of $9,000 and nil, were $29,000 and $28,000 for the three months ended December 31, 2012 and 2011, respectively. There were no significant increases or decreases in research and development costs between the two periods.

Research and development stock-based compensation for the three months ended December 31, 2012 and 2011 consists of the following:

                                                     Three months    Three months
                                                         ended          ended
                                                     December 31,    December 31,
                                                         2012            2011
 Research and development:
  Fair value of stock options expensed under ASC 718 $  9,000          $  -
    Total                                            $  9,000          $  -

Stock-based compensation expense increased from nil for the three months ended December 31, 2011 to $9,000 for the three months ended December 31, 2012. The increase is attributable to an increase in research and development activity by an employee whose salary is no longer being capitalized as part of the Kreider 1 project.

Loss from Operations

As a result of the factors described above, the loss from operations was $1,109,000 and $1,054,000 for the three months ended December 31, 2012 and 2011, respectively.

Other Expense (Income)

Other expense was $72,000 and $7,000 for the three months ended December 31, 2012 and 2011, respectively. Interest expense increased to $72,000 for the three months ended December 31, 2012 from $7,000 for the three months ended December 31, 2011. Interest expense increased primarily due to $49,000 of Pennvest loan interest no longer being capitalized as of August 1, 2012 due to Kreider 1 being placed in service. Interest also increased $16,000 due to deferred compensation balances owed to Brightcap and Mark Smith as of December 31, 2012.

Net Loss Attributable to the Noncontrolling Interest

The net loss attributable to the noncontrolling interest was $1,000 for each of the three months ended December 31, 2012 and 2011, respectively.

Net Loss Attributable to Bion's Stockholders

As a result of the factors described above, the net loss attributable to Bion's stockholders was $1,181,000 and $1,268,000 for the three months ended December 31, 2012 and 2011, respectively, representing a $0.01 decrease in the net loss per basic and diluted common share from $0.08 to $0.07. For the three months ended December 31, 2011, the Company recorded $207,000 as an inducement offered to its Series C Preferred stockholders to convert their Series C Preferred shares into the Company's restricted common shares at a conversion rate of $3.00 versus the original conversion rate of $4.00.

SIX MONTHS ENDED DECEMBER 31, 2012 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
2011

General and Administrative

Total general and administrative expenses were $3,421,000 and $4,778,000 for the six months ended December 31, 2012 and 2011, respectively.

General and administrative expenses, excluding stock-based compensation charges of $1,536,000 and $3,346,000, were $1,885,000 and $1,432,000 for the six months ended December 31, 2012 and 2011, respectively, representing a $453,000 increase. The primary reason for the increase is due to the increase in depreciation expense from $8,000 for the six months ended December 31, 2011 to $413,000 for the six months ended December 31, 2012. Kreider 1 was placed in service on August 1, 2012 and its components are being depreciated over their estimated useful lives. Salaries and related payroll tax expenses increased to $615,000 for the six months ended December 31, 2012 from $468,000 for the six months ended December 31, 2011, primarily due to the fact that during the six months ended December 30, 2011, certain salaries were being capitalized as part of Kreider 1.

General and administrative stock-based employee compensation for the six months ended December 31, 2012 and 2011 consists of the following:

                                               Six months        Six months
                                                  ended             ended
                                              December 31,      December 31,
                                                  2012              2011
     General and administrative:
      Fair value of stock/warrant bonuses
     expensed                                  $1,151,000       $1,035,000
      Fair value of stock issued to an
     employee                                      50,000           50,000
      Change in fair value from modification
     of option terms                                    -           95,000
      Fair value of stock options expensed
     under ASC 718                                335,000        2,166,000
        Total                                  $1,536,000       $3,346,000

Stock-based compensation charges were $1,536,000 and $3,346,000 for the six months ended December 31, 2012 and 2011, respectively. Compensation expense relating to stock options was $335,000 and $2,166,000 during the six months ended December 31, 2012 and 2011, respectively, and the decrease is due to more options being vested upon grant date during the six months ended December 31, 2011 and a decrease in options being granted during the periods from 1,400,000 to 150,000. The Company also recognized general and administrative non-cash compensation expenses of $1,151,000 and $1,035,000 during the six months ended December 31, 2012 and 2011, respectively, due to the granting and vesting of stock and warrant bonuses. The non-cash compensation expense related to stock and warrant bonuses for both periods were primarily in connection with the extension of employment agreements of two key officers. Compensation expense relating to the change in fair value from the modification of option terms was nil and $95,000 for the six months ended December 31, 2012 and 2011, respectively. During the six months ended December 31, 2011 the options of a key employee were modified.

Research and Development

Total research and development expenses were $86,000 and $98,000 for the six months ended December 31, 2012 and 2011, respectively.

Research and development expenses, excluding stock-based compensation charges of $18,000 and $41,000 were $77,000 and $57,000 for the six months ended December 31, 2012 and 2011, respectively. The primary reason for the increase is due to pilot program testing related to the enhancement of the Company's technology.

Research and development stock-based employee compensation for the six months ended December 31, 2012 and 2011 consists of the following:

                                                    Six months ended     Six months ended
                                                    December 31, 2012    December 31, 2011
Research and development:
 Fair value of stock options expensed under ASC 718      $  18,000            $  41,000
   Total                                                 $  18,000            $  41,000

Stock-based compensation expense decreased from $41,000 for the six months ended December 31, 2011 to $18,000 for the six months ended December 31, 2012. The decrease is due to the signing in March 2011 of a new employment agreement with a research and development employee which vested stock options previously granted to the employee during May 2008, with issuance and vesting contingent upon the signing of the new employment agreement. There were no similar charges for the six months ended December 31, 2012.

Loss from Operations

As a result of the factors described above, the loss from operations was $3,507,000 and $4,887,000 for the six months ended December 31, 2012 and 2011, respectively.

Other Expense (Income)

Other expense was $127,000 and $13,000 for the six months ended December 31, 2012 and 2011, respectively. Interest expense increased to $127,000 for the six months ended December 31, 2012 from $14,000 for the six months ended December 31, 2011. Interest expense increased primarily due to $83,000 of Pennvest loan interest no longer being capitalized as of August 1, 2012 due to Kreider 1 being placed in service. Interest also increased by $29,000 due to deferred compensation balances owed to Brightcap and Mark Smith as of December 31, 2012.

Net Loss Attributable to the Noncontrolling Interest

The net loss attributable to the noncontrolling interest was $3,000 and $14,000 for the six months ended December 31, 2012 and 2011, respectively.

Net Loss Attributable to Bion's Stockholders

As a result of the factors described above, the net loss attributable to Bion's stockholders was $3,634,000 and $5,792,000 for the six months ended December 31, 2012 and 2011, respectively, representing a $0.19 decrease in the net loss per basic and diluted common share from $0.40 to $0.21. For the six months ended December 31, 2011, the Company recorded $755,000 as an inducement offered to its Series C Preferred stockholders to convert their Series C Preferred shares into the Company's restricted common shares at a conversion rate of $3.00 versus the original conversion rate of $4.00.

LIQUIDITY AND CAPITAL RESOURCES

The Company's financial statements for the six months ended December 31, 2012 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registered Public Accounting Firm on the Company's financial statements as of and for the year ended June 30, 2012 includes a "going concern" explanatory paragraph which means that the auditors stated that conditions exist that raise substantial doubt about the Company's ability to continue as a going concern.

Operating Activities

As of December 31, 2012, the Company had cash of approximately $380,000. During the six months ended December 31, 2012, net cash used in operating activities . . .