<PAGE>
                                       
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                       

                                  FORM 10-Q
(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the quarterly period ended     JUNE 30, 1998  
                               -------------------------------------------

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 

For the transition period from                    to   
                               ---------------        -----------------

Commission File Number:          1-10285   
                        ----------------------------------------------
                                       
                        BIOMAGNETIC TECHNOLOGIES, INC.  
               (Exact name of registrant as specified in its charter)

          CALIFORNIA                                     95-2647755
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

9727 PACIFIC HEIGHTS BOULEVARD, SAN DIEGO, CALIFORNIA         92121-3719
(Address of principal executive offices)                     (zip code) 
                                       
                                (619) 453-6300     
           Registrant's telephone number, including area code)
                                       
--------------------------------------------------------------------------------
           (Former name, former address and formal 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


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

Indicate by check mark whether the registrant 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.                       [  ] Yes       [  ] No

                    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.

     As of August 10, 1998 Registrant had only one class of common stock of
     which there were 83,367,112  shares outstanding.


<PAGE>



PART I -- FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS


                           BIOMAGNETIC TECHNOLOGIES, INC.
                CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS)


<TABLE>
<CAPTION>

                                                          JUNE 30,     SEPTEMBER 30,
                                                            1998           1997
                                                         (UNAUDITED)
                                                         -----------   -------------
<S>                                                      <C>           <C>
ASSETS

Cash and cash equivalents                                 $   245        $  1,229
Restricted cash and short-term investments                    127              500
Accounts receivable, less allowance for 
  doubtful accounts of $10                                    952              398
Inventories                                                 2,677            2,388
Prepaid expenses and other current assets                     185              270
                                                          -------          -------
  Total current assets                                      4,186            4,785
                                                          -------          -------
Net property and equipment                                    419              526
Investment in Magnesensors                                    160              160
Restricted cash                                               199              192
Other assets                                                  332              339
                                                          -------          -------
TOTAL ASSETS                                              $ 5,296          $ 6,002
                                                          -------          -------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable                                           $1,107         $  1,341
Accrued liabilities                                           963              934
Accrued salaries and employee benefits                        375              512
Customer deposits                                           2,109            2,172
Deferred revenue                                              441            1,135
Note payable to  shareholder                                1,500              975
                                                          -------          -------
     Total current liabilities                              6,495            7,069
Other long-term liabilities                                   172              219
                                                          -------          -------
     Total liabilities                                      6,667            7,288
                                                          -------          -------
SHAREHOLDERS' DEFICIT
Common stock -- no par value, 100,000,000 shares
  authorized; 53,367,112 and 47,720,887 shares
  issued and outstanding in June and September,
  respectively                                             84,392           81,569
Additional paid-in capital                                  3,000            3,000
Accumulated deficit                                       (88,763)         (85,855)
                                                          -------          -------
  Total shareholders' deficit                              (1,371)          (1,286)
                                                          -------          -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT               $ 5,296          $ 6,002
                                                          -------          -------
                                                          -------          -------
</TABLE>

             See notes to consolidated condensed financial statements.

                                       2

<PAGE>

                           BIOMAGNETIC TECHNOLOGIES, INC.
            CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                              THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                    JUNE 30,                    JUNE 30,
                                                             1998         1997            1998           1997
                                                            ------       ------         --------       -------
<S>                                                         <C>         <C>             <C>            <C>
REVENUES                                                         
   Product                                                $   416       $ 5,198         $ 2,040        $ 6,733
   Product services                                           127            91             467            278
   Contract research                                           73             -             169              -
                                                          -------       -------         -------        -------
                                                              616         5,289           2,676          7,011
COST OF REVENUES
   Product                                                    232         2,857           1,508          3,941
   Product services                                           107            47             254            119
   Contract research                                           74             -             165              -
                                                          -------       -------         -------        -------
                                                              413         2,904           1,927          4,060
                                                          -------       -------         -------        -------
GROSS MARGIN                                                  203         2,385             749          2,951
                                                          -------       -------         -------        -------


OPERATING EXPENSES
   Research and development                                   501           819           1,177          2,706
   Marketing, general and administrative                      644         1,083           2,426          3,508
                                                          -------       -------         -------        -------
                                                            1,145         1,902           3,603          6,214
                                                          -------       -------         -------        -------

OPERATING INCOME  (LOSS)                                     (942)          483          (2,854)        (3,263)

   Interest expense                                           (34)           (7)            (63)        (2,327)
   Interest income                                             16            36              46            214
   Other income (expense), net                                (66)          254             (37)           349
                                                          -------       -------         -------        -------
NET INCOME (LOSS)                                         $(1,026)         $766         $(2,908)       $(5,027)
                                                          -------       -------         -------        -------

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE             $ (0.02)       $ 0.02         $ (0.06)       $ (0.11)
                                                          -------       -------         -------        -------

WEIGHTED AVERAGE NUMBER
  OF SHARES OUTSTANDING                                    53,367        47,692          51,508         45,119
                                                          -------       -------         -------        -------
</TABLE>

             See notes to consolidated condensed financial statements.
                                          

                                          3

<PAGE>

                           BIOMAGNETIC TECHNOLOGIES, INC.
            CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                   (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                   NINE MONTHS ENDED
                                                                       JUNE 30,
                                                                1998            1997
                                                              --------        ---------

<S>                                                           <C>              <C>
OPERATING ACTIVITIES
  Net loss                                                    $(2,908)         $(5,027)
  Adjustments to reconcile net loss to net
  cash used in operating activities:
    Depreciation and amortization                                 146              342
    Gain on disposition of assets                                   -               (5)
    Interest cost for conversion feature of note 
      payable to shareholder                                        -            2,250
  Changes in operating assets and liabilities:
    Restricted cash                                               366            4,949
    Prepaid expenses and other current assets                      85             (100)
    Accounts receivable                                          (554)            (421)
    Inventories                                                  (289)           1,374
    Accounts payable                                              (15)            (138)
    Accrued liabilities                                           (70)            (848)
    Customer deposits                                             (63)          (4,286)
    Deferred revenue                                             (694)              90
    Changes in other operating assets and liabilities             (40)            (117)
                                                              -------          -------
  Net cash  used in operating activities                       (4,036)          (1,937)
                                                              -------          -------

INVESTING ACTIVITIES
  Investment in Magnesensors                                        -              (80)
  Change in short-term investments                                  -              744
  Payments for property and equipment                             (39)             (65)
  Proceeds from sale of assets                                      -               26
                                                              -------          -------
Net cash provided by (used in)  investing activities              (39)             625
                                                              -------          -------

FINANCING ACTIVITIES
  Proceeds from note payable to shareholder                     2,225               - 
  Proceeds from issuances of common stock                         866               - 
                                                              -------          -------
  Net cash provided by financing activities                     3,091               -
                                                              -------          -------
NET DECREASE IN CASH AND CASH EQUIVALENTS                        (984)          (1,312)
                                                              -------          -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                1,229            1,752
                                                              -------          -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                    $   245          $   440
                                                              -------          -------
                                                              -------          -------

</TABLE>

             See notes to consolidated condensed financial statements.

                                          4

<PAGE>
                                     (CONTINUED)
                                          
                           BIOMAGNETIC TECHNOLOGIES, INC.
            CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                   (IN THOUSANDS)


SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

<TABLE>
<CAPTION>
                                                                 NINE MONTHS ENDED
                                                                      JUNE 30,
                                                               1998              1997
                                                             --------          --------
<S>                                                          <C>               <C>

Note payable to shareholder exchanged
    for common stock                                          $ 1,700          $ 3,000

Accrued interest on note payable to shareholder
    exchanged for common stock                                $    38          $    87
    
Accounts payable to shareholder
    exchanged for common stock                                $   219          $     -

Contribution of property and                                         
    equipment for investment
    in Magnesensors                                            $    -           $   80

</TABLE>

             See notes to consolidated condensed financial statements.


                                           5
<PAGE>

                       BIOMAGNETIC TECHNOLOGIES, INC.
       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


1.   BASIS OF PRESENTATION

The unaudited consolidated condensed financial statements of Biomagnetic
Technologies, Inc. and its subsidiary (the "Company") have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission.  Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.  Although the Company believes that the disclosures made in this
report are adequate to make the information not misleading, it is suggested that
these financial statements be read in connection with the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1997.

As of October 1, 1997 the assets and liabilities of the Company's subsidiary, 
Biomagnetic Technologies, GmbH, were acquired by Biomagnetic Technologies, 
Inc. Niederlassung Germany, newly established as a branch office of 
Biomagnetic Technologies, Inc.  Biomagnetic Technologies, GmbH continues to 
exist as a non-operating wholly owned entity.

In the opinion of the Company, the accompanying unaudited consolidated 
condensed financial statements contain all adjustments,  consisting only of 
normal recurring entries, necessary to present fairly its financial position 
at June 30, 1998 and the results of its operations and its cash flows for the 
periods presented.

The preparation of financial statements, in conformity with generally 
accepted accounting principles, requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities and 
disclosure of contingent assets and liabilities at the date of the financial 
statements and the reported amounts of revenues and expenses during the 
reporting period. Actual results could  differ from these estimates.

Certain prior period balances have been reclassified to conform to the 
current period presentation.

2.   FINANCING

On August 5, 1998 the Company received $15,000,000 from the sale of 
30,000,000 shares of common stock to offshore investors (which amount is not 
reflected in the accompanying balance sheet as of June 30, 1998), pursuant to 
regulation S of the Security Act of 1933, as amended. Of the total 30,000,000 
shares, 10,000,000 shares were sold for $5,000,000 to "La Caixa", Caja de 
Ahorros y Pensiones de Barcelona, one of the leading financial institutions 
of the Kingdom of Spain, 8,000,000 shares were sold for $5,000,000 to ON 
Dassesta International S.A., a major shareholder of BTi, 2,000,000 shares 
were sold to Swisspartners Investment Ltd., and the remaining 8,000,000 
shares were sold to three European banks under the same terms and conditions.

As of June 30 1998, the Company had borrowed $1,500,000 from Dassesta 
International, S.A. at an interest rate of 8%.  In July 1998, Dassesta 
granted the Company an increase of $500,000 in its loan commitment  which the 
Company borrowed. The loan was a 180 day unsecured loan bearing interest at 
8%. In August 1998, the Company paid off total principal of $2,000,000 owed 
to Dassesta plus $36,000 of related accrued interest using proceeds from the 
August 5, 1998 financing of $15,000,000.

The Company intends to use the remaining proceeds of approximately 
$13,000,000 to execute its plans and take steps to accelerate clinical 
acceptance of Magnetic Source Imaging and to pursue system sales in the 
current limited worldwide research and clinical markets.

In February 1998, the Company discounted two customer notes for a net amount 
of $355,000 received from Dassesta International, S.A., a principal 
shareholder. The face amount of these notes was 2,200,000 French Francs, 
equal to approximately $366,000 at the then current exchange rate.

3.   BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

Shares used in computing basic and diluted net income (loss) per share 
include the weighted average number of common shares outstanding.  Common 
stock equivalents are antidilutive and are excluded from the computation of 
basic and diluted net income (loss) per share.

                                      6
<PAGE>

4.   INVENTORIES

The composition of inventories is as follows:

                                             June 30,          September 30,
                                               1998                1997 
                                             --------          -------------
               Raw materials                 $   236             $   281
               Work-in process                 1,941               1,528
               Finished goods                    500                 579
                                             -------             -------
                                             $ 2,677             $ 2,388
                                             -------             -------

5.   MAGNES-Registered Trademark- WHOLE HEAD SYSTEM PRODUCTION AND DELIVERY RISK

The Company's backlog at June 30, 1998 amounted to $3,395,000 and is composed 
primarily of an order for a  Magnes 2500 Whole Head Magnetic Source Imaging 
System ("Magnes 2500 WH") which was shipped in the second quarter of 1998, 
but is not yet installed and accepted by the customer, an order for an 
expanded 248-channel sensor, and service revenues on certain systems shipped 
since fiscal 1996.  As of June 30, 1998 the Company has received related 
advance payments from customers totaling approximately $3,000,000. As sales 
of the Company's systems typically involve transactions of $1 million or 
more, the backlog is expected to fluctuate significantly from fiscal period 
to fiscal period depending upon timing of orders received, installations 
completed, and customer acceptances received during the reporting period.    

6.   SEGMENT INFORMATION AND RECENT ACCOUNTING PRONOUNCEMENTS

The Company operates in one segment which includes developing, manufacturing 
and selling magnetic source imaging products. The overall market for the 
Company's operations can be further divided into three overlapping segments:  
the basic research market, the clinical applications development market, and 
the commercial clinical market.  To date, substantially all of the Company's 
revenues have been derived from, and substantially all of the Company's 
assets have been devoted to, the basic research market.

In March 1998, the Accounting Standards Executive Committee (AcSEC) issued 
AICPA Statement of Position (SOP) 98-1, "Accounting for costs of computer 
software developed or obtained for internal use." This statement provided 
guidance on accounting for the costs of computer software developed or 
obtained for internal use and identifies characteristics of internal-use 
software and provides assistance in determining when computer software is for 
internal use. SOP 98-1 is effective for fiscal years beginning after 
December 15, 1998, with earlier application permitted. The Company does not 
anticipate the adoption of SOP 98-1 having a material impact on the Company's 
financial position of results of operations.

In April 1998, AcSEC issued AICPA SOP 98-5, "Reporting on the costs of 
start-up activities." This statement provides guidance on financial reporting 
of start-up costs and organization costs and requires that such costs of 
start-up activities be expensed as incurred. SOP 98-5 is effective for fiscal 
years beginning after December 15, 1998, which earlier application permitted. 
The Company does not anticipate the adoption of SOP 98-5 having a material 
impact on the Company's financial position or results of operations.

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

Except for the historical information contained herein, the following 
discussion may contain (and the Notes to the Consolidated Condensed Financial 
Statements may contain) forward-looking statements that involve risks and 
uncertainties. The Company's future results could differ materially from 
those discussed here. Factors that could cause or contribute to such 
differences include, but are not specifically limited to, failure to satisfy 
system performance obligations, timely product development, changes in 
economic conditions in various markets the Company serves, ability to obtain 
routine reimbursement for MSI procedures and uncertainty regarding the 
Company's patents and propriety rights, as well as the other risks detailed 
in this section.  The Company does not undertake to update the results 
discussed herein as a result of changes in risks or operating results.

OVERVIEW

Biomagnetic Technologies, Inc. ("BTi") is a leader in magnetic source imaging 
("MSI") and has developed the Magnes system, an instrument designed to assist 
in the noninvasive diagnosis of a broad range of medical disorders.  The 
Magnes system developed by the Company uses advanced superconductor 
technology to measure and locate the source of magnetic fields created by the 
human body. While traditional medical imaging methods provide anatomical 
detail, the measurement of the body's magnetic fields by MSI provides 
information about normal and abnormal functions of the brain, heart and other 
organs.  The Company is focusing the development of its technology on 
potentially large commercial market applications such as pre-surgical 
planning for neurosurgery, the diagnosis and surgical planning for treatment 
of epilepsy and evaluation of the fetal heart, among others. 


                                        7
<PAGE>

However, to date the Company has developed only limited applications for its 
systems, and there can be no assurance that any further applications may be 
developed or accepted by the market, or that the Company will be able to 
obtain any additional funds to pursue such new applications. (See "Additional 
Risk Factors and Uncertainties")

Since 1984, the primary business of the Company has been the development of 
magnetic source imaging ("MSI") systems that measure magnetic fields 
generated by the human body and assist in the noninvasive diagnosis of a 
broad range of medical disorders.  The measurement of the body's magnetic 
fields by MSI provides information about the normal and abnormal functions of 
the brain, heart and other organs.

Additionally, since 1984, twenty-three (23) Magnes systems have been shipped 
and twenty-two (22) systems have been installed in medical and research 
institutions worldwide by the end of the third quarter 1998.  To date, more 
than 5,000 MSI examinations have been performed on patients and control 
subjects at the Company's application development sites. Related findings by 
BTi and its collaborators have been published in more than 80 scientific and 
medical papers. Since the first reimbursement for MSI procedures was received 
in September 1993, 123 insurance companies have approved reimbursement for 
certain MSI procedures performed with the Company's Magnes MSI systems and 
233 reimbursements have been received on a case-by case basis.
 
In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion 
of the existing Magnes I and Magnes II systems product line.  Development of 
the Magnes 2500 WH hardware was substantially completed in fiscal year 1996.  
The Magnes 2500 WH allows simultaneous examination of the entire brain and is 
designed for evaluating ambulatory or critically ill patients in a seated or 
fully reclined position. As of June 30, 1998 the Company had shipped nine 
Magnes 2500 WH systems and received eight final acceptances from customers. 

The current price of BTi's MSI systems ranges from approximately $1.0 to $2.5 
million, depending upon system configuration.  A significant portion of the 
Company's sales have been, and are expected to continue to be, in foreign 
markets.  The Company generally prices its European sales in the currency of 
the country in which the product is sold and the prices of such products in 
dollars will vary as the value of the dollar fluctuates against the quoted 
foreign currency price.  There can be no assurance that currency fluctuations 
will not reduce the dollar return to the Company on such sales.  The Company 
has in the past, and may periodically enter into forward exchange contracts 
to partially hedge such foreign currency exposure.

Due to substantial product research and  development expenses and low unit 
sales, the Company has incurred net losses every year since fiscal 1982.  
Since concentrating on the development of its MSI  systems in 1984, the 
Company's corporate strategy and commitment of resources have focused on 
long-term product applications and continued product development rather than 
near-term operating performance.  Since the development of the Magnes 2500 WH 
system was substantially completed in fiscal year 1996, the Company has 
significantly reduced product and applications development expenses and 
expects that such expenditures will continue at comparatively reduced levels 
in 1998.

The Company believes that the relatively small number of proven medical 
applications for the Magnes systems,  the lack of routine reimbursement for 
MSI procedures and the uncertainty of product acceptance in the U.S. market 
have limited system sales through June 30, 1998.  Additionally,  it is not 
possible to reliably predict the timing and extent of future product sales 
due to the uncertainties of medical applications, reimbursement  and product 
acceptance. The Company does not anticipate multiple sales to the same 
end-user and at current sales volumes, the sale of one Magnes system may have 
a significant impact on the Company's financial position and results of 
operations during any reporting period.  As a result, quarterly and annual 
operating performance will continue to fluctuate significantly. 


                                       8
<PAGE>

RESULTS OF OPERATIONS

Total revenues for the third quarter of fiscal 1998 were $616,000 including 
$127,000 of service revenues compared to $5,289,000 of total revenues 
including $91,000 of service revenues for the third quarter of fiscal 1997. 
Net loss in the third quarter of fiscal 1998 amounted to $1,026,000 compared 
to  net income of $766,000 for the comparable period in the prior fiscal 
year.  Decreased total revenues and net loss is attributed to the lack of 
customer final acceptances of Magnes 2500 WH systems in the third quarter of 
1998 compared to three final acceptances in the third quarter of 1997. 
  
Revenues for the first nine months of fiscal 1998 amounted to $2,676,000 
compared to $7,011,000 for the first nine months of  fiscal 1997.  The net 
loss for the first nine months of 1998 was $2,908,000 compared to $5,027,000 
for the first nine months of 1997.  The revenues for the first nine months of 
fiscal 1998 resulted from the sale and final customer acceptance of one 
Magnes 2500 WH system, the sale of one Magnes I system and service contract 
income for Magnes systems. The $5,207,000 loss in the first nine months of 
fiscal 1997 included a $2,250,000 non-cash charge to interest expense in 
connection with the conversion of a note payable to a shareholder.
  
Research and development expenses amounted to $501,000 and $1,177,000 for the 
three and nine month periods ended June 30, 1998, respectively.  In fiscal 
year 1997 these expenses amounted to $819,000 and $2,706,000, respectively, 
for the comparable periods.  The decrease is due to reduction of research and 
development expenses related to the Magnes 2500 WH system.

Marketing, general and administrative expenses, amounted to $644,000 in the 
third quarter of fiscal 1998, compared to $1,083,000 during the comparable 
period in fiscal 1997. For the first nine months of fiscal 1998 these 
expenses amounted to $2,426,000 a decrease of $1,082,000 from the comparable 
period of the prior year.  The decrease in marketing, general and 
administrative expenses, is primarily due to reduced employee headcount and 
related payroll costs.
 
Interest expense totaled $66,000 during the nine months ended June 30, 1998 
as compared to $2,327,000 during the comparable period in fiscal 1997.  The 
decrease is primarily the result of a $2,250,000 non-cash interest cost for 
conversion of a note payable to a shareholder which was included in the first 
quarter of fiscal 1997.

Order backlog for the Company's products at June 30, 1998 was $3,395,000, as 
compared to $7,736,000 at June 30, 1997 and $4,763,000 at September 30, 1997 
in the second quarter of fiscal year 1998.  Receipt of final customer 
acceptance of one Magnes 2500 WH system is the primary factor for the 
reduction in backlog as of June 30, 1998 as compared to the September 30, 
1997 backlog. In the second quarter of fiscal 1998 the Company received an 
order for a Magnes 2500 WH system, which was shipped in the same quarter with 
final customer acceptance pending installation at the customer site.  This 
order is included in the $3,395,000 backlog as of June 30, 1998 pending final 
customer acceptance.

LIQUIDITY AND CAPITAL RESOURCES

On August 5, 1998 the Company received $15,000,000 from the sale of 
30,000,000 shares of common stock to offshore investors pursuant to 
Regulation S of the Security Act of 1933, as amended. Of the total 30,000,000 
shares, 10,000,000 shares were sold for $5,000,000 to "La Caixa", Caja de 
Ahorros y Pensiones de Barcelona, one of the leading financial institutions 
of the Kingdom of Spain, 10,000,000 shares were sold for $5,000,000 to 
Dassesta International S.A., a major shareholder of BTi, 2,000,000 shares 
were sold to Swisspartners Investment Network Ltd., and the remaining 
8,000,000 shares were sold to three European banks under the same terms and 
conditions.

As of June 30 1998, the Company had borrowed $1,500,000 from Dassesta 
International, S.A. at an interest rate of 8%.  In July 1998, Dassesta 
granted the Company an increase of $500,000 in its loan commitment which the 
Company borrowed. The loan was a 180 day unsecured loan bearing interest at 
8%. In August 1998, the Company paid off total principal of $2,000,000 owed 
to Dassesta plus $36,000 of related accrued interest using proceeds from the 
August 5, 1998 financing of $15,000,000.

The Company intends to use the remaining proceeds of approximately 
$13,000,000 to execute its plans and take steps to accelerate clinical 
acceptance of Magnetic Source Imaging and to pursue system sales in the 
surrent limited worldwide research and clinical markets.

In February 1998, the Company discounted two customer notes for a net amount of
$355,000 received from Dassesta International, S.A., a principal shareholder.
The face amount of these notes was 2,200,000 French Francs, equal to
approximately $366,000 at the then current exchange rate. 

At June  30, 1998 the Company had a net 


                                        9
<PAGE>

working capital deficit of $2,309,000, as compared to $2,284,000 at September 
30, 1997. The deficit is primarily due to continued losses and negative cash 
flows from operations.
 
Cash and cash equivalents, exclusive of any restricted cash, continued to 
decline to $245,000 at June 30, 1998 from $1,229,000 as of September 30, 
1997. The Company's operations during the first nine months of 1998 were 
funded by existing cash resources, the sale of a Magnes I system, working 
capital loans from Dassesta International, S.A.  ("Dassesta"), a principal 
shareholder of the Company, and equity placements to Dassesta and a foreign 
investor.

The Company recognizes the need to ensure that its operations will not be 
adversely impacted by Year 2000 hardware and software issues. The Company 
intends to confirm its compliance regarding Year 2000 issues for both 
internal and external information systems. This process will entail 
communicating with significant suppliers, financial institutions, insurance 
companies and other parties that provide significant services to the Company. 
Expenditures required to make the Company Year 2000 compliant may be 
material to the Company's financial position and results of operations.


Additional Risk Factors and Uncertainties
-----------------------------------------

FORWARD-LOOKING STATEMENTS

The statements in this quarterly report that are not descriptions of 
historical facts may be forward-looking statements that are subject to risks 
and uncertainties without limitation. Actual results could differ materially 
from those currently anticipated due to a number of factors including, but 
not limited to,  those identified below. The Company undertakes no obligation 
to release publicly the results of any revisions to these forward-looking 
statements to reflect events and circumstances arising after the dates hereof.

ONLY LOW VOLUME SALES TO DATE

To date the Company has been engaged principally in research and development 
activities, and has made only low volume sales to research and medical 
institutions.

HISTORY OF LOSSES 

The Company reported  a net loss of $1,026,000 in the third quarter of fiscal 
1998, and has reported losses every year since 1982. The Company also had 
negative cash flows from operations of $4,036,000 for the first three 
quarters of fiscal year 1998. At June 30, 1998 the Company has an accumulated 
deficit of $88,763,000 and a working capital deficiency of $2,309,000. 
Management anticipates that capital and working capital requirements in the 
remainder of fiscal year 1998 will substantially exceed cash projected to be 
generated by operations.

FEW DEMONSTRATED CLINICAL APPLICATIONS; UNCERTAINTY OF MARKET ACCEPTANCE

The Company is dependent on its Magnes systems as its principal product for 
which there are currently few demonstrated clinical applications.  Additional 
clinical applications development needs to be conducted with the MSI system 
at major medical centers before the Company can begin to penetrate the 
potential commercial clinical market.  There can be no assurance that a 
commercial clinical market will develop for diagnostic or monitoring uses of 
the MSI system. A continued lack of clinical applications and commercial 
market for the Company's Magnes 2500 WH system would have a material adverse 
impact on the Company's financial position, results of operations, and cash 
flows.

THIRD-PARTY REIMBURSEMENT

The Company's commercial success is highly dependent on the availability of 
reimbursement for procedures using its MSI system.  To date reimbursements 
from third-party payors are on a case-by-case basis.  As of June 30, 1998, 
and since the initial payment in September 1993, there have been a total of 
233 reimbursements from 123 different third party payors in the U.S. Although 
the number of third party payors making reimbursements has increased, there 
is no assurance that third party reimbursements will become more widely 
available. Reimbursement is not currently provided for such procedures by the 
United States government, nor is there any assurance that the U.S. government 
will authorize or budget for such procedures in the future. If widespread 
availability of reimbursement from government and private insurers is not 
achieved, the Company's financial position, results of operations and cash 
flows would be materially adversely affected.


                                      10
<PAGE>

NEW GOVERNMENT LEGISLATION; UNFAVORABLE MEDICAL INDUSTRY TRENDS

The Company cannot predict what legislation relating to its business or the 
health care industry may be enacted in the future, including legislation 
relating to third party reimbursement, or what effect such legislation may 
have on the Company's financial position or results of  operations.  
Regardless of legislation, medical industry trends are not favorable for 
generous third-party reimbursement of diagnostic procedures requiring 
big-ticket equipment.

RISK OF TECHNOLOGICAL OBSOLESCENCE

The Company operates in an industry characterized by rapid technological 
change. New products using other technologies or improvement of existing 
products may reduce the size of the potential markets for the Company's 
products, and may render them obsolete or non-competitive by competitors' 
development of new or different products using technology or imaging 
modalities that may provide or be perceived as providing greater value than 
the Company's products. Any such development could have a material adverse 
effect on the Company's financial position, results of operations, and cash 
flows.

SEVERE PRICE COMPETITION; LIMITED SYSTEMS BEING PURCHASED WORLDWIDE

Additionally, there has been recently, and continues to be, ongoing severe 
price competition from the Company's competitors for the extremely limited 
number of whole head magnetic source imaging systems currently being 
purchased worldwide. This aggressive competition is likely to affect 
potential profitability of the Company's whole head system, the extent of 
which is not presently determinable.

YEAR 2000 COMPLIANCE

The Company recognizes the need to ensure that its operations will not be 
adversely impacted by Year 2000 hardware and software issues. The Company 
intends to confirm its compliance regarding Year 2000 issues for both 
internal and external information systems. This process will entail 
communicating with significant suppliers, financial institutions, insurance 
companies and other parties that provide significant services to the Company. 
Expenditures required to make the Company Year 2000 compliant may be 
material to the Company's financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None


                             PART II--OTHER INFORMATION


ITEM 5. OTHER INFORMATION
                 
On August 5, 1998 the Company issued and sold an aggregate of 30,000,000 
shares of Common Stock (the "Shares") of the Company to certain foreign 
investors (the "Investors"), including 10,000,000 Shares issued to Dassesta, 
a principal shareholder of the Company, 10,000,000 Shares issued to "La 
Caixa", Caja de Ahorros y Pensiones de Barcelona, 2,000,000 Shares to 
Swisspartners Investment Network Ltd., and the remaining 8,000,000 Shares
to other European Banks. The Shares were issued pursuant to Offshore 
Stock Subscription Agreements, dated July 22 and July 31, 1998. In 
consideration for the issuance and sale of the Shares, the Company 
received $.50 per Share from each of the Investors, representing an 
aggregate consideration of $15,000,000, all of which was paid in cash.
There were no underwriting discounts or commissions.

The offers and sales to the Investors, all non-U.S. entities, were made 
pursuant to a claim of exemption under Regulation S promulgated by the 
Securities and Exchange Commission or, alternatively, under Section 4 (2) of 
the Securities Act of 1933, as amended. The sales of the Shares to the 
Investors were made in "offshore transactions" (as defined in Regulation S) 
and no "direct selling efforts" (as defined in Regulation S) were made by the 
Company or any of its affiliates. The investors represented and warranted 
among other things, that they were not "U.S. persons" (as defined in 
Regulation S", that at the time the buy orders for the Shares were originated 
they were located outside the United States, and that neither the Investors 
nor any of their affiliates had engaged in any "direct selling efforts: (as 
defined in Regulation S). Appropriate legends were affixed to the 
certificates for the Shares. in addition, the Company did not use any general 
advertisements or solicitation in connection with the offer or sale of the 
Shares to the Investors and the Investors represented and warranted that they 
were purchasing the Shares for Investment only and not with a view to 
distribution.

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<PAGE>

ITEM 6 . EXHIBITS AND REPORTS ON FORM 8-K.
               

               a)  EXHIBIT NO.               DESCRIPTION

                         27                  Financial Data Schedule


               b)  Reports on  Form 8-K
 
                     None.


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<PAGE>

                                     SIGNATURES


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



BIOMAGNETIC TECHNOLOGIES, INC.


Date           August 12, 1998           /s/ D. SCOTT BUCHANAN
                                         -------------------------------------
                                         D. Scott Buchanan
                                         President and Chief Executive Officer


Date           August 12, 1998           /s/ HERMAN BERGMAN
                                         -------------------------------------
                                         Herman Bergman
                                         Vice President of Finance, Chief
                                         Financial Officer Secretary


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