<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              March  31, 1999
                                ------------------------------------------------

[ ]  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 May 12, 1999 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, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>

                                                       March 31,   September 30,
                                                         1999           1998
                                                       ---------   -------------
                                                      (Unaudited)
<S>                                                      <C>         <C>     
ASSETS
Cash and cash equivalents                                $    381    $  2,282
Short-term investments                                      7,781      10,082
Restricted cash                                                94         138
Accounts receivable, less allowance for
  doubtful accounts of $10                                  1,052         932
Interest receivable                                           242        --
Inventories                                                 2,833       2,991
Prepaid expenses and other                                    223         271
                                                         --------    --------

     Total current assets                                  12,606      16,696
                                                         --------    --------

Net property and equipment                                    830         304
Restricted cash                                                54         187
Other assets                                                  174         156
                                                         --------    --------

TOTAL ASSETS                                             $ 13,664    $ 17,343
                                                         --------    --------
                                                         --------    --------

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable                                         $  1,192    $    783
Accrued liabilities                                           707         748
Accrued salaries and employee benefits                        412         461
Customer deposits                                           1,714       2,909
Deferred revenue                                              679         657
                                                         --------    --------

       Total current liabilities                            4,704       5,558

Other long-term liabilities                                    15         216
                                                         --------    --------

     Total liabilities                                      4,719       5,774
                                                         --------    --------

Commitments and Contingencies                                --          --

SHAREHOLDERS' EQUITY
Common stock -- no par value, 100,000,000 shares
  authorized; 83,367,112 shares issued and outstanding     99,392      99,392
Additional paid-in capital                                  3,000       3,000
Accumulated deficit                                       (93,447)    (90,823)
                                                         --------    --------

     Total shareholders' equity                             8,945      11,569
                                                         --------    --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY               $ 13,664    $ 17,343
                                                         --------    --------
                                                         --------    --------
</TABLE>



            See notes to consolidated condensed financial statements.



                                       2
<PAGE>



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

<TABLE>
<CAPTION>

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

<S>                                    <C>         <C>         <C>         <C>     
REVENUES
   Product                             $  2,537    $  1,520    $  2,561    $  1,624
   Product services                          99         173         191         340
   Contract research                         12          43          15          96
                                       --------    --------    --------    --------
                                          2,648       1,736       2,767       2,060

COST OF REVENUES
   Product                                1,217       1,168       1,486       1,276
   Product services                          16          39          67         147
   Contract research                         11          41          14          91
                                       --------    --------    --------    --------
                                          1,244       1,248       1,567       1,514
                                       --------    --------    --------    --------
GROSS MARGIN                              1,404         488       1,200         546

OPERATING EXPENSES
   Research and development               1,336         267       1,845         676
   Marketing, general and
    administrative                        1,050         896       2,222       1,782
                                       --------    --------    --------    --------
                                          2,386       1,163       4,067       2,458
                                       --------    --------    --------    --------

OPERATING LOSS                             (982)       (675)     (2,867)     (1,912)

Interest & other income (expense), 
  net                                       107          78         243          30
                                       --------    --------    --------    --------
NET LOSS                               $   (875)   $   (597)   $ (2,624)   $ (1,882)
                                       --------    --------    --------    --------
                                       --------    --------    --------    --------

BASIC AND DILUTED NET 
  LOSS PER SHARE                       $  (0.01)   $  (0.01)   $  (0.03)   $  (0.04)
                                       --------    --------    --------    --------
                                       --------    --------    --------    --------

Weighted average number of
   shares outstanding                    83,367      50,522      83,367      50,522
                                       --------    --------    --------    --------
                                       --------    --------    --------    --------
</TABLE>


            See notes to consolidated condensed financial statements.

                                       3
<PAGE>


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

<TABLE>
<CAPTION>

                                                                   Six  Months Ended
                                                                        March 31,
                                                                     1999       1998
                                                                  -------    -------

<S>                                                               <C>        <C>     
            OPERATING ACTIVITIES
              Net loss                                            $(2,624)   $(1,882)
              Adjustments to reconcile net loss to net
              cash used in operating activities:
                 Depreciation and amortization                        104         87
                 Loss on disposition of assets                       --           19
              Changes in operating assets and liabilities:
                Restricted cash                                       177        371
                Prepaid expenses and other                             48         63
                Accounts receivable                                  (120)      (344)
                Inventories                                           158        166
                Accounts payable                                      409       (145)
                Accrued liabilities                                   (90)      (383)
                Customer deposits                                  (1,195)       (63)
                Deferred revenue                                     (180)      (413)
                Other assets and liabilities                          (17)       (15)
                                                                  -------    -------
                      Net cash used in operating activities        (3,330)    (2,539)
                                                                  -------    -------

            INVESTING ACTIVITIES
              Net change in short-term investments                  2,301       --
              Interest receivable                                    (242)      --
              Payments for property and equipment                    (630)       (42)
                                                                  -------    -------
                      Net cash provided by (used in) investing 
                         activities                                 1,429        (42)
                                                                  -------    -------

            FINANCING ACTIVITIES
              Proceeds from notes payable to shareholder             --          870
              Proceeds from issuances of common stock                --          866
                                                                  -------    -------
                      Net cash provided by financing activities      --        1,736
                                                                  -------    -------
            NET DECREASE IN CASH AND CASH EQUIVALENTS              (1,901)      (845)
            CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD        2,282      1,229
                                                                  -------    -------
            CASH AND CASH EQUIVALENTS AT END OF PERIOD            $   381    $   384
                                                                  -------    -------
                                                                  -------    -------
</TABLE>


            See notes to consolidated condensed financial statements.

                                       4
<PAGE>


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



SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES


<TABLE>
<CAPTION>

                                                                           Six Months Ended
                                                                               March 31,
                                                                     1999                   1998
                                                                  ----------             ---------
<S>                                                               <C>                   <C>       
Note payable to shareholder exchanged
    for common stock                                              $      -              $    1,700


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

Accounts payable to shareholder
    exchanged for common stock                                    $      -              $      219
</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, Biomagnetic Technologies, GmbH, an
inactive wholly owned German entity, (together, the "Company", "we", "our", or
"BTi") 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. The Company suggests that these financial statements be
read in conjunction 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,
1998.

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 March
31, 1999 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.  BUSINESS RISKS AND UNCERTAINTIES

Biomagnetic Technologies, Inc., founded in 1970 as a California corporation, is
engaged primarily in the business of developing, manufacturing and selling
innovative functional imaging systems to medical institutions located in the
United States, Europe and Japan. The magnetic source imaging ("MSI") systems
developed by the Company measure magnetic fields created by the human body for
the noninvasive diagnosis of a broad range of disorders.

To date, the Company has been engaged principally in research and development
activities, and has made only low volume sales to medical research institutions.
The Company is currently dependent on its Magnes 2500 WH system for clinical
market sales, for which there are currently limited clinical applications.
Additional clinical applications testing needs to be conducted with the MSI
system at major clinical research centers before a substantial commercial
clinical market emerges. The Company is currently developing its Magnes 3600 WH
system, which is targeted primarily for research markets, and must continue to
depend upon sales to this market to meet its revenue goals for the very
near-term. There can be no assurance that a substantial commercial market will
develop for diagnostic or monitoring uses of the Company's MSI systems or for
the MSI industry to become viable and profitable. A continued lack of clinical
applications and commercial market for the Company's MSI systems will have a
material adverse impact on the Company's financial position, results of
operations and cash flows.

The Company's commercial success is also highly dependent on the availability of
reimbursement for procedures using the MSI system. To date, reimbursements from
third party payors are on a case-by-case basis. As of March 31, 1999, there have
been limited reimbursements from third party payors in the US. Although the
number of third party payors making reimbursements has increased, there is no
assurance that third party reimbursements will become widely available.
Reimbursements are not currently provided for MSI procedures by the United
States government, nor is there any assurance that the US government will
authorize or budget for such procedures in the future. If widespread
availability of reimbursement from the government and private insurers is not
achieved, the Company's financial position, results of operations and cash flows
would be materially adversely affected. The Company also 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 its financial position, results of
operations and cash flows.



                                       6
<PAGE>


The industry in which the Company operates is characterized by rapid
technological change. New products using other technologies or improvements to
existing products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors may
develop 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.

Additionally, there has been recently, and continues to be, ongoing significant
price competition from the Company's competitors for the currently limited
number of whole head systems being purchased worldwide. This aggressive
competition may affect future profitability of the Company, the extent of which
is not presently determinable.

For the quarter ended March 31, 1999, the Company incurred a net loss of
$875,000 and had negative cash flows from operations of $1,187,000. At March 31,
1999, the Company has an accumulated deficit of $93,447,000, net capital of
$8,945,000 and working capital of $7,902,000. The Company anticipates that in
fiscal 1999, operating and working capital requirements will substantially
exceed cash projected to be generated by product sales.

Based on its current operating plans, including anticipated product orders and
resulting revenues and cash receipts capital expenditures, expected working
capital requirements and existing capital resources, the Company anticipates
that it will be able to fund its operations through the second quarter of fiscal
2000. The realization of the Company's operating plans is dependent upon its
ability to successfully close a number of MSI system sales in the current highly
competitive market for the limited number of systems being purchased worldwide.
There can be no assurance that sufficient sales of the Company's Magnes systems
will be achieved in order to realize its current operating plans. If these
revenues are not achieved, the Company believes its existing capital resources
as of March 31, 1999 will be sufficient to meet its obligations through calendar
1999 only. In either case, the Company must continue to fund its operating
needs, and is currently considering a number of financing alternatives, such as
corporate partnerships and the sale of equity or debt securities. There can be
no assurance that such financing will be available on terms acceptable to the
Company, if at all.

Additional risks and uncertainties include, but are not limited to, satisfying
customer performance requirements for our systems, unfavorable medical industry
trends, increased government regulations and requirements, foreign exchange
risks and Year 2000 issues. The reader is encouraged to refer to the Company's
other Securities and Exchange Commission filings, including its most recent Form
10-K, to ascertain the extent and magnitude of these and other risks and
uncertainties the Company may encounter.

3.   FINANCING

In August 1998, the Company received total proceeds of $15,000,000 from the sale
of 30,000,000 unregistered shares of common stock at $.50 per share to offshore
investors pursuant to Regulation S. Dassesta International S.A., a major
shareholder of BTi since March 1995 purchased 10,000,000 shares. "La Caixa",
Caja de Ahorros y Pensiones de Barcelona, one of the leading financial
institutions of the Kingdom of Spain purchased 10,000,000 shares. A total of
2,000,000 shares were sold to Swisspartners Investment Network LTD, and the
remaining 8,000,000 shares were purchased by two European banks under the same
terms and conditions.

As of July 1998, the Company had borrowed $2,000,000 from Dassesta
International, S.A. The loan was a 180 day unsecured loan bearing interest at
8%. In August 1998, the Company paid off the total principal of $2,000,000 owed
to Dassesta plus $36,000 of related accrued interest using proceeds from the
August 1998 financing of $15,000,000.

4.   BASIC AND DILUTED NET LOSS PER SHARE

Shares used in computing basic and diluted net 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
loss per share.



                                       7
<PAGE>


5.   INVENTORIES

The composition of inventories is as follows:

<TABLE>
<CAPTION>

                                   March 31,    September 30,
                                      1999          1998 
                                    ------         ------
<S>                                 <C>            <C>   
Raw materials                       $  132         $  163
Work-in process                      2,701          2,328
Finished goods                        --              500
                                    ------         ------
                                    $2,833         $2,991
                                    ------         ------
                                    ------         ------
</TABLE>


The Company regularly evaluates the composition of its inventories and has
established reserves for estimated obsolete and excess inventories. The values
presented on the Company's most recent balance sheets are net of these reserve
estimates.

6.   CUSTOMER BACKLOG AND DELIVERY RISK

The Company's backlog at March 31, 1999 amounted to $2,852,000 and is composed
primarily of orders for a 248 channel Magnes 3600 WH system, a Magnes 1300 C
cardiac system and research contracts. Future cash payments to the Company
pertaining to backlog beyond cash deposits already received as of March 31, 1999
total approximately $819,000. 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.

7.   SEGMENT INFORMATION

The Company operates in one segment that includes developing, manufacturing and
selling magnetic source imaging products. The overall market for the Company's
operations can be further divided into three overlapping sub-segments: the basic
research market, the applications research 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.

8.   COMPREHENSIVE INCOME

The Company has no components of comprehensive income.

9.   RECENT ACCOUNTING PRONOUNCEMENTS

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 provides 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, with 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.

10.      SUBSEQUENT EVENTS

The Company has recently entered into clinical research agreements with three
medical institutions. Under the terms of the agreements, the Company will
reimburse an aggregate of approximately $400,000 to the institutions for costs
incurred related to operation of, and research performed with, the Company's MSI
systems.



                                       8
<PAGE>


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 those discussed in "Risks and Uncertainties" below. The
Company does not undertake to update the statements discussed herein as a result
of changes in risks or operating results.

OVERVIEW

Since 1984, the primary business of the Company has been the development of 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. The Company is focusing
on the development of its technology for potential commercial market
applications such as mapping of functional cortex at risk during surgery for
tumors and other lesions, and the diagnosis and planning for surgical treatment
of epilepsy. The Company is continuing to investigate the potential applications
of its technology for problems of the heart, spine, and gastrointestinal system,
as well as for disorders of the brain such as closed-head trauma, schizophrenia
and other neuro-psychiatric disorders. To date, the Company, its competitors and
the market have identified only a limited number of diagnostic applications for
MSI systems.

Twenty four (24) Magnes systems were installed in medical and research
institutions worldwide as of March 31, 1999. 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 75 scientific and medical papers.
Since the first reimbursement for MSI procedures was received in September 1993,
more than 140 insurance companies have approved reimbursement on a case-by-case
basis for certain MSI procedures performed with the Company's Magnes MSI
systems.

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 seated or fully
reclined positions. As of March 31, 1999, the Company has sold eleven Magnes
2500 WH systems.

In fiscal 1998 the Company commenced the development of the Magnes 3600 WH. This
system entered development in response to a continuing need in the research
market for increased sensitivity and deep body imaging, as well as competitive
pressures. BTi expects delivery of its first 3600 WH to a Japanese customer
during the Company's fiscal fourth quarter.

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 has previously priced certain of its European sales in the
currency of the country in which the product was sold and the prices of such
products in dollars varied as the value of the dollar fluctuated 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 if
made in the future. At March 31, 1999 and September 30, 1998, the Company did
not have any open forward exchange contracts. The Company may in the future
enter into forward exchange contracts to partially hedge such foreign currency
exposure, if appropriate.

Due to substantial research and development expenses and low unit sales, the
Company has historically reported net losses. Research and development
expenditures have increased significantly since capital funding was received in
August 1998. Such expenditures may continue to increase in the future as new
products enter into development, and Company sponsored clinical testing is
performed to establish a baseline of data for reimbursement approvals and for
substantiating new applications for MSI systems.



                                       9
<PAGE>


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 March 31, 1999. 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 at current sales
volumes, and 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.

RESULTS OF OPERATIONS

Total revenues for the second quarter of fiscal 1999 were $2,648,000 including
$99,000 of service revenues, compared to $1,736,000 of total revenues, including
$173,000 of service revenues, for the second quarter of fiscal 1998. Increased
total revenues is attributed to the revenue recognition of two 2500 WH systems
and one Magnes I system in the second quarter of fiscal 1999. The decrease in
service revenues reflects a decrease in the amount of service contracts in
effect during this time period. Total revenues for the first six months of
fiscal 1999 were $2,767,000 including $191,000 of service revenues, compared to
$2,060,000 of total revenues, including $340,000 of service revenues for the
first six months of fiscal 1998.

Research and development expenses amounted to $1,336,000 and $1,845,000 for the
three month and six month periods ended March 31, 1999. These amounts
represented an increase of 500% for the quarter and 273% for the six month
period compared to research and development expenses of $267,000 and $676,000
for the same periods in fiscal 1998. These increases are primarily due to
development efforts for software and hardware enhancements to the Magnes 2500
WH, the construction of product engineering testing equipment, support of the
epilepsy clinical testing program at two research clinics in the US, and ongoing
development of the Magnes 3600 WH system. Further, the fiscal 1998 periods
reflected reductions in project spending and research staff attributable to very
limited cash resources.

Marketing, general and administrative expenses increased by $154,000 to
$1,050,000 for the second quarter of fiscal 1999, a 17% increase versus the
comparable period in fiscal 1998. For the first six months of fiscal 1999, such
expenses increased by $440,000 to $2,222,000, a 20% increase as compared to the
same period last fiscal year. These increases are primarily attributable to
increased marketing communication expenses, the addition of sales personnel and
related sales activities, and increased consulting costs.

Interest income totaled $242,000 during the six months ended March 31, 1999 as
compared to $30,000 during the comparable period in fiscal 1998. The increase is
the result of investing excess cash generated from the August 1998 financing,
described below in "Liquidity and Capital Resources".

Net loss in the second quarter of fiscal 1999 amounted to $875,000 compared to a
net loss of $597,000 for the comparable period in the prior fiscal year. Net
loss for the six months ended March 31, 1999 was $2,624,000 as compared to
$1,882,000, for the comparable period last fiscal year. The increased net loss
for the six month period was primarily due to the increase in research and
development costs and increased marketing and general and administrative costs.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1999 the Company has working capital of $7,902,000. At September
30, 1998, the Company's working capital was $11,138,000. Cash and cash
equivalents and short-term investments decreased $4,202,000 to $8,162,000 at
March 31, 1999 as compared to $12,364,000 at September 30, 1998. The decline in
cash primarily reflects the use of working capital to fund operations and to
purchase and construct capital equipment for use in the epilepsy clinical
expansion program.

Capital equipment expenditures totaled $630,000 for the second quarter of fiscal
1999, compared with $42,000 for the same period in fiscal 1998. The increase was
due primarily to the construction of a 2500 WH system for use in the epilepsy
clinical testing program and the purchase of computer equipment to replace
existing outdated equipment.



                                       10
<PAGE>


The Company has recently entered into clinical research agreements with three
medical institutions. Under the terms of the agreements, the Company will
reimburse an aggregate of approximately $400,000 to the institutions for costs
incurred related to operation of, and research performed with, the Company's MSI
systems.

The Company anticipates that in fiscal 1999 operating and working capital
requirements will substantially exceed cash projected to be generated by product
sales. Historically, the Company has offset this deficit by raising capital
funds from private placements of its common stock and from debt offerings. The
Company anticipates that it will continue to incur operating losses for the
foreseeable future, until market acceptance of MSI applications and
corresponding product sales are sufficient to generate continuing profits.

In August 1998 the Company received $15,000,000 in proceeds from the sale of
30,000,000 shares of unregistered common stock at $.50 per share to offshore
investors pursuant to Regulation S. Dassesta International S.A. ("Dassesta"), a
major shareholder of the Company since March 1995, purchased 10,000,000 shares,
"La Caixa", Caja de Ahorras y Pensiones de Barcelona, one of the leading
financial institution of the Kingdom of Spain, purchased 10,000,000 shares. A
total of 2,000,000 shares were sold to Swisspartners Investment Network LTD, and
the remaining 8,000,000 shares were purchased by two European banks under the
same terms and conditions.

From January to July 1998 the Company had borrowed a total of $2,000,000 from
Dassesta for working capital requirements. In August 1998, out of the proceeds
received from the above offering, the Company paid off the Dassesta principal,
plus $36,000 of accrued interest.

In December 1997, the Company sold 4,000,000 unregistered shares of common stock
to Dassesta and an additional 1,500,000 unregistered shares of common stock to
Bank Leu under Regulation S at $.50 per share. Consideration received by the
Company for the sale consisted of cash totaling $793,000 and cancellation of its
then outstanding loan principal of $1,700,000, related accrued interest of
$38,000 and accounts payable of $219,000, all owed to Dassesta.

Based on its current operating plans, including anticipated product orders and
resulting revenues and cash receipts, capital expenditures, expected working
capital requirements and existing capital resources, the Company anticipates
that it will be able to fund operations through the second quarter of fiscal
2000. The realization of the Company's operating plans is dependent upon its
ability to successfully close a number of MSI system sales in the current highly
competitive market for the limited number of systems being purchased worldwide.
There can be no assurance that sufficient sales of the Company's Magnes systems
will be achieved in order to realize its current operating plans. If these
revenues are not achieved, the Company believes its existing capital resources
as of March 31, 1999 will be sufficient to meet its obligations through calendar
1999 only. In either case, the Company must continue to fund its operating
needs, and is currently considering a number of financing alternatives, such as
corporate partnerships and the sale of equity or debt securities. There can be
no assurance that such financing will be available on terms acceptable to the
Company, if at all.

YEAR 2000 ASSESSMENT

Many currently installed computer systems and software products are coded to
accept only 2 digit entries in the date code field. Beginning in the year 2000,
these date code fields will need to accept 4 digit entries to distinguish 21st
century dates from the 20th century dates. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. As a result, computer systems, software and industrial controls used by
many companies may need to be upgraded to comply with Year 2000 requirements.

We are utilizing both internal and external resources to identify, correct or
reprogram, and test our internal systems for Year 2000 compliance. We have
determined that it is necessary to acquire new Year 2000 compliant computer
hardware and software systems for our accounting, purchasing, production control
and inventory management systems. Also, our security system and portions of our
telephone system must be upgraded.

We are currently seeking to ensure that the software and operating systems
included in our Magnes systems are Year 2000 compliant. Our current testing has
indicated that earlier models of our products were purchased from us using
computer hardware and software that requires modification or replacement. We are
developing a new version of our software that when combined with a new computer
and operating system should be Year 2000 compliant; we expect to make this
solution available by June 1999 to our customers that have earlier models. Our
current Magnes 2500 WH product has been tested and customer systems in the field
should not require modification.



                                       11
<PAGE>


We are also in the process of requesting information and assurances from our
major vendors, service providers and customers about their state of Year 2000
compliance and readiness. In the event that significant Year 2000 issues are
identified with such parties, we will identify contingency plans such as the use
of alternate vendors or manual systems.

Current estimates of total costs of Year 2000 compliance amount to approximately
$350,000, including internal and external hardware, software and labor costs for
systems implementation and testing. Installation, replacement and updating of
these systems is currently in process. It is estimated that installation,
replacement and updating will be completed by June 1999, and testing will be
ongoing through September 1999 and completed by December 1999.

If our systems are not made compliant by year-end it could significantly
adversely affect our sales. Year 2000 issues could cause potential customers to
reevaluate their current needs and consider deferring purchase of our Magnes
systems or decide to purchase from a competitor. Additionally, we could have
potential warranty or other claims with existing Magnes systems placed with
customers if such systems are not made Year 2000 compliant. Any of the foregoing
could result in a material adverse effect on our business, financial position
and results of operations.

ADDITIONAL RISKS AND UNCERTAINTIES

WE EXPECT CONTINUED OPERATING LOSSES.

Our financial position reflects that we have been principally focused on
research and development, with only low volume sales to medical research
institutions. For the first six months of fiscal 1999, our net loss was
$2,624,000 and we had negative cash flows from operations of $3,330,000.

At March 31, 1999, our accumulated deficit was $93,447,000 with working capital
of $7,902,000. Our cash balance at March 31, 1999 was $8,162,000. This balance
reflects the sale during August 1998 of 30,000,000 shares of common stock for
proceeds of $15,000,000, and the sale of two 2500 WH systems and the sale of one
Magnes I system, less usage of cash from ongoing operations.

We anticipate that in fiscal 1999 we will incur a net loss from operations, and
cash usage will substantially exceed that projected to be received from product
sales.

OUR SUCCESS MAY BE LIMITED BY OUR ABILITY TO SATISFY CUSTOMER PERFORMANCE
REQUIREMENTS.

Our success may be limited by our ability to complete, in a timely fashion,
product developments and enhancements to satisfy customer requirements for our
systems.

OUR SUCCESS MAY BE LIMITED BY OUR DEPENDENCE UPON A SINGLE PRODUCT AND
UNCERTAINTY WITH RESPECT TO THE DEVELOPMENT OF ADDITIONAL PRODUCTS.

Our success may be limited by our dependence on our one current product, the
Magnes 2500 WH system. Before we can more fully penetrate the research and
commercial markets, we need to have additional products. In development is our
Magnes 3600 WH, which is intended to address more fully the needs of research
institutions. Our Magnes 2500 WH system is more appropriate for the commercial
market. Our financial results will be materially adversely affected if our
Magnes 2500 WH system does not suit the majority of commercial applications that
emerge, or we are not able to offer new products in a timely and cost effective
manner that meet the emerging needs of the marketplace.

OUR SUCCESS HAS BEEN LIMITED BY A LACK OF CURRENTLY IDENTIFIED CLINICAL
APPLICATIONS FOR MSI SYSTEMS.

Currently, there are only a few established diagnostic uses for MSI systems that
the medical industry is aware of. Although we have started our own clinical
research and testing to identify new, large application areas, we cannot assure
you that a commercial market will develop for multiple uses of our products.



                                       12
<PAGE>




OUR SUCCESS MAY BE LIMITED BY OUR DEPENDENCY ON AND UNCERTAINTY WITH RESPECT TO
THIRD PARTY REIMBURSEMENT AND HEALTHCARE REFORM.

Our commercial success is also highly dependent on reimbursement for procedures
using the MSI system. Currently, Medicare, insurance companies and other
healthcare providers approve payment for MSI procedures on a case-by-case basis.
As of March 31, 1999, these third party payors have only approved limited
reimbursements in the United States. Although third party payors have
increasingly approved reimbursements, we cannot assure you that third party
reimbursements will become widely available. The United States government does
not currently reimburse for MSI procedures. If reimbursement does not become
more widely available, our financial position will be materially adversely
affected. In addition, there is currently no reimbursement for MSI procedures
outside of the United States.

OUR PRODUCTS AND TECHNOLOGY MAY BECOME OBSOLETE.

Our industry is characterized by rapid technological change, which may also
impact our commercial success. Competitors may develop products using other
technologies or may improve existing products. This competition may reduce the
size of the potential market for our products or make them obsolete or
non-competitive. Competitors may also develop new or different products using
technology or imaging modalities that provide, or are perceived as providing,
greater value than the Company's products. Our financial position will be
materially adversely affected if such competitive developments occur.

WE MAY BE NEGATIVELY IMPACTED BY AGGRESSIVE COMPETITION IN OUR INDUSTRY.

Our industry is characterized by ongoing significant price competition, due to
the existence of a number of competitors in a fledgling marketplace with a
limited number of MSI systems being purchased worldwide. The future
profitability of our systems may be negatively impacted by this aggressive
competition; we currently cannot predict how rapidly the market may expand to
provide MSI system manufacturers with appropriate shareholder returns.

NEW GOVERNMENT LEGISLATION AND UNFAVORABLE MEDICAL INDUSTRY TRENDS MAY ADVERSELY
IMPACT US.

We cannot predict what adverse effect, if any, future legislation or Food and
Drug Administration regulations may have on the MSI market and our financial
results. Medical industry cost containment trends may impose restrictions on
sizeable third-party reimbursements for diagnostic procedures, limiting the
market opportunity. Further, if Federal government agencies or any state
legislature enacts legislation or guidelines relating to our business or the
health care industry that create additional business hurdles, including
legislation relating to third party reimbursement, our financial position could
be negatively affected.

OUR BUSINESS ACTIVITIES MAY INVOLVE FOREIGN EXCHANGE RELATED RISKS.

Because we sell in foreign markets, we are exposed to potential risks of
increases and decreases in foreign currency exchange rates. When appropriate, we
enter into forward exchange contracts to partially hedge (or protect) against
such foreign currency exchange fluctuations. Nonetheless, these fluctuations may
reduce the return in U.S. dollars that we actually receive on our sales. These
risks may become material as our sales increase or dramatic currency
fluctuations occur from outside events.

FAILURE TO BE YEAR 2000 COMPLIANT COULD HARM OUR BUSINESS.

For risks relative to Year 2000 issues, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000
Assessment".


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


                  None.



                                       13
<PAGE>


PART II.      OTHER INFORMATION


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

The Company held its Annual Meeting of Shareholders on March 19, 1999 and
proxies for such meeting were solicited pursuant to Regulation 14A. There was
no solicitation in opposition to the Company's nominees for directors as listed
in the proxy statement and all such nominees were elected. In addition, the
following matters were adopted by the Shareholders at the Annual Meeting.



              (a) For the election of Nominees to the Board of Directors for the
                  fiscal year ending September 30, 1999.


<TABLE>
<CAPTION>

                  Nominee                                  For                      Against               Non-votes
                  -------                                  ---                      -------               ---------
<S>                                                    <C>                          <C>                   <C> 

                  D. Scott Buchanan                    73,497,063                    67,910                   0

                  Martin P. Egli                       73,497,063                    67,910                   0

                  Galleon Graetz                       73,497,063                    67,910                   0

                  Rodolfo Llinas                       73,497,063                    67,910                   0

                  Enrique Maso                         73,497,063                       -
</TABLE>



              (b) Ratify the selection of Arthur Andersen LLP as independent
                  accountants for the fiscal year ending September 30, 1999.
<TABLE>

<S>               <C>                   <C>                   <C>                   <C>    
                  For - 73,520,649      Against - 18,050      Abstain - 26,274      Broker Non-Votes - 0
</TABLE>


              (c) Amend the Company's Articles of Incorporation to increase the
                  number of authorized shares of Common Stock from 100,000,000
                  to 200,000,000 shares.
<TABLE>

<S>               <C>                   <C>                   <C>                   <C>    
                  For - 73,226,972      Against - 277,901     Abstain - 60,100      Broker Non-Votes - 0
</TABLE>


              (d) Amend the 1997 Stock Incentive Plan to increase the number of
                  shares of Common Stock from 3,000,000 to 6,000,000 shares.
<TABLE>

<S>               <C>                   <C>                   <C>                   <C>    
                  For - 72,149,763      Against - 345,567     Abstain - 108,965     Broker Non-Votes - 960,678
</TABLE>


ITEM 5.       OTHER INFORMATION


                           None.



                                       14
<PAGE>



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


<TABLE>
<CAPTION>

              a)  EXHIBIT NO.                 DESCRIPTION
<S>                             <C>

                    3.1         Form of Certificate of Amendment of
                                Fourth Restated Articles of
                                Incorporation to be filed with the
                                California Secretary of State.

                    3.2         Fourth Restated Articles of Incorporation, as 
                                amended.

                    3.3         Restated By-laws.

                    27          Financial Data Schedule
</TABLE>


              b)  Reports on Form 8-K.

                      None.



                                       15
<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.


     May 14, 1999                    /s/ D. SCOTT BUCHANAN
-------------------------            ------------------------------------------
     Date                            D. Scott Buchanan
                                     President and Chief Executive Officer


     May 14, 1999                    /s/ ARON P. STERN
-------------------------            -------------------------------------------
     Date                            Aron P. Stern
                                     Vice President of Finance, Chief Financial 
                                     Officer Secretary
                                     Principal Financial and Accounting Officer










                                      16