Bacterial species in the plant-beneficial-environmental clade of Burkholderia represent a substantial component of rhizosphere microbes in many plant species. To better understand the molecular mechanisms of the interaction, we combined functional studies with high-resolution dual transcriptome analysis of sugarcane and root-associated diazotrophic Burkholderia strain Q208. We show that Burkholderia Q208 forms a biofilm at the root surface and suppresses the virulence factors that typically trigger immune response in plants. Up-regulation of bd-type cytochromes in Burkholderia Q208 suggests an increased energy production and creates the microaerobic conditions suitable for BNF. In this environment, a series of metabolic pathways are activated in Burkholderia Q208 implicated in oxalotrophy, microaerobic respiration, and formation of PHB granules, enabling energy production under microaerobic conditions. In the plant, genes involved in hypoxia survival are up-regulated and through increased ethylene production, larger aerenchyma is produced in roots which in turn facilitates diffusion of oxygen within the cortex. The detected changes in gene expression, physiology and morphology in the partnership are evidence of a sophisticated interplay between sugarcane and a plant-growth promoting Burkholderia species that advance our understanding of the mutually beneficial processes occurring in the rhizosphere.