<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 December 31, 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 February 9, 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)
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,                  SEPTEMBER 30,
                                                                      1998                           1998
                                                                  -------------                  -------------
                                                                   (UNAUDITED)
<S>                                                               <C>                            <C>
ASSETS
Cash and cash equivalents                                             $    174                       $  2,282
Short-term investments                                                   9,838                         10,082
Restricted cash                                                            137                            138
Accounts receivable, less allowance for
  doubtful accounts of $10                                                 874                            932
Interest receivable                                                        126                              -
Inventories                                                              3,673                          2,991
Prepaid expenses and other assets                                          324                            271
                                                                      --------                       --------

      Total current assets                                              15,146                         16,696
                                                                      --------                       --------

Net property and equipment                                                 335                            304
Restricted cash                                                            118                            187
Other assets                                                               155                            156
                                                                      --------                       --------

TOTAL ASSETS                                                          $ 15,754                       $ 17,343
                                                                      --------                       --------
                                                                      --------                       --------

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable                                                      $    750                       $    783
Accrued liabilities                                                        623                            748
Accrued salaries and employee benefits                                     473                            461
Customer deposits                                                        3,305                          2,909
Deferred revenue                                                           667                            657
                                                                      --------                       --------

       Total current liabilities                                         5,818                          5,558

Other long-term liabilities                                                117                            216
                                                                      --------                       --------

     Total liabilities                                                   5,935                          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                                                   (92,573)                       (90,823)
                                                                      --------                       --------

      Total shareholders' equity                                         9,819                         11,569
                                                                      --------                       --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                            $ 15,754                       $ 17,343
                                                                      --------                       --------
                                                                      --------                       --------
</TABLE>

                                       2

<PAGE>

                                       
                         BIOMAGNETIC TECHNOLOGIES, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                                     DECEMBER 31,
                                                              1998                 1997
                                                            --------             --------
<S>                                                         <C>                  <C>
REVENUES
   Product                                                  $    24              $   104
   Product services                                              92                  167
   Contract research                                              3                   53
                                                            --------             --------
                                                                119                  324

COST OF REVENUES
   Product                                                      269                  108
   Product services                                              51                  108
   Contract research                                              3                   50
                                                            --------             --------
                                                                323                  266
                                                            --------             --------

GROSS MARGIN                                                   (204)                  58

OPERATING EXPENSES
   Research and development                                     509                  409
   Marketing, general and administrative                      1,172                  886
                                                            --------             --------
                                                              1,681                1,295
                                                            --------             --------

OPERATING LOSS                                               (1,885)              (1,237)
   Interest expense                                               -                  (27)
   Interest income                                              121                   15
   Other income (expense), net                                   14                  (36)
                                                            --------             --------

NET LOSS                                                    $ (1,750)            $ (1,285)
                                                            --------             --------
                                                            --------             --------

BASIC AND DILUTED NET LOSS PER SHARE                        $  (0.02)            $  (0.03)
                                                            --------             --------
                                                            --------             --------
Weighted Average Number of
   Shares Outstanding                                        83,367                47,871
                                                            --------             --------
                                                            --------             --------
</TABLE>




            See notes to consolidated condensed financial statements.

                                       3

<PAGE>
                                       
                         BIOMAGNETIC TECHNOLOGIES, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED
                                                                            DECEMBER 31,
                                                                1998                         1997
                                                             ----------                   ----------
<S>                                                          <C>                          <C>
OPERATING ACTIVITIES
  Net loss                                                   $  (1,750)                   $  (1,285)
  Adjustments to reconcile net loss to net 
  cash used in operating activities:
    Depreciation and amortization                                   52                           38
Changes in operating assets and liabilities
    Restricted cash                                                 70                          198
    Accounts receivable                                             58                         (122)
    Inventories                                                   (682)                        (449)
    Prepaid expenses and other assets                              (52)                         136
    Accounts payable                                               (33)                         (35)
    Accrued liabilities                                           (125)                           3
    Accrued salaries and employee benefits                          12                          (77)
    Customer deposits                                              396                            -
    Deferred revenue                                               (89)                        (167)
    Other liabilities                                                _                           (8)
                                                             ----------                   ----------
        Net cash used in operating activities                   (2,143)                      (1,768)
                                                             ----------                   ----------
INVESTING ACTIVITIES
  Change in short-term investments                                 244                            -
  Change in interest receivable                                   (126)                           -
  Payments for property and equipment                              (83)                         (13)
                                                             ----------                   ----------
        Net cash provided by (used in) investing activities         35                          (13)
                                                             ----------                   ----------
FINANCING ACTIVITIES
  Proceeds from note payable to shareholder                          -                          725
  Proceeds from sale of common stock                                 -                          854
                                                             ----------                   ----------
        Net cash provided by financing activities                    -                        1,579
                                                             ----------                   ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS                       (2,108)                        (202)
                                                             ----------                   ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                 2,282                        1,229
                                                             ----------                   ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                   $     174                    $   1,027
                                                             ----------                   ----------
                                                             ----------                   ----------
</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>
                                                                         THREE MONTHS ENDED
                                                                            DECEMBER 31,
                                                                 1998                        1997
                                                             ------------                 ----------
<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" 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 December 31, 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.  BUSINESS RISKS AND UNCERTAINTIES

Biomagnetic Technologies, Inc. (the "Company"), founded in 1970 as a 
California corporation, is engaged primarily in the business of developing, 
manufacturing and selling innovative medical 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 dependent on its current Magnes 2500 WH system 
as its principal product for which there are currently limited 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 commercial clinical market. There can be no assurance 
that a commercial 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.

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 December 31, 1998, 
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 condition, 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 is likely to affect potential future 
profitability of the Company's Magnes 2500 WH system, the extent of which is 
not presently determinable.

For the quarter ended December 31, 1998, the Company incurred a net loss of 
$1,750,000 and had negative cash flows from operations of $2,143,000. At 
December 31, 1998, the Company has an accumulated deficit of $92,573,000, net 
capital of $9,819,000 and working capital of $9,328,000. 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, revenue expectations, 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 Magnes 2500 WH 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 the current operating plans. If these revenues 
are not achieved, the Company believes its existing capital resources as of 
December 31, 1998 will be sufficient to meet its obligations through calendar 
1999. In either case, the Company must continue to fund its operating needs, 
and is currently considering a number of financial 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.

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.

                                       7

<PAGE>

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.

5.   INVENTORIES

The composition of inventories is as follows:

<TABLE>
<CAPTION>
                                 December 31,               September 30,
                                     1998                       1998     
                                 ------------               -------------
<S>                              <C>                        <C>
      Raw materials               $      170                 $      163
      Work-in process                  3,003                      2,328
      Finished goods                     500                        500
                                  ----------                 ----------
                                  $    3,673                 $    2,991
                                  ----------                 ----------
                                  ----------                 ----------
</TABLE>

6.    CUSTOMER BACKLOG AND DELIVERY RISK

The Company's backlog at December 31, 1998 amounted to $3,933,000 and is 
composed primarily of orders for a 248 channel Magnes 3600 WH sensor, a 
Magnes 2500 WH system and a Magnes 1300 C cardiac system . Future cash 
payments to the Company pertaining to backlog beyond cash deposits already 
received as of December 31, 1998 total approximately $1,194,000. 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 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 
sub-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.

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,

                                       8

<PAGE>

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.

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 one (21) Magnes systems were installed in medical and research 
institutions worldwide as of December 31, 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 75 scientific and medical 
papers. Since the first reimbursement for MSI procedures was received in 
September 1993, more than 130 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 December 31, 1998, the Company has shipped 
ten Magnes 2500 WH systems and received nine 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 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 December 31, 1998 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 decreased significantly since completion of the Magnes 2500 
WH system in fiscal 1996. Such expenditures may increase in the future as new 
products enter into development.

                                       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 December 31, 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 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 first quarter of fiscal 1999 were $119,000, including 
$92,000 of service revenues, compared to $324,000 of total revenues, 
including $167,000 of service revenues, for the first quarter of fiscal 1998. 
Net loss in the first quarter of fiscal 1999 amounted to $1,750,000 compared 
to a net loss of $1,285,000 for the comparable period in the prior fiscal 
year. Decreased total revenues is attributed to the lack of sales and 
decreased service contracts in the first quarter of fiscal 1999, compared to 
service contracts in effect in the first quarter of fiscal 1998.

Research and development expenses amounted to $509,000 and $409,000 for the 
three months ended December 31, 1998 and 1997, respectively, an increase of 
24%. The increase is due to development efforts for software and hardware 
enhancements to the Magnes 2500 WH, and the development of the Magnes 3600 WH 
system

Marketing, general and administrative expenses amounted to $1,172,000 in the 
first quarter of fiscal 1999, compared to $886,000 during the comparable 
period in fiscal 1998, a 32% increase. The increase in marketing, general and 
administrative expenses is attributable to the implementation of the 
Company's epilepsy clinical expansion program, increased marketing and 
regulatory consulting costs and the addition of sales personnel and related 
activities.

Interest income totaled $121,000 during the three months ended December 31, 
1998 as compared to $15,000 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".

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998 the Company has working capital of $9,328,00. At 
September 30, 1998, the Company's working capital was $11,139,000. The net 
decrease in working capital is due to the funding of current operations with 
existing cash and short-term investments. Cash, cash equivalents and 
short-term investments decreased $2,352,000 to $10,012,000 at December 31, 
1998 compared to $12,364,000 at September 30, 1998.

Capital equipment expenditures totaled $83,000 for the first quarter of 
fiscal 1999, compared with $13,000 for the same period in fiscal 1998. The 
increase was due primarily to the purchase of computer equipment to replace 
existing outdated equipment.

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 raised capital resources from 
private placements of its common stock and debt offerings.

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.

                                       10

<PAGE>

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, revenue expectations, 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 Magnes 2500 WH 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 the current operating plans. If these revenues 
are not achieved, the Company believes its existing capital resources as of 
December 31, 1998 will be sufficient to meet its obligations through calendar 
1999. In either case, the Company must continue to fund its operating needs, 
and is currently considering a number of financial 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. (See "Additional Risks and Uncertainties", below.)

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, in less than two years, computer systems 
and/or software used by many companies may need to be upgraded to comply with 
Year 2000 requirements.

We are utilizing both internal and external resources as applicable, to 
identify, correct or reprogram, and test our internal systems for Year 2000 
compliance. The total cost of compliance and its effect on our future results 
of operations are being determined as part of the detailed conversion 
process. We have preliminarily determined that it may be necessary to acquire 
new Year 2000 compliant hardware and software systems for our accounting, 
purchasing , production control and inventory management systems. Current 
estimates indicate potential costs may amount to approximately $250,000 for 
expenditures, including hardware, software and systems conversions, plus 
additional, yet to be quantified internal and external labor costs for 
systems conversions and implementation.

We are currently seeking to ensure that the software and operating systems 
included in our Magnes 2500 WH are Year 2000 compliant. If such systems are 
not compliant it could significantly adversely affect our sales. Year 2000 
issues could cause potential customers to reevaluate their current system 
needs and as a result consider deferring purchase of our Magnes systems. 
Additionally, we could have potential warranty or other claims with existing 
Magnes systems placed with customers if such systems are not year 2000 
compliant. Any of the foregoing could result in a material adverse effect on 
our business, operating results, and financial condition.

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.

As of December 31, 1998, we have spent approximately $85,000 in addressing 
Year 2000 issues including consultant and in-house labor costs.

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<PAGE>

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. In the first quarter of fiscal 1999, our net loss was 
$1,750,000 and we had negative cash flows from operations of $2,143,000.

At December 31, 1998, our accumulated deficit was $92,573,000 with working 
capital of $9,328,000. Our working capital at December 31, 1998 resulted 
primarily from the sale of 30,000,000 shares of common stock for proceeds of 
$15,000,000 during August 1998.

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 OR 
APPLICATIONS.

Our success may be limited by our dependence on one product, our Magnes 2500 
WH system, which currently has limited clinical applications. Before we can 
more fully penetrate the research and commercial markets, we need to develop 
additional products. Further, the market for additional clinical applications 
for MSI systems must emerge. We cannot assure you that a commercial market 
will develop for multiple uses of our MSI system. Our financial position will 
be materially adversely affected if we do not develop additional clinical 
applications or if we are not able to develop a commercial market for our 
Magnes 2500 WH system.

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 December 31, 1998, 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. Further, if the Federal government or 
any state legislature enacts legislation relating to our business or the 
health care industry, including legislation relating to third party 
reimbursement, our financial position could be negatively 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.

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<PAGE>

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 also impose 
restrictions on sizeable third-party reimbursements for diagnostic 
procedures, limiting the market opportunity.

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.
 
PART II    OTHER INFORMATION

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

           None.

ITEM 5.    OTHER INFORMATION

           None.

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

           a)  EXHIBIT NO.                                   DESCRIPTION

           3.1 (1)    Articles of Incorporation of the Company, as amended.

           3.2 (1)    Bylaws of the Company, as amended.

           3.3 (10)   Certificate of Amendment of Fourth Restated Articles of 
                      Incorporation (numbered originally as 10.73)

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<PAGE>

           27         Financial Data Schedule

           (1)   These exhibits were previously filed as part of, and are hereby
                 incorporated by reference to, the same numbered exhibits
                 (except as otherwise indicated) in the Registration Statement
                 filed pursuant to the Securities Act of 1933 on Form S-1,
                 Registration Statement No. 33-29095, filed June 7, 1989, as
                 amended by Amendment No. 1, filed June 13, 1989, Amendment No.
                 2, filed July 21, 1989 and Amendment No. 3, filed July 28,
                 1989.

           (10)  This exhibit was previously filed as part of, and is hereby
                 incorporated by reference to, the same numbered exhibits
                 (except as otherwise indicated) in form 8-K, filed April 14,
                 1995.

           b)    Reports on Form 8-K

                 None.

                                       14

<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.

        February 16, 1999     /s/ D. SCOTT BUCHANAN
        ------------------    ---------------------
        Date                  D. Scott Buchanan
                              President and Chief Executive Officer

        February 16, 1999     /s/ ARON P. STERN
        ------------------    ---------------------
        Date                  Aron P. Stern
                              Vice President of Finance, Chief Financial Officer
                              Secretary
                              Principal Financial and Accounting Officer

                                       15