<PAGE>

                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.  20549

                                      FORM 10-K
                                           
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
                                  September 30, 1996
For the fiscal year ended_____________________________________  

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period
from______________________________to__________________________________
                                                                      
                                   
Commission File                  1-10285
Number_________________________________________________________________

                            BIOMAGNETIC TECHNOLOGIES, INC.

                (Exact name of registrant as specified in its charter)
    
             California 
(State or other jurisdiction of incorporation or organization)

             95-2647755
 (I.R.S. Employer Identification Number) 


    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____________________  

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:   COMMON STOCK, 
NO PAR VALUE PER SHARE
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-K is not contained herein, and will not be contained, to 
the best of registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-K or any 
amendment to this Form 10-K.  [ ]

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

The aggregate market value of the voting stock (which consists solely of 
shares of Common Stock) held by non-affiliates of the registrant as of 
December 31, 1996 was $23,845,912, based on the closing price on that date on 
the Nasdaq National Market.

The number of shares outstanding of the registrant's Common Stock, no par 
value, as of December 31, 1996 was  47,691,824 shares.
                        
                      DOCUMENTS INCORPORATED BY REFERENCE

1.  Certain portions of Registrant's Proxy Statement and Notice of Annual
    Meeting to be filed pursuant to Regulation 14A of the Securities 
    Exchange Act of 1934, as amended, in connection with the Annual 
    Meeting of Shareholders to be held March 18, 1997 are incorporated by
    reference into Part III of this report.
2.  Registrant's Annual Report of its Employee Stock Purchase Plan for the
    fiscal year ended September 30, 1996 is included as Exhibit 99.1.
3.  Items contained in the above-referenced documents which are not
    specifically incorporated by reference are not included in this report.

<PAGE>


                            BIOMAGNETIC TECHNOLOGIES, INC.

                                      FORM 10-K

                     FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996

                                        INDEX



                                                                  PAGE

PART I

Item  1.   Business                                                 1
Item  2.   Properties                                              18
Item  3.   Legal Proceedings                                       19
Item  4.   Submission of Matters to a Vote of Security Holders     19


PART II

Item  5.   Market for Registrant's Common Stock and Related
              Shareholder Matters                                  20
Item  6.   Selected Financial Data                                 21
Item  7.   Management's Discussion and Analysis of Financial 
              Condition and Results of Operations                  22
Item  8.   Financial Statements and Supplementary Data             28
Item  9.   Changes in and Disagreements with Accountants 
              on Accounting and Financial Disclosure               28


PART III

Item 10.   Directors and Executive Officers of the Registrant      29
Item 11.   Executive Compensation                                  29
Item 12.   Security Ownership of Certain Beneficial Owners 
             and Management                                        29
Item 13.   Certain Relationships and Related Transactions          29


PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports 
              on Form 8-K                                          30
Signatures                                                         34

<PAGE>

                                        PART I
                                  
ITEM 1.   BUSINESS.

Except for the historical information contained herein, the following 
discussion contains 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 are discussed  in greater detail in "Item 7  - Management's 
Discussion and Analysis of Financial Condition and Results of Operations" of 
this report.  The Company does not undertake to update the results discussed 
herein as a result of changes in risks or operating results.

In December 1996, the Company reported a restructuring of its operations due 
to lower short-term market projections for its MSI systems. As part of the 
restructuring, D. Scott Buchanan, Ph.D., assumed the responsibilities of 
President and COO, reporting to Chairman and CEO President James Schumacher. 
The restructuring resulted in an immediate reduction of 16 employees which is 
expected to be followed by additional reductions of approximately 28 persons 
after completion of the final development phases of its Magnes 2500 WH system 
over the next several months.  As a result of the restructuring, the Company 
also expects to reduce its program costs in non-personnel related areas. 

In fiscal 1995, BTi  announced development of the Magnes -Registered 
Trademark-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 position. 
The Company commenced shipments of its Magnes 2500 WH prior to the end of 
fiscal year 1996, however, there were no final acceptances received from the 
customers. Furthermore, although the Company received provisional acceptance 
from two customers, no final acceptances were received in the first quarter 
of fiscal year 1997 which ended December 31, 1996.  The delay in receipt of 
customer final acceptances is primarily due to a pending hardware upgrade, 
the need for which was not discovered to be necessary prior to installing the 
systems at customer sites, and additional software development required to 
meet customer contractual requirements.  

COMPANY OVERVIEW

Biomagnetic Technologies, Inc. (the "Company" or "BTi") was established in 
1970 to produce specialized instruments for ultra-sensitive magnetic field 
and low temperature measurements.  These products were supplied to physicists 
for basic research.  The Company has been developing its core magnetic 
sensing technologies since the early 1970s and incorporated those 
technologies into its magnetic source imaging ("MSI") system, an instrument 
designed to assist in the noninvasive diagnosis of a broad range of medical 
disorders.  

The MSI system developed by the Company uses advanced superconducting 
technology to measure and locate the source of magnetic fields,  generated by 
the human body,  which are one billion times smaller than the earth's 
magnetic field. While traditional medical imaging methods provide anatomical 
detail, the measurement of the body's magnetic fields by MSI provides 
information about normal and abnormal function of the brain, heart and other 
organs.  The Company is focusing the development of its 

                                    1

<PAGE>


technology on large potential commercial market applications such as mapping 
of functional cortex at risk during surgery for tumors and other lesions, the 
diagnosis and planning for surgical treatment of epilepsy and is continuing 
to investigate the potential applications of its technology to problems of 
the heart.

MSI differs significantly from other existing functional and anatomical 
imaging methods.  The Company believes MSI is the only method that can 
precisely capture and locate rapid changes in organ function without the 
injection of radioactive isotopes or costly invasive procedures such as 
surgical placement of electrodes into the body.  Other functional imaging 
methods such as electroencephalography ("EEG") or positron emission 
tomography ("PET") either require invasive procedures to provide the needed 
accuracy of locating functional areas or respond too slowly to follow 
transient physiological events.  Anatomy oriented diagnostic methods such as 
computed tomography ("CT") and magnetic resonance imaging ("MRI") produce 
anatomical images showing cross-sectional slices of various parts of the 
body. The Company's MSI system, when used in conjunction with anatomy 
oriented diagnostic methods, provides the clinician with an image that links 
anatomy with function to give a more complete picture of the patient's 
condition without the use of radioactive isotopes or costly invasive 
procedures.

The Company's MSI system is currently being used by physicians for planning 
the surgical removal of brain tumors and vascular malformations to reduce the 
risk of neurological injury resulting in paralysis and expensive 
rehabilitation therapy.  The Company's MSI system is also being used to 
assist physicians specializing in epilepsy to evaluate whether the surgical 
treatment of drug-resistant epileptic seizures is appropriate by helping to 
locate brain tissue that triggers such seizures.  Other potential 
neurological applications for the Company's MSI system include certain 
stroke, trauma, psychiatric and mental disorders.  The Company's MSI system 
has also been used to investigate certain cardiac applications including the 
assessment of risk for lethal arrhythmias and the location of the tissue 
responsible for the arrhythmias as a guide for subsequent therapy.  In 
addition, the Company is focusing its internal research efforts on developing 
and expanding its proprietary technology into more cost-effective products.

Several leading medical centers worldwide have performed more than 5,000 
clinical examinations on patients and control subjects with the Company's MSI 
systems for the purpose of developing the clinical applications, either 
independently or in collaboration with BTi.  Since the first third-party 
reimbursement was received in September 1993,  75 insurance companies and 
other health care providers have approved reimbursement for certain MSI 
procedures performed with the Company's Magnes MSI system.  Magnes systems 
are installed in 16  medical and research institutions worldwide as of 
September 30, 1996.  These sites include the Scripps Clinic & Research 
Foundation in La Jolla, California ("Scripps"), New York University Medical 
Center ("NYU"), the University of Tokyo ("UT"), the University of California, 
San Francisco Medical Center ("UCSF"), Karolinska Hospital in Sweden,   
Institute of Medicine in Julich, Germany, and the University of Magdeburg in  
Magdeburg, Germany.  In addition, two Magnes 2500 WH systems were in the 
process of installation on September 30, 1996 at the Max Planck Institute in 
Leipzig, Germany and the Communications Research Laboratory in Tokyo, Japan.  
Patients have been referred to collaborating domestic sites from more than 50 
leading medical institutions throughout the United States.

                                             2

<PAGE>


According to statistics issued by the National Institutes of Health ("NIH"), 
the annual cost associated with neurological and mental illness disorders in 
the U.S. is more than $285 billion.  This amount includes the direct cost of 
health care and, in the case of most neurological disorders, the indirect 
cost of income lost due to illness.  The Company currently is directing its 
sales efforts toward the more than 150 medical centers in the U.S., Asia and 
Europe where clinical applications for MSI may be developed.  The potential 
commercial clinical market in the U.S. consists of more than 1,200 large 
hospitals and independent imaging centers.

CURRENT MEDICAL IMAGING TECHNOLOGY

Most debilitating or life threatening disorders of the body, such as stroke, 
seizures, dementia, movement disorders, mental illness, cardiac arrhythmias 
and gastrointestinal disorders, involve a disruption of function.  Because 
electrical activity plays a critical role in many functions of the body, such 
activity is frequently monitored as a means to diagnose functional disorders. 
The electrocardiogram ("ECG") and EEG are recordings of electrical activity 
of the heart and brain used to obtain information about heart and brain 
function, respectively.  Similarly, electrical activity is often recorded to 
diagnose functional disorders of skeletal muscles and peripheral nerves.

In the diagnosis and treatment of certain disorders, knowledge of the 
specific location of the malfunctioning tissue is a key factor.  Numerous 
medical imaging technologies have been developed in response to this need.  
These include imaging technologies oriented toward organ structure and 
anatomy, such as CT and MRI, and imaging technologies oriented toward 
function, such as PET, single-photon emission computed tomography ("SPECT") 
and functional MRI ("fMRI")..

CT and MRI produce anatomical images showing cross-sectional slices of 
various parts of the body.  These anatomical imaging methods help in locating 
structural malformations and assessing physical organ damage.  Their 
applications are limited, however, in that many functional disorders have no 
corresponding structural abnormality.

Other imaging technologies have been developed specifically to show the 
location of certain functional areas.  PET and SPECT produce cross-sectional 
pictures showing the location of certain radioactively labeled substances 
that have been injected into the body.  Relative levels of metabolic activity 
and regional blood flow, two measures of cell function, are determined by 
measuring the amount of radiation emitted by different tissues.
                                           
An adaptation of conventional MRI known as fMRI is used to create images 
related to localized changes in blood flow in the brain.  While fMRI has the 
advantage compared with PET and SPECT in that it does not involve injecting 
radioactive substances into the body, fMRI, PET and SPECT all have a 
relatively long response time that prevents observation of rapidly changing 
activities.  Much of the valuable diagnostic information observed in brain 
and cardiac electrical activity occurs in intervals much less than one 
second, typically tens of milliseconds, and is spontaneous in nature.  
Because the physiological response time of PET, SPECT and fMRI is several 
seconds at best, critical information about the sequence of activity, which 
is essential for understanding disorders such as epilepsy and cardiac 
arrhythmias, is unavailable from these technologies.

                                       3

<PAGE>

Conventional ECG and EEG have a faster response time than fMRI, PET and 
SPECT, and provide critical information about the sequence of electrical 
activity but, in many cases, lack the ability to locate the source of such 
activity with sufficient accuracy to guide therapy.  Locational accuracy is 
lost because the electrical activity is distorted as it passes through body 
tissues between the electrical source in the brain or heart and the 
electrodes on the body's surface.  For this reason, electrodes are commonly 
inserted into the body in an attempt to obtain accurate localization of 
functional abnormalities in the brain or heart prior to ablation procedures.  
This procedure is invasive, very costly and involves risk and discomfort.

MSI TECHNOLOGY

MSI is based on a measurement of the magnetic fields produced by 
intracellular electrical activity which, as discussed above, is associated 
with many of the body's most critical functions.  Unlike electrical activity 
generated by the body, the corresponding magnetic fields pass through the 
body without distortion and without obscuring the location of the source.  By 
measuring the magnetic fields and analyzing them to extract locational 
information, MSI can noninvasively provide information about the location of 
the origin of normal and abnormal electrical activity with a combination of 
millimeter spatial resolution and millisecond time response that has 
otherwise been available only from highly invasive procedures.  The Company 
believes that MSI has a unique capability to obtain such information without 
introducing radioactive or other tracer substances into the body or use of 
other invasive procedures.

THE MAGNES MSI SYSTEM

The Company's current MSI systems, the single sensor Magnes I, the dual 
sensor Magnes II and the Magnes 2500 WH MSI system (Magnes 2500 WH), are 
integrated systems capable of measuring, analyzing and locating magnetic 
fields associated with the body's electrical activity in millisecond time 
frames.  The Magnes II was announced in fiscal 1994 and is an enhancement of 
the Company's original Magnes I MSI system.  Magnes II employs two sensors, 
each containing an array of 37 magnetic detectors (for a total of 74 
detectors, each consisting of a superconducting detection coil and an 
amplifier called a superconducting quantum interference device ("SQUID")).  
Magnes I and Magnes II systems have been used in both neurological and 
cardiac applications and incorporate a number of unique technologies which 
are discussed later under the caption "Proprietary Core Technologies".

The Magnes 2500 WH employs a total of 148 magnetic detectors incorporated 
into a sensor with a helmet shaped recess that is placed over the patient's 
head and is limited to neurological applications.  This design  allows 
simultaneous examination of the entire brain and is designed for evaluating 
both ambulatory and critically ill patients in a seated or fully reclined 
position.  

 The Company has received 510(k) clearance from the United States Food and 
Drug Administration (the "FDA") of the Magnes I and the Magnes II for 
applications relating to the brain.   The Magnes I system received approval 
from the Japanese Ministry of Health and Welfare ("JMHW") in 1992 for sale in 
Japan as a clinical device and the dual sensor Magnes II system received 
similar JMHW approval in 1995.  The Company  filed  a 510(k) premarket 
notification for the Magnes 2500 WH in June, 1996.

                                         4

<PAGE>

MEDICAL APPLICATIONS

The Company believes its Magnes systems have significant commercial potential 
in the diagnosis and treatment of neurological disorders.  However, as a new 
medical technology, the Magnes system faces several challenges to commercial 
success.  Medical applications for the Magnes system must be developed that 
result in better patient care than existing technologies, and regulatory 
approval, which has been applied for, must still be obtained to sell the 
Magnes 2500 WH system as a clinical device. The Company has regulatory 
approval to sell its Magnes I and Magnes II systems as clinical devices. In 
general, reimbursement for MSI procedures must be obtained from third party 
payors and the Magnes system must provide an economic benefit to the health 
care provider. 

Currently, the Company believes there are two medically accepted applications 
for the Magnes, presurgical functional mapping and assistance in the 
diagnosis and treatment planning for epilepsy.  Reimbursement from a number 
of insurance companies has been obtained for both of these procedures, 
however,  the expected volume of such procedures at most hospital sites under 
current standard treatment practices  does not currently provide sufficient 
operating revenue to offset the investment and operating cost of a Magnes 
system.  The Company is currently primarily focused on the development of MSI 
applications for functional mapping and for epilepsy and is also 
investigating potential applications in cardiology.  The Company is also 
pursuing programs to increase awareness of MSI technology to its target 
market of neurosurgeons, neurocardiologists, neurologists and epileptologists.

The Company's Magnes I and Magnes II systems have, to date, been cleared by 
the FDA for applications relating to the brain and filed a 510(k) premarket 
notification for the Magnes 2500 WH system in June 1996.   The Company 
believes the systems are appropriate for presurgical functional mapping and 
epilepsy surgery, significant applications development and clinical testing 
must be conducted before these systems can be deemed appropriate for the 
other applications described below. Notwithstanding the size of the potential 
markets, there is no assurance the Company's systems will be accepted for 
commercial use in any of the areas mentioned.

NEUROLOGICAL APPLICATIONS

Research at leading medical centers has demonstrated that the Company's MSI 
system can be used by physicians to noninvasively locate specific functional 
regions of the brain in preparation for surgery.  In addition, research has 
shown that the Company's MSI system can assist physicians to noninvasively 
locate brain tissue suspected of triggering epileptic seizures and abnormal 
neurological activity associated with closed head injury and trauma, ischemic 
disorders and stroke.   

PRESURGICAL FUNCTIONAL MAPPING:  Approximately 100,000 brain surgeries are 
performed annually in the U.S.  These procedures include tumor resection, 
surgical correction of epilepsy and removal of vascular malformations.  The 
precise locations of functional regions vary even among healthy individuals 
and more widely among patients with large brain lesions, and the locations 
cannot reliably be determined solely from anatomical imaging such as MRI.  By 
relating information about the primary sensory function areas provided by the 
Company's MSI systems to MRI-generated anatomical images, however, a function 
map of the brain can be obtained and presented on a screen or recorded on 
film.  Thus, images produced with the Company's MSI systems allow the surgeon 
to reliably estimate the risk of 

                                       5

<PAGE>


damage to the identified function areas arising from the surgery itself and 
to select the best surgical approach, such as where to open the head, and 
from which direction to access the targeted area to minimize the risk.
    
Using the Company's MSI systems, reliable and practical methods of providing 
a functional map have been developed, verified  and reported in several 
medical journals.  The Company's MSI systems allow the surgeon, hospital, 
insurer and patient to more accurately assess the risk of a proposed surgery 
and the possibility of improving the outcome of the surgery.

EPILEPSY SURGERY:  There are approximately 1.2 million people in the United 
States with recurrent epileptic seizures, and approximately 150,000 new cases 
emerge each year.  The seizures for many of these people can be controlled 
with drugs, but a number require alternative treatments.  There are at least 
100,000 people in the United States alone that could benefit from surgical 
intervention, although, based on the most recent data published in 1993 only 
about 2,500 such procedures are performed each year due to limited facilities 
needed to perform the presurgical evaluations.

Over the past decade, a number of research studies have demonstrated that 
information produced by MSI can noninvasively locate brain tissue suspected 
of triggering epileptic seizures.  Locating epileptic tissue is vital in the 
evaluation of patients for epilepsy surgery.  In the absence of a noninvasive 
method, it has often been necessary to implant an array of electrodes 
directly on or into the brain to locate this tissue.  The invasive approach 
requires lengthy hospitalization in facilities that are equipped for 
long-term intensive monitoring of patients, 24-hour nursing care and 
participation of a highly trained team of specialists.  To date, the cost and 
relative scarcity of appropriate facilities for this long-term monitoring 
procedure severely limit the number of patients who can benefit from a 
surgical approach to epilepsy treatment.

Recent medical literature shows that MSI provides additional information 
which is useful for locating epileptic tissue and could, in many cases, avoid 
invasive evaluation procedures.  The Company believes the necessary 
information can be obtained with its MSI systems in a clinically acceptable 
time frame and at a cost that will allow for routine use in evaluating 
patients for epilepsy surgery.  The results to date suggest that, in a large 
number of cases, the use of the Company's MSI system would be a 
cost-effective alternative to currently used invasive evaluation procedures.

CLOSED HEAD INJURY AND TRAUMA:  The National Institute of Neurological 
Disorders and Stroke and the National Head Injury Foundation estimate that 
there are approximately 500,000 incidents of closed head injury per year, 
about 10% of which result in lingering brain damage.  Currently, clinicians 
primarily use MRI or CT scans which provide only anatomical images to 
determine the nature and extent of brain damage following a closed head 
injury.  These anatomical images are often normal even though the patient 
shows severe neurological symptoms.

Research studies conducted at the Company's cooperating clinical sites show 
that the Company's MSI systems are sensitive detectors for abnormal brain 
activity accompanying traumatic injury while also providing a map of the 
abnormality as it relates to anatomy.  Researchers believe the information 
provided by the Company's MSI systems could prove  valuable in enabling the 
trauma physician to 

                                    6

<PAGE>

assess the severity and potential consequences of the 
physical damage and to help determine the appropriate course of treatment.

ISCHEMIC DISORDERS AND STROKE: Ischemia and stroke are common neurological 
disorders resulting from the disruption of blood supply to the brain.  The 
total direct cost to the U.S. health care system for treatment and 
rehabilitation of stroke exceeds $10 billion per year. MSI may potentially 
assist physicians treating stroke by identifying damaged brain areas before 
they are detectable by CT or MRI scans.  Also, as an indicator of 
neurological function, MSI may be useful to monitor rehabilitation and 
treatment of stroke patients.   

CARDIAC APPLICATIONS

Each year more than 300,000 Americans die from arrhythmias, or irregular 
heart rhythms, that stop the heart from pumping enough blood through the 
body. Arrhythmias result from electrical disturbances in damaged heart 
tissue.  Two of the great challenges facing cardiologists today are 
identifying people at risk for arrhythmias and treating those people once 
they are identified.  Early results of measurements on subjects with a wide 
range of cardiac disorders suggest that the Company's MSI system can help 
address both challenges.

Current techniques for reliably identifying people at risk for lethal 
arrhythmias require the cardiologists to insert a catheter into the heart to 
perform an electrophysiological test.  Patterns of electrical stimuli are 
then introduced into the heart in an attempt to artificially induce the 
arrhythmia. This test lasts about two hours and requires a specially equipped 
catheterization laboratory.  In 1993, approximately $615 million was spent in 
the United States on 246,000 electrophysiological tests performed for this 
purpose.

Although the use of the Company's MSI system for magnetic field detection 
related to cardiac arrhythmias is in the very early stages, the Company 
believes that a noninvasive cardiac arrhythmia risk assessment test could be 
developed using its MSI system based on detecting the magnetic fields of the 
damaged heart tissues that produce arrhythmias.  If successful, such a test 
would be far less expensive than the current electrophysiological test 
because it would not require a cardiologist to be present and could be 
completed in about 30 minutes. The availability of a reliable, inexpensive 
and noninvasive test would greatly facilitate the selection of antiarrhythmic 
drugs and the dosage appropriate to each patient. The Company has 
applications pending with the FDA for clearance to market the Magnes I system 
for applications relating to the heart.

CLINICAL COLLABORATIONS

The Company's primary near-term objective is to accelerate the use of its MSI 
systems by cooperating with researchers and physicians at key medical centers 
selected by the Company.  The Company's MSI systems must be established by 
clinical researchers as an effective tool suitable for mainstream clinical 
applications in order to establish a large commercial market.  Accordingly, 
the early clinical research sales and collaborations with clinical sites are 
strategically important to the Company's overall market development plan.  

                                     7

<PAGE>

As of September 30, 1996, the Company's MSI systems are installed for 
neurological use at 16 sites worldwide listed in Table 1, with 2 additional 
systems in process of installation. The Company also has established programs 
for the development of cardiac applications and cardiac test protocols at two 
of these sites.  The Company provides technical support to all of these 
sites. While the sites listed in Table 1 below do not all have formalized 
clinical applications development agreements with BTi, the Company benefits 
from the extensive research conducted at these sites through the clinical 
results disseminated to the medical community and from potential future 
applications that may be developed.  To date, the findings of BTi and its 
collaborators have been presented in more than 75 published papers. 

TABLE 1
<TABLE>
<CAPTION>
  <S>                                               <C>
    NAME OF INSTITUTION                                  LOCATION     
    The Scripps Clinic & Research Foundation*         United States  
    U.C. San Francisco Medical Center*                United States
    New York University Medical Center                United States
    University of Tokyo Hospital                      Japan 
    National Institute for Physiological Sciences     Japan 
    Kyushu University Hospital                        Japan 
    National Epilepsy Center                          Japan 
    Sumitomo Research Center                          Japan 
    National Chubu Hospital                           Japan 
    University of Muenster                            Germany    
    Institute of Medicine-KFA Juelich                 Germany    
    University of Erlangen                            Germany  
    University of Vienna General Hospital             Austria
    University of Rennes                              France
    Karolinska Hospital                               Sweden
    Max Planck Institute, Leipzig                     Germany
           (in process of installation)
    University of Magdeburg                           Germany
    Communications Research Laboratory                Japan
           (in process of installation)        
    * Represents equipment on loan under a collaboration agreement
</TABLE>

MARKETING, SALES AND DISTRIBUTION

MARKET DESCRIPTION

The overall market for the Company's Magnes systems can be divided into three 
overlapping segments: the basic research market, the clinical applications 
development market and the commercial clinical market.  Customers in each 
market segment are identified by the focus of their work, the source of 
purchase funds and other characteristics, as described below.

The basic research market consists of scientists working in university and 
government laboratories to discover new information about organ function and 
to make fundamental advances in their scientific 

                                       8

<PAGE>

fields.  Patient treatment is not their principal concern.  Equipment used by 
these scientists generally is purchased with funds provided by government and 
private research grants.  The basic research market continues to be the 
source of  the majority of the Company's sales.

The clinical applications development market consists primarily of teaching 
medical centers where the majority of clinical applications development work 
for new medical technologies and procedures is conducted.  Because of their 
size, buying power, prestige and early involvement in assessing and using new 
medical technologies, teaching medical centers continue to be the primary 
focus of the Company's near-term marketing plans.  The Company has identified 
more than 150 key members of this group in the U.S., Europe and Asia, which 
are centers of excellence in (i) neurosurgery, neurology and neurophysiology, 
(ii) neuroradiology and radiology and (iii) cardiology.  

The commercial clinical market for MSI systems includes hospitals and clinics 
that would use the MSI systems in routine diagnosis and therapeutic 
monitoring of patients.  The primary commercial clinical market in the United 
States consists of approximately 450 major medical centers with 500 or more 
beds and approximately 780 hospitals with between 300 and 500 beds.  In 
addition, independent imaging centers in major metropolitan areas have often 
been among the first buyers of new imaging technologies, and the Company 
believes this pattern may be repeated for its MSI systems.  Of the top 25 
neurology centers in the United States, 24 have significant and growing 
epilepsy centers.  There are approximately 200 epilepsy surgery centers in 
the United States, Western Europe, and Asia that could be candidates for the 
Company's MSI system.  Multiple sales at the same site are not likely in the 
near term.  Sales to the commercial clinical market are expected to develop 
when regulatory approvals are obtained, adequate third-party reimbursement 
for MSI tests becomes routine,  and MSI procedure costs decline.  Therefore, 
growth in this market depends on the development of effective, regulatory 
approved clinical applications that qualify for third-party reimbursement and 
are accepted by physicians such as neurosurgeons, neurologists, cardiologists 
and radiologists.

The NIH has estimated that there are approximately 90 million cases annually 
of neurological and mental illness disorders in the U.S.  Each case 
represents a separate incident of such disorders and not separate patients. 
In most cases, diagnostic methods for these disorders remain inadequate.  
According to NIH estimates, the annual cost associated with these 
neurological and mental illness disorders in the U.S. is more than $285 
billion.  This amount includes the direct cost of health care and, in the 
case of neurological disorders, the indirect cost of income lost due to 
illness.  The majority of these disorders are functional in nature and are a 
major cause of disability and death.  In most cases, no noninvasive test 
exists to help physicians diagnose or effectively monitor the functional 
activity associated with these neurological and mental illness disorders.  
The Magnes systems are designed to address this need.

There is substantial medical evidence supporting the view that a significant 
percentage of mental illness disorders have a physiological origin which may 
be treated by pharmaceuticals.  In most cases, however, it has not been 
possible to detect physiological dysfunctions clearly associated with the 
symptoms of mental illness.  There has been no objective measure to use for 
the diagnosis of mental illness, for the prescription of therapy or for 
measuring the effectiveness of the therapy on the patient. MSI has 
demonstrated the ability to provide accurate spatio-temporal maps of 
neurophysiological function which may serve as an objective measure and, the 
Company believes, the Magnes systems could fulfill a major need of physicians 
dealing with mental disorders.  Researchers are in the early 

                                     9

<PAGE>

stages of investigating MSI applications for mental illness and therefore no 
reliable estimates can be made of the number of patients that might be aided 
by data provided by the Magnes system.

MARKETING STRATEGIES

In order to promote sales in both the clinical applications development and 
commercial clinical markets, the Company's fundamental marketing strategy is 
to accelerate clinical applications development for the Magnes systems by 
collaborating with and promoting the work of a core group of influential 
medical centers engaged in applications development.  The Company plans to 
continue implementation of this strategy by (i) encouraging physicians 
developing applications for the Magnes  to publish their results in 
professional journals, (ii) participating in key medical meetings to generate 
interest among targeted medical specialists, (iii) direct mailings to 
encourage communication between research groups working with the Magnes 
systems, (iv) site visits by key customers, (iv) public relations activities, 
and (v) continuing its patient referral program.

DISTRIBUTION

The Company has a small direct sales organization with the specialized skills 
needed to sell the Company's MSI system in the United States.  The European 
and Asian markets are served, respectively, by the Company's subsidiary in 
Germany and by the biomedical division of Sumitomo Metal Industries, LTD.  
("SMI")  in Japan.  In March 1990, the Company entered into a distribution 
agreement granting SMI the exclusive rights to market, sell, distribute and 
service the Company's MSI products in certain regions of Asia and in 
Australia and New Zealand for an initial period of seven years.  The 
agreement establishes a minimum number of units to be purchased by SMI during 
the period and grants to SMI a right of first refusal to negotiate a license 
to manufacture and sell the Company's MSI products in certain regions of Asia 
and in Australia and New Zealand.  An extension of the distribution agreement 
with SMI which expires January 1997 is currently in negotiation.

REIMBURSEMENT

The Company's long-term commercial success in the United States is dependent 
upon obtaining approval of routine payment for clinical MSI procedures by 
Medicare and third-party payors.  The Health Care Financing Administration, 
which is responsible for the administration of Medicare, and most third-party 
payors follow similar guidelines for determining whether a specific procedure 
or health care technology is "reasonable" and "necessary" and, therefore, 
reimbursable under Medicare or private insurance coverage.  These guidelines 
generally include consideration of whether (i) the procedure or technology is 
more or less costly than an alternative already covered by insurance, (ii) 
the added benefit of the procedure or technology is significant enough to 
justify the expense, and (iii) the procedure or technology provides 
significant medical benefits not otherwise available from other procedures or 
technologies. 

Substantial data is already available to support the use of MSI and the 
Company's Magnes systems for presurgical functional mapping and epileptic 
foci localization.  This includes a number of publications in NEUROSURGERY, 
AMERICAN JOURNAL OF NEURORADIOLOGY,  and the THE JOURNAL OF EPILEPSY AND 
BRAIN. The 

                                     10

<PAGE>

data have been successfully used by several medical centers to 
receive third-party reimbursement on a case-by-case basis.  Since the first 
reimbursement was received in September 1993,  more than 75 insurance 
companies and other healthcare providers have now approved reimbursement for 
certain MSI procedures. Although initial results are encouraging and a number 
third-party payors have approved reimbursement, there is no assurance that 
third-party reimbursement will become widely available.  

In Japan, a large number of hospitals are government funded and operated.  
These hospitals are paid by the JMHW only for procedures that have been 
approved by a reimbursement board of the JMHW.  The JMHW follows guidelines 
similar to those followed by third-party payors in the U.S. in determining 
whether a new medical procedure will be reimbursed by the Japanese 
government.  Once reimbursement for a procedure is approved by the JMHW, all 
hospitals, both public and private, are reimbursed for the procedure at the 
same reimbursement rate.  Since January 1992, when the Magnes system received 
approval from the JMHW for sales in Japan as a clinical device, Japanese 
public and private hospitals may purchase the system for clinical use on 
patients.  Reimbursement is not yet available from the Japanese government or 
third-party payors, but private Japanese hospitals are allowed to charge 
patients for procedures with the Magnes system.  The Kyushu University Magnes 
system and the National Epilepsy Center  Magnes system in Shizuoka have been 
designated as Highly Advanced Medical Technology Sites by the Japanese 
government.  This designation is required for application to the JMHW for 
reimbursement.  SMI, with assistance from the Company, continues to work with 
medical centers in Japan in an effort to have the JMHW establish a 
reimbursement level for Magnes system procedures that will help support 
future purchases of the Magnes system.

In Europe, the Magnes sites have concentrated primarily on research and have 
not pursued governmental or private approval for reimbursement of MSI 
procedures.

PRODUCT PRICES AND  TERMS OF SALE 

The current prices for the Company's MSI systems range from $1.5-$2.5 million,
depending upon system configuration.  Standard terms of sale provide for 
payment of 40% of the purchase price upon placement of the order, 40% upon 
shipment and the remaining 20% when installation is completed and final 
acceptance is obtained from the customer.  Typically for sales to European 
customers who receive their funding from governmental agencies, the Company 
is required to provide a bank guarantee for the amount of the deposit which 
usually is released upon shipment and/or acceptance by the customer.  The 
Company may also enter into special collaboration and sale arrangements with 
medical centers to promote clinical applications development.  The time 
between placement of an order and installation typically ranges between six 
and twelve months.

INSTALLATION, SERVICE AND TRAINING

In the medical device market, the ability to provide comprehensive and timely 
service is a key competitive advantage and important for establishing 
customer confidence.  Installation and service for the Company's products in 
the United States and Europe is provided from its San Diego headquarters and 
from the Company's subsidiary in Germany, both of which maintain customer 
service departments 

                                      11

<PAGE>

capable of performing sophisticated systems installation and equipment 
maintenance.  SMI has its own service capabilities in Japan to service MSI 
systems sold in their distribution area.

Installation and a service agreement for the first year are provided as part 
of the standard terms of sale in the United States and Europe.  Thereafter, 
service and maintenance are available on a time and materials basis or 
pursuant to a yearly service agreement for an annual fee.

Initial customer training in the operation of the Company's MSI systems is 
provided by the Company's personnel at the customer's site and is included in 
the selling price of the system.  Physician training in interpreting the 
clinical significance of MSI information is currently provided at the 
Company's cooperating United States clinical sites.

COMPETITION 

The Company operates in an industry 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 would have a material adverse effect on the 
Company's financial condition and results of operation.

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 profitability of 
the Company's whole head system, the extent of which is not presently 
determinable.

Companies known to BTi that have manufactured an integrated large-array MSI 
system are CTF Systems Inc., a Canadian company, Neuromag Ltd., a Finnish 
company, Siemens AG, a German company, Phillips N.V., a Netherlands company, 
and Shimadzu and Daikin, both Japanese companies.  To the best of the 
Company's knowledge, as of October 31, 1996 Neuromag Ltd. has received FDA 
clearance for marketing its system as a clinical device in the United States. 
An MSI system produced by CTF Systems, Inc. has been cleared for sale as a 
clinical device in Japan by the JMHW and their distributor, Aloka, is 
currently soliciting orders for the CTF system.  The Company believes that 
Siemens AG and Phillips N.V. do not currently manufacture or market 
integrated large-array MSI systems.  The Company believes that  Magnes 
systems compete favorably with other MSI systems on the basis of performance 
for detecting magnetic fields.
  
The Japanese government funded an extensive long-term program to develop a 
MSI system by a consortium of Japanese companies coordinated by the Japan 
Ministry of International Trade and Industry ("MITI")  This program 
terminated in 1996. Other large multinational corporations with substantial 
resources available for research and development activities, including GE 
Corporation, a United States company, have initiated product investigation 
programs in magnetic source imaging.  The Company's ability to compete 
successfully against any of its current or potential future competitors will 
depend upon various factors, including its ability to continue its 
technological and market development leadership role and to raise the 
necessary capital for further development and commercialization. 

                                       12

<PAGE>

BACKLOG

As of September 30, 1996, the aggregate amount of firm backlog orders for the 
Company's products was $16,254,000  of which the Company expects to fill 
approximately $14,000,000  before September 30, 1997. The backlog is composed 
primarily of orders for the new Magnes 2500 WH.  As sales of the Company's 
systems typically involve transactions of $1 million or more, the backlog is 
expected to fluctuate significantly from year to year depending upon orders 
received and installations completed during the reporting period.     

PROPRIETARY CORE TECHNOLOGIES

BTi has pioneered the development of technologies associated with MSI.  
Several core technologies that have been developed by and are proprietary to 
the Company, such as superconducting MSI detectors, magnetic noise reduction, 
data analysis and clinically useful displays, represent areas where the 
Company believes it has established a leadership position in MSI.

SUPERCONDUCTING MSI DETECTORS

The Company's MSI detectors consist of a superconducting detection coil and 
an extraordinarily sensitive amplifier called a SQUID.  Superconductivity 
describes the ability of certain materials, when refrigerated to near 
absolute zero (-460 DEG. F or -273 DEG. C), to carry electricity without 
electrical resistance. This property enables the detection coil to act as a 
noise-free antenna to pick up magnetic fields and transfer them to the SQUID. 
The SQUID utilizes other unique electrical properties of superconductors to 
generate readily measured voltage changes in response to very small magnetic 
field changes.  Together, the superconducting detection coil and SQUID 
amplifier are able to detect magnetic fields that are at least 1,000 times 
smaller than is possible with other magnetic field detectors.

BTi has developed proprietary processes for fabricating highly reliable 
superconducting magnetic field detectors and integrating a large number of 
such detectors into complex sensors that measure magnetic fields generated by 
electrical activity in the body.  Sensors are comprised of the MSI detectors 
and the components required to refrigerate them to their operating 
temperature.  The MSI detectors are refrigerated to a near absolute zero 
temperature with liquid helium.  Novel methods have been developed by the 
Company to accomplish the necessary refrigeration without the requirement of 
immersing the MSI detectors directly in liquid helium.  Without this 
requirement, the magnetic field detectors can be used in any orientation with 
respect to the body, thereby overcoming limitations of previous designs that 
have prevented simultaneous measurements on the entire brain of a patient 
lying in a horizontal position. BTi believes this unique ability may provide 
a significant competitive advantage for the Company's future MSI systems. 
This construction technique and subsequent system design have  received U.S. 
patent numbers 5,494,033, 5,441,107, and 5,471,985.  The Company has applied 
for foreign patents.

The Company has also developed proprietary processes for fabricating 
detection coils and SQUIDs from materials that become superconducting at the 
temperature of liquid nitrogen, which is significantly higher than the 
temperature of liquid helium.  The availability of superconducting detection 
coils and SQUIDs refrigerated with liquid nitrogen would greatly simplify the 
design and reduce the costs to 

                                         13

<PAGE>

build and operate an MSI system.  The Company has built and tested 
experimental magnetic detectors fabricated from superconductors operating at 
liquid nitrogen temperature.  While their noise properties are currently less 
favorable than those obtained by using liquid helium superconductors, further 
improvements may make them suitable for certain MSI applications.  The 
Company believes its novel high-temperature SQUID fabrication process is the 
only process having the reliability and reproducibility required of a 
commercial manufacturing process.

MAGNETIC NOISE REDUCTION

The ability to detect the weak magnetic fields created by the body depends 
upon the elimination or reduction of magnetic noise generally present in the 
environment.  The magnetic fields generated by the electrical activity of the 
body can easily be overwhelmed by the stronger magnetic fields generated by 
automobile traffic, elevators, electrical machinery or even an ordinary wrist 
watch worn by a patient.  The Company has developed techniques to reduce 
interference from magnetic noise.  The Company houses its MSI systems in a 
shielded room constructed according to the Company's specifications from 
special alloys that reduce magnetic noise.  All equipment used in the 
shielded room is selected or fabricated to avoid contaminating this low-noise 
environment.  In addition, the configuration of the detection coils in the 
Company's Magnes I and Magnes II systems sharply reduces their sensitivity to 
magnetic fields from sources located more than about 10 inches from the 
sensor, which allows the Company to focus the sensors on the specific portion 
of the body being measured.

Finally, the Company's MSI sensor contains additional detectors to measure 
the magnetic noise in the vicinity of the patient.  Signal processing 
algorithms have been developed that use this information to remove magnetic 
interference in the recorded fields.  The Company is investigating whether 
its noise reducing algorithms could allow a reduction in magnetic shielding 
requirements which could substantially lower the cost of future MSI systems.

DATA ANALYSIS

The Company has developed techniques to automate the collecting and 
processing of reliable clinical data according to standardized protocols.  
The use of standardized protocols enables the Company's MSI system to be 
operated by a trained technician and helps to ensure the reliability of the 
results.  BTi's proprietary software has dramatically reduced the time to 
compute specific sources of electrical activity. These developments have been 
critical factors in the Company's efforts at making its MSI system suitable 
for routine clinical use.

In analyzing a patient's magnetic field data, it is usually assumed that the 
magnetic field at any instant of time is generated by a very small region of 
electrically active tissue.  There are situations of potential clinical 
interest in which the assumption of a single focal source of electrical 
activity cannot be used, and new analysis techniques are needed.  The Company 
has developed and is testing techniques to extend the analysis to multi-focal 
and spatially extended sources of electrical activity to address this need.

                                        14

<PAGE>

CLINICALLY USEFUL DISPLAYS

Effective display of the results of an MSI examination is required to allow 
the technician operator to assess the data quality and to allow the physician 
to interpret the significance of the MSI results relative to the patient's 
condition.  The Company provides a number of displays ranging from temporal 
displays, which allow the physician to determine the time sequence of events 
to overlay displays, which estimate the location of the analyzed functions 
relative to the patient's anatomical images provided by MRI or CT.  The 
Company has developed or has access to data interfaces compatible with a wide 
variety of MRI and CT scanners.

RESEARCH AND DEVELOPMENT

The Company has funded its research and development of its technology 
programs primarily through revenues from product sales and product-related 
services, through capital raised by venture capital financing and from its 
public and private sales of stock. During fiscal 1996, 1995 and 1994, the 
Company's internally funded research and development expenses were 
$7,767,000, $5,507,000 and $6,735,000, respectively. In view of the fact 
that the Company has commenced production and shipment of the new Magnes 2500 
WH system, expenditures for research and development in fiscal year 1997 are 
currently expected to decrease from fiscal year 1996. However, there can be 
no assurance that a reduction in expense will be realized.

MANUFACTURING AND MATERIALS

The Company engineers and manufactures every major component of the Magnes 
system, other than the host computer and its peripherals, the magnetically 
shielded room that houses the sensor, and the sensor position indicator 
hardware used to determine how the sensor is oriented to the body. The 
Company currently is also purchasing its SQUID requirements from a vendor. 
However, the Company has complete facilities to fabricate SQUIDs from 
materials that become superconductive at liquid helium and liquid nitrogen 
temperatures.

Of the major components of the Magnes system not manufactured by the Company, 
the host computer and peripherals are widely available standard items.  The 
other major purchased components are constructed in accordance with Company 
specifications that ensure compatibility with its MSI system.  The 
magnetically shielded rooms for Magnes systems sold in the United States and 
Europe are currently supplied by two European manufacturers.  In 1991, the 
Company completed development of a magnetically shielded room of its own 
design in cooperation with SMI and retains an option to manufacture the room 
or purchase it from SMI for sales outside the SMI distribution area.  In June 
1994, the Company also entered into an agreement with a United States company 
to develop and manufacture a lower cost alternative to existing magnetically 
shielded rooms, the development of which has been completed. The Company 
believes it has adequate alternate sources of supply for this major system 
component from these four sources.

The Company believes its current manufacturing capacity is sufficient to 
satisfy present demand.  In order to achieve its long-term objectives, 
however, the Company will be required to expand production 

                                       15

<PAGE>

capabilities, mainly through additional personnel.  There can be no assurance 
that the Company will be able to increase its level of output.  The Company 
believes that its control over the development and manufacture of its MSI 
system will enable it to modify its devices to address specific needs of 
anticipated clinical applications without significant dependence upon outside 
suppliers, manufacturers or providers of technology.

GOVERNMENTAL REGULATION

The Company is subject to various regulations of the FDA and the California 
Health Services.  In particular, the FDA and the California Health Services 
have promulgated regulations to which the Company must adhere relating to the 
manufacturing standards, effectiveness and safety of the Company's diagnostic 
products.  The FDA regulates marketing of medical devices, requiring 
premarket clearance or premarket approval based upon review of information 
submitted by the Company relating to intended product use and product 
labeling, safety and efficacy.  The premarket clearance or approval processes 
are based upon risk class and degree of equivalence to devices already 
marketed that are proven to be safe and effective.

The Company filed a Section 510(k) premarket notification with the FDA in 
March 1990 for applications of the Magnes I system relating to the brain.  In 
June 1990, it received clearance from the FDA to market the Magnes I system 
based upon that 510(k) premarket notification.  That clearance enables the 
Company to market the Magnes I MSI system as a diagnostic device rather than 
as research equipment.  The Company has also received clearance of a 510(k) 
premarket notification for applications of its Magnes II systems relating to 
the brain from the FDA and is  currently seeking FDA clearance of a 510(k) 
premarket notification for its new Magnes 2500 WH system relating to the 
brain. A Section 510(k) premarket notification with the FDA for applications 
of the Magnes I system relating to the heart is still pending.

Medical devices are placed in one of three classes, depending upon their use 
or the degree to which they provide functions critical to sustaining life.  
Class I devices are subject to general controls, including Good Manufacturing 
Practice regulations, and examples of such devices are tongue depressors and 
hot water bottles.  Class II devices are subject to general performance 
standards not yet established by regulation.  General controls of Class I 
presently apply to Class II devices, because no performance standards have 
been developed or promulgated by the FDA for Class II devices.  Examples of 
Class II devices are ECG and EEG. Class III devices consist of "critical 
devices," those represented to be life sustaining or life supporting, 
implanted in the body or presenting potential unreasonable risk of illness or 
injury.  Safety and efficacy must be demonstrated and supported by clinical 
data submitted to the FDA for "premarket approval."  Examples are kidney 
dialysis systems and cardiac pacemakers.  Class I and II devices may be 
marketed by demonstration of "substantial equivalence" to existing devices 
via a Section 510(k) premarket notification, and subsequent FDA clearance to 
market.  The Magnes I and Magnes II systems have been determined under the 
510(k) process to be substantially equivalent to BTi's prior Model 607 
Neuromagnetometer and to EEG.  The currently pending application for the 
Company's Magnes 2500 WH system has been determined to be substantially 
equivalent to BTi's Magnes I and Magnes II systems. The Company's Magnes MSI 
systems are classified as Class II, and therefore are subject to the general 
controls of Class I and to performance standards that have not yet been 
defined for Class II devices.

                                        16

<PAGE>

The Company's continued compliance with applicable governmental regulations 
is assessed by internal audits and by audits of manufacturing operations and 
procedures conducted by the FDA and California Health Services.  These 
agencies have the authority, among other things, to limit or stop product 
shipments and require product recall should a failure to comply with 
regulations be observed. The Company has registered with the FDA and the 
California Health Services as a medical device manufacturer.  California 
Health Services has completed an inspection of the Company's facilities and 
manufacturing processes and has issued the Company a license which permits it 
to manufacture, sell and ship the Magnes systems as  medical devices for 
diagnostic purposes.  The FDA conducted an audit of the Company to federal 
current Good Manufacturing Practices ("cGMP") regulation requirements in July 
1996.  All areas of the Company's internal cGMP program were observed to be 
in compliance with the regulations.

In addition, in order to export its products, the Company must comply with 
United States export control regulations, which restrict the export of 
devices containing certain of the Company's technology to certain foreign 
nations. Although the export control regulations have not prohibited the 
Company from exporting its MSI systems to foreign nations, there can be no 
assurance that the Company will continue to be able to obtain the necessary 
export licenses in the future.  The Company is currently allowed to export 
the Magnes system to many foreign countries, including all Western European 
countries and Japan, under a general license that requires no additional 
approval prior to shipment.

While Western Europe and Japan have regulatory agencies that are somewhat 
similar to the FDA, each country's regulatory requirements for product 
acceptance are unique and will require the expenditure of substantial time, 
money and effort to obtain regulatory acceptance for marketing for clinical 
use. There can be no assurance that the Company will be able to obtain such 
approvals.  The Magnes I system received approval in Japan from the JMHW in 
1992 for sale as a clinical device and Magnes II received similar JMHW 
approval in 1995.

PATENTS AND PROPRIETARY INFORMATION

The Company significantly relies on proprietary technology and seeks to 
maintain confidentiality of its trade secrets, unpatented proprietary 
know-how and other proprietary information and to obtain patent protection 
when appropriate.  As of September 30, 1996, the Company held 40 patents in 
the United States. One of these had counterpart patents issued in the United 
Kingdom, France, Germany, the Netherlands and Canada and three others have 
counterpart patents granted by the European Patent Organization.  As of 
September 30, 1996 the Company had filed 6 U.S. patent applications that are 
in various stages of the patent prosecution process.  The Company has also 
filed 8 applications with the European Patent Organization for patent 
protection in Western Europe, 14 applications in Japan and three in Canada.  
The Company anticipates that patents, if issued, will be issued (i) within 
two to 20 months with respect to the pending patent applications in the U.S., 
and (ii) within three years with respect to the pending patent applications 
in Western Europe.  The Company has reserved its priority with respect to 
receiving patents on its applications in Japan, and may pursue those 
applications in due course.

                                       17

<PAGE>

The Company's patents protect several fundamental aspects of the technology 
used in its products.  Patents have been issued with respect to 
superconducting devices, ultra-low-noise electronics circuits, 
biomagnetometer design, biomagnetic signal processing, magnetic shielding 
techniques, noise suppression methodologies, cryogenic apparatus construction 
techniques, and system design concepts.  Patent applications have been filed 
with respect to a new process for fabrication of electronic devices using 
high-temperature superconducting materials, superconducting device designs, 
magnetic shielding technology, cryogenic refrigeration, ultra-low-noise 
electronic circuits, patient handling equipment and biomagnetic signal 
processing and data analysis.  The Company currently is considering 
additional patent applications covering inventions already made in these and 
related fields of technology.  BTi is not aware of any infringement by any of 
its products on patents issued to others.

Magnes-Registered Trademark- and Neuromagnetometer-Registered Trademark- are 
registered trademarks of the Company.  Ferritometer-TM-, Biomagnetic 
Technologies-TM- (with and without the design) and BTi-TM- are 
trademarks/service marks of the Company either by registration with the State 
of California or by application for registration with the U.S. Patent and 
Trademark Office.  

HUMAN RESOURCES

As of September 30, 1996, the Company employed 95 full-time employees at its 
facilities in San Diego, California and Germany.  None of the Company's 
employees is covered by a collective bargaining agreement and the Company has 
experienced no work stoppages.  The Company believes that it maintains good 
relationships with its employees.  In December 1996, the Company reduced its 
workforce from 95 full-time employees to 79 full-time employees.  

FINANCIAL INFORMATION

Additional financial information concerning revenues related to foreign 
operations and sales to certain customers is included in Note 3 of the Notes 
to Consolidated Financial Statements included in Part II, Item 8 of this 
report.

ITEM 2.   PROPERTIES.

The Company's executive offices and manufacturing facilities are located in a 
55,000 square foot facility at 9727 Pacific Heights Boulevard, San Diego, 
California.  All domestic operations of the Company are conducted from this 
facility, which was first occupied in December 1989.  The Company leases this 
facility pursuant to an eight-and-one-half-year lease agreement which expires 
in February 1998.  Average monthly lease payments over the term of the lease 
are approximately $39,500.  The Company's subsidiary in Germany leases 
approximately 3,000 square feet at Gruener Weg 82, D-5100 Aachen, Germany 
pursuant to a year-to-year lease agreement.  Monthly lease payments are 
approximately $1,700. Sales and service for the Company's European operations 
are conducted from the German facility.

                                     18

<PAGE>

ITEM 3.   LEGAL PROCEEDINGS.

Neither the Company nor its subsidiary are involved in any litigation which 
is expected to have a material adverse effect on the Company's business, 
consolidated financial position,  results of operations and cash flows.

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

None.

                                        19
<PAGE>

PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
                 SHAREHOLDER MATTERS.

The Company's Common Stock is traded on the Nasdaq  National Market under the 
symbol "BTIX".  The following table sets forth the range of high and low 
closing sales prices by quarter for the Company's Common Stock as reported by 
the Nasdaq National Market  for the last two fiscal years.

             FISCAL YEAR 1996       HIGH         LOW
             ---------------      --------     --------
               1st Quarter        $1-  7/8     $1
               2nd Quarter        $1-15/16     $1-5/16
               3rd Quarter        $1-17/32     $1-1/32
               4th Quarter        $1- 7/16     $   3/4



             FISCAL YEAR 1995       HIGH         LOW
             ----------------     --------     --------
               1st Quarter        $1- 5/8      $    5/8
               2nd Quarter        $1- 3/16     $    5/8
               3rd Quarter        $1- 1/8      $  11/16
               4th Quarter        $2- 1/8      $  13/16


As of December 31, 1996, there were approximately 264 holders of record of 
the Company's Common Stock.

The Company has never declared or paid dividends on its Common Stock.  The 
Company does not anticipate declaring any dividends on its Common Stock in 
the foreseeable future and intends to retain its earnings, if any, for the 
development of its business.

During August 1996, the Company  entered into an agreement with a principal 
shareholder, Dassesta International S.A. ("Dassesta"), for an unsecured 
working capital loan of $3,000,000.  The note evidencing the loan was issued 
under Regulation S, promulgated under the Securities Act of 1933, as amended. 
This loan matures February 14, 1997 and bears interest at 9% per annum.  The 
principal amount of the loan, and any accrued interest thereon, was 
convertible at the option of the Company into common stock at any time during 
the six months at $.40 per share, and was convertible at the option of the 
noteholder at the end of the six months or upon default under the note at 
$.40 per share.  The Company elected to convert the $3,000,000 loan and the 
accrued interest thereon of $87,040 into 7,717,602 shares of common stock of 
the Company on  December 31, 1996.



                                       20


<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA.
    
The selected financial data set forth below with respect to BTi's 
consolidated statements of operations for each of the three years in the 
period ended September 30, 1996 and with respect to the consolidated balance 
sheets at September 30, 1996 and 1995, are derived from the audited 
consolidated financial statements which are included elsewhere in this 
document.  The statement of operations data for the years ended September 30, 
1993 and 1992 and the balance sheet data at September 30, 1994, 1993 and 1992 
are derived from audited consolidated financial statements not included in 
this document.  The data set forth below should be read in conjunction with 
the consolidated financial statements and related notes included elsewhere in 
this document.  Dollars are stated in thousands, except per-share amounts.

<TABLE>
<CAPTION>
                                             YEARS ENDED SEPTEMBER 30,
                                --------------------------------------------------
STATEMENT OF OPERATIONS DATA:     1996      1995       1994       1993      1992
                                -------    -------   -------    -------   --------
<S>                             <C>        <C>       <C>        <C>       <C>
Total revenues                  $ 1,422    $9,196    $ 3,344    $ 4,327   $10,048
Net loss                        (14,816)   (6,673)   (10,313)   (10,989)   (8,700)
Net loss per share (1)            (0.37)    (0.27)     (1.03)     (1.11)    (0.98)
Shares used in computing 
per share amounts (1)            39,950    24,783      9,977      9,912     8,907

</TABLE>

<TABLE>
<CAPTION>
                                             YEARS ENDED SEPTEMBER 30,
                                --------------------------------------------------
BALANCE SHEET DATA:               1996      1995       1994       1993      1992
                                -------    -------   -------    -------   --------
<S>                             <C>        <C>       <C>        <C>       <C>
Working capital                 $(3,031)   $10,274   $(2,114)   $ 7,115    $17,562
Total assets                     16,250     20,124     9,419     14,434     26,429
Long term obligations                48        493       459        650        548
Shareholders' equity             (1,396)    13,368     2,283     11,970     22,787
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements describing
    shares used in calculating net loss per share.


<TABLE>
<CAPTION>
                                             YEARS ENDED SEPTEMBER 30,
                                --------------------------------------------------
BACKLOG DATA: (2)                 1996      1995       1994       1993      1992
                                -------    -------   -------    -------   --------
<S>                             <C>        <C>       <C>        <C>       <C>
                                $16,254     $9,300    $6,444     $3,138     $3,773
</TABLE>
(2) Backlog of Business is derived from Company data not subject to audit.


                                       21

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS.

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

OVERVIEW

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. 
 BTi is focusing the development of its MSI system on large potential 
commercial market applications such as brain surgery, the diagnosis and 
surgical planning for treatment of epilepsy and life-threatening cardiac 
arrhythmias.

Sixteen (16) Magnes systems were installed in medical and research 
institutions worldwide at the end of fiscal 1996.  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, 75 insurance companies have approved reimbursement 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 a seated or 
fully reclined position. The Company commenced shipments of its Magnes 2500 
WH prior to the end of fiscal year 1996; however, there were no final 
acceptances received from customers. Furthermore, although the Company 
received provisional acceptance from two customers, no final acceptances were 
received in the first quarter of fiscal year 1997 which ended December 31, 
1996. The delay in receipt of customer final acceptances is primarily due to 
a pending hardware upgrade, the need for which was not discovered to be 
necessary prior to installing the systems at customer sites, and additional 
software development required to meet customer contractual requirements.

The current price of BTi's MSI systems ranges from approximately $1.5 to 
$2.5 million, depending upon system configuration.  A significant portion of 
the Company's sales have been, and are expected to continue to be in foreign 
markets.  The Company generally prices its European sales in the currency of 
the country in which the product is sold and the prices of such products in 
dollars will vary as the value 

                                       22

<PAGE>

of the dollar fluctuates against the quoted foreign currency price.  There 
can be no assurance that currency fluctuations will not reduce the dollar 
return to the Company on such sales.  The Company periodically enters into 
forward exchange contracts to hedge such foreign currency exposure.  

Due to substantial research and product development expenses and low unit 
sales, the Company has incurred net losses every year since fiscal 1982.  
Since concentrating on the development of its MSI  systems in 1984, the 
Company's corporate strategy and commitment of resources have focused on 
long-term product applications and market development rather than near-term 
operating performance. Although considerable progress has been achieved, the 
Company expects to continue to incur significant product and applications 
development expenses in the foreseeable future and anticipates incurring 
operating losses at least through fiscal 1997.

In December 1996, the Company reported a restructuring of its operations due 
to lower short-term market projections for its MSI systems.  As part of the 
restructuring, D. Scott Buchanan, Ph.D. assumed the responsibilities of 
President and COO, reporting to Chairman and CEO James Schumacher.  The 
restructuring resulted in an immediate reduction of 16 employees which is 
expected to be followed by additional reductions of approximately 28 persons 
after completion of the final development phases of its Magnes 2500 WH system 
over the next several months.  As a result of the restructuring, the Company 
also expects to reduce its program costs in non-personnel related areas.

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

The consolidated financial statements and notes thereto which appear in Part 
II, Item 8 should be read in conjunction with the following review.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995

As a result of delays in completion of the Magnes 2500 WH system development, 
no systems sales were made during fiscal year 1996, which contributed to the 
$8,143,000 increase in the Company's net loss as compared to fiscal 1995. 
Research and development expenses increased by $2,260,000 from the prior year 
as a result of increased efforts to substantially complete the development of 
the Magnes 2500 WH system.  In addition, marketing and sales expenditures 
increased in fiscal 1996 as compared to fiscal 1995 as a result of the 
Company's increased efforts to obtain additional sales contracts in the 
highly competitive and limited market in which the Company operates.  General 
and administrative expenses increased primarily as the result of the $319,000 
write-off of certain patent costs related to the Company's Magnes II system 
that had been previously capitalized but are no longer considered to have 
value due to the Company's decision to focus primarily on the production  of 
the Magnes 2500 WH 


                                       23

<PAGE>

system. The Company will, however, produce Magnes II systems in the future as 
orders are received.  There can be no assurance that any such orders will be 
received in the future.

Revenue from  product sales and service decreased 92% in fiscal 1996 to 
$733,000 from $8,981,000 in fiscal 1995.  Revenue in fiscal 1996 consisted of 
service and components revenue and no Magnes system sales,  as compared to 
fiscal 1995,  in which revenue consisted of both service and component 
revenue and four Magnes II systems sales.  Sales to SMI represented 
approximately  8% and 19% of total sales for fiscal years 1996 and 1995, 
respectively.  

The $2,398,000 excess of production costs over product sales is primarily 
attributable to an approximate $900,000 increase in the Company's provision 
for obsolescence associated with the Magnes II systems.  This provision was 
made in light of the Company's decision to focus primarily on the production 
of the Magnes 2500 WH system.  The Company will, however, produce Magnes II 
systems in the future as orders are received. There can be no assurance that 
any such orders will be received in the future.

Research and development expenses increased by 41% in fiscal 1996 to 
$7,767,000 from $5,507,000 in fiscal 1995.  This increase was primarily 
attributable to the Company's decision to substantially complete development 
of the Magnes 2500 WH system, which included development of a prototype unit 
that was installed at Scripps in July 1996. Additionally,  $554,000 was 
incurred in fiscal 1996 under collaborative agreements with UCSF and Scripps 
for applications development performed on behalf of the Company. The Company 
anticipates that future expenditures under these collaborative agreements 
will be reduced to less than $150,000 on an annual basis. 

Marketing and sales expenses increased 18% in fiscal 1996 to $2,798,000 from 
$2,370,000 in fiscal 1995.  This increase was attributable to higher 
expenditures for sales support and marketing activities, including an 
increase in salary, travel and trade show expenses.

General and administrative expenses increased 29% in fiscal 1996 to 
$2,958,000 from $2,300,000 in fiscal 1995.  This increase was primarily the 
result of the write-off of $319,000 in patent costs that related to the 
Magnes II system previously included in other assets determined to no longer 
have value due to the Company's decision to focus primarily on the production 
of the Magnes 2500 WH system.  The Company will, however, produce Magnes II 
systems in the future as orders are received. There can be no assurance that 
any such orders will be received in the future.

Interest expense decreased 93% in fiscal 1996 to $38,000 from  $573,000 in 
fiscal 1995 as a result of the conversion of short-term notes in exchange for 
the issuance of common stock that occurred in fiscal 1995.  The Company also 
executed a $3,000,000 working capital loan in the last quarter of fiscal 
1996; however, the loan plus accrued interest was converted into 7,717,602 
shares of common stock on December 31, 1996.

The Company recorded a net loss of $14,816,000 in fiscal 1996 and $6,673,000 
in fiscal 1995.  The increased loss was primarily due to lack of system 
acceptances, increased research and development expenses, increased marketing 
and sales expenses, and additional production costs, including the increase 
in the Company's provision for inventory obsolescence as well as the 
write-off of patent costs.


                                       24

<PAGE>

FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994

Fiscal 1995 results of operations improved from fiscal 1994 levels primarily 
as a result of the increased volume of Magnes product sales and reduced 
research and development expenses.  The improvement in operating results was 
partially offset by higher sales and marketing expenses, higher interest 
expense on short-term debt and the extraordinary loss resulting from the 
conversion of certain short-term debt to equity.

Revenues from product sales and service increased in fiscal 1995 to 
$8,981,000 from $3,119,000 in fiscal 1994 as a result of four Magnes system 
sales in 1995 compared to a single Magnes system sale in fiscal 1994.  
Product sales in both fiscal years were composed of Magnes MSI systems and 
Magnes components.  Sales to SMI represented approximately 19% and 28% of the 
total sales for fiscal years 1995 and 1994, respectively.  In fiscal 1994 
sales to one customer represented 68% of total sales.

The gross profit margin on product sales in fiscal 1995 was 47%, a 28% 
increase over 1994.  The improvement in gross margin was primarily the result 
of volume related manufacturing efficiencies and reduction in production 
costs.

Research and development expenses declined 18% in fiscal 1995 to $5,507,000 
from $6,735,000 in fiscal 1994.  The decline is primarily the result of lower 
overhead costs associated with research and development activities and the 
transfer of several people from research and development projects to sales 
support and marketing activities.  The decline in research and development 
was partially offset by an increase in materials spending associated with the 
Magnes WH development program.

Marketing and sales plus general and administrative expenses in fiscal 1995 
totaled $4,670,000 versus $3,959,000 in the prior fiscal year.  These 
expenses represented 51% and 118% of total revenues in fiscal 1995 and 1994, 
respectively.  General and administrative expenses totaled $2,300,000 in 
fiscal 1995, representing a slight decline from fiscal 1994.  Fiscal 1994 
general and administrative expenses included nonrecurring expenses of 
$423,000 related to an uncompleted public offering of common stock.  
Considering only recurring expenses, the increase from fiscal 1994 to 1995 in 
general and administrative expenses resulted primarily from higher personnel 
costs and higher insurance costs.  Total marketing and sales expenses 
increased $740,000 over the prior year as a result of higher expenditures for 
sales support and marketing activities.  This included the addition of a Vice 
President of Sales and Marketing, the transfer of personnel noted above and 
associated program expenses. 

Interest expense increased to $573,000 in fiscal 1995 from $391,000 in the 
prior fiscal year as a result of continued short-term debt financing and an 
increase in short-term borrowing.

LIQUIDITY AND CAPITAL RESOURCES

BTi has financed its operations largely through private and public sales of 
equity and debt securities. During July 1996, the Company completed 
negotiations with a principal shareholder, Dassesta, for an unsecured working 
capital loan of $3,000,000. This loan matures February 14, 1997 and bears 
interest at 9% per annum.  The principal amount of the loan and any accrued 
interest thereon, is convertible at the option of the Company into common 
stock at any time during the six month term  at $.40 per share, and is 
convertible at the option of the noteholder at the end of the six month term 
or upon default under the


                                       25

<PAGE>

note at  $.40 per share. As of September 30, 1996, the  Company had 
borrowed the entire $3,000,000 under the terms of the above loan agreement. 
The Company elected to convert the $3,000,000 loan and the $87,040 of accrued 
interest into 7,717,602 shares of common stock of the Company on December 31, 
1996.

At September 30, 1996, the Company's current liabilities exceeded current 
assets, resulting in a working capital deficiency of $3,031,000. At September 
30, 1995, the Company had working capital of $10,274,000. The decrease in 
working capital is primarily due to the fiscal 1996 net loss incurred by the 
Company as a result of efforts to complete the development of the Magnes 2500 
WH system.  Restricted cash increased from  $2,621,000  to  $6,085,000 as a 
result of the increase in customer deposits received by the Company which are 
legally restricted as to withdrawal.  Cash, cash equivalents and short-term 
investments, exclusive of any restricted cash, declined by $7,712,000 to 
$2,496,000 at September 30, 1996. The Company's operations were funded by 
existing cash and short-term investment resources and the Dassesta working 
capital loan discussed above.

Capital equipment expenditures were $577,000 in fiscal 1996 compared to 
$453,000 in fiscal 1995. The Company anticipates capital equipment 
expenditures will amount to approximately $250,000 in fiscal 1997.  

Based on the Company's current operating plans, capital and working capital 
expenditures necessary to support the on-going development and 
commercialization of the Company's products through September 30, 1997 are 
expected to substantially exceed cash expected to be generated from 
operations and will result in a further decline in the Company's liquidity.  
The Company's backlog at September 30, 1996 of $16,254,000 is composed 
primarily of orders for the new Magnes 2500 WH system. 

The Company believes that the development of the Magnes 2500 WH system may be 
completed in the second quarter fiscal 1997.  Although significant effort is 
being  expended to  complete development and obtain customer final system 
acceptances commencing in the second quarter of fiscal 1997, there can be no 
assurance that this will be accomplished.  In the event such development and 
acceptances are not obtained as anticipated, revenue reporting and cash 
collections could be further delayed with possible negative effects on the 
cash flow and cash resources of the Company.

The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000 
for the years ended September 30, 1996, 1995, and 1994, respectively.  In 
addition, at September 30, 1996 the Company has an accumulated deficit of 
$79,863,000 and its current liabilities exceed its current assets, resulting 
in a working capital deficiency.  Management anticipates that capital and 
working capital expenditures in fiscal 1997 will substantially exceed cash 
generated by operations.

Management is currently concentrating on completing installation of and 
obtaining final customer acceptances for its Magnes 2500 WH systems; however, 
there is no assurance that this will be achieved.  In the event that such 
final acceptances are not obtained, the Company will experience further 
negative effects on usable cash resources of the Company.  Management is also 
continuing to seek additional sources of debt or equity financing.  The 
Company anticipates that existing capital resources, the reduction in the 
scope of its operations, and the additional debt or equity financing, will be 
sufficient to provide operating capital required to meet its obligations in 
the normal course of business through fiscal 


                                       26
<PAGE>

1997;  however, there can be no assurances that the Company will be able to 
obtain the additional debt or equity financing that is required.  If such 
additional debt or equity financing is not obtained, the Company will be 
required to further reduce the scope of its operations. The consolidated 
financial statements do not include any adjustments that might result from 
the outcome of this uncertainty.

RISK AND UNCERTAINTIES

The Company incurred  net losses of $14,816,000, $6,673,000, and $10,313,000 
for the years ended September 30, 1996, 1995, and 1994, respectively.  In 
addition, at September 30, 1996 the Company has an accumulated deficit of 
$79,863,309 and its current liabilities exceed its current assets, resulting 
in a working capital deficiency.  Management anticipates that capital and 
working capital expenditures in fiscal 1997 will substantially exceed cash 
generated by operations.

Management is currently concentrating on completing the installation of and 
obtaining final customer acceptances for its Magnes 2500 WH systems; however, 
there is no assurance that this will be achieved.  In the event that such 
final acceptances are not obtained, the Company will experience further 
negative effects on usable cash resources of the Company.  Management is also 
continuing to seek additional sources of debt or equity financing.  The 
Company anticipates that existing capital resources, the reduction in the 
scope of its operations, and the additional debt or equity financing, will be 
sufficient to provide operating capital required to meet its obligations in 
the normal course of business through fiscal 1997;  however, there can be no 
assurances that the Company will be able to obtain the additional debt or 
equity financing that is required.  If such additional debt or equity 
financing is not obtained, the Company will be required to further reduce the 
scope of its operations.  The consolidated financial statements do not 
include any adjustments that might result from the outcome of this 
uncertainty.

Although the Company commenced shipments of its Magnes 2500 WH prior to the 
end of fiscal year 1996 there were no final acceptances received from 
customers. Furthermore, although the Company received provisional acceptance 
from two customers, there were no final acceptances received from customers 
during the first quarter of fiscal year 1997. The delay in receipt of 
customer acceptances is primarily due to a pending hardware upgrade, the need 
for which was not discovered to be necessary prior to installing the systems 
at customer sites, and additional software development  required to meet 
customer contractual requirements. Although the Company anticipates that the 
additional system hardware upgrade and software development required by the 
contracts will be completed prior to the second quarter of fiscal year 1997, 
there can be no assurances that this will be accomplished.  In the event that 
the hardware upgrade and software development are  not completed as 
anticipated, customer final acceptances could be further delayed, which could 
have a material adverse effect on the cash flow and cash resources of the 
Company.

To date the Company has been engaged principally in research and development 
activities, and has made only low volume sales to research and medical 
institutions primarily in Europe and Japan, and has not made any MSI system 
sales for commercial/clinical use in the U.S.  Such sales require prior FDA 
approval.  The Company has received 510(k) clearance to market its Magnes I 
and Magnes II systems in the U.S.,  and has recently applied for 510(k) 
clearance for its Magnes 2500 WH system for applications relating to the 
brain.  There can, however, be no assurance that the Company will receive 
such clearance 


                                       27

<PAGE>

in the near future or at all. Failure to receive such clearances to market 
would have a material adverse effect on the Company's financial condition and 
results of operations.

The Company is dependent on its Magnes systems 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.

The Company's commercial success is 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, 
1996, there have been a total of 153 reimbursements from 75 different third 
party payors in the U.S. Although the number of third party payors making 
reimbursements has increased from the September 30, 1995 total of 49 payors, 
there is no assurance that third party reimbursements will become widely 
available.  Reimbursements are not currently provided for such procedures by 
the United States government, nor is there any assurance that the U.S. 
government will authorize or budget for such procedures in the future.  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 the results of its operations.

The Company operates in an industry 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 would have a material adverse effect on  the 
Company's financial condition and results of operations.

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 profitability of 
the Company's whole head system, the extent of which is not presently 
determinable.  

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Company's consolidated financial statements as of September 30, 1996 and 
1995, and for each of the three years in the period ended September 30, 1996 
and the report of independent accountants are included in this report as 
listed in the index on page 30 of this report ( Item 14 (a)).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE.

None.



                                       28

<PAGE>
                                       PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information required for this item with respect to directors and executive 
officers is set forth in the sections entitled "Election of Directors", 
"Security Ownership of Management-Business Experience of Executive Officers" 
and "Compliance with Section 16(a) of the Exchange Act" in the Company's 
Proxy Statement and Notice of Annual Meeting of Shareholders to be held March 
18, 1997 (the "Proxy Statement"), to be filed with the Commission within 120 
days of the Company's fiscal year end, which sections are incorporated herein 
by reference.  

ITEM 11. EXECUTIVE COMPENSATION.

Information required for this item is set forth in the section entitled 
"Executive Compensation and Other Information" in the Proxy Statement, which 
section is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information required for this item is set forth in the section entitled 
"Security Ownership of Management" and "Principal Shareholders" in the Proxy 
Statement, which sections are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information required for this item is set forth in the sections entitled 
"Executive Compensation and Other Information" and "Certain Transactions" in 
the Proxy Statement, which sections are incorporated herein by reference.



                                       29


<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

    (a)  The following documents are filed as part of this report:

         (1)  Financial Statements

              Report of Independent Accountants...........................36
 
              Consolidated Balance Sheets at September 30, 1996 and 1995..37 

              Consolidated Statements of Operations for the three years
              ended September 30, 1996....................................38
              
              Consolidated Statement of Shareholders' (Deficit) Equity 
              for the three years ended September 30, 1996................39
              
              Consolidated Statements of Cash Flows for the three years 
              ended September 30, 1996....................................40
              
              Notes to Consolidated Financial Statements..................41
    
         (2)  Financial Statement Schedule
              
              Schedule II - Consolidated Valuation and Qualifying Accounts
              
              All other schedules are omitted because they are not applicable
              or the required information is shown in the consolidated 
              financial statements or notes thereto

         (3)  Exhibits
              
              The Exhibits listed in the accompanying Exhibit Index are filed
              or incorporated by reference as part of this report.

    (b)  Reports on Form 8-K during the fourth quarter:

         None

    (c)  Exhibits

         The following documents are exhibits to this Form 10-K:



                                       30

<PAGE>

Exhibit
  No.                          Description of Document

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

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

  3.3  (10)   Amendment to the Articles of Incorporation (numbered originally
              as 10.73)

+10.6  (4)    The Company's 1987 Stock Option Plan, as amended.

+10.7  (4)    Form of Incentive Stock Option and related exercise documents.

+10.8  (1)    The Company's 1985 Incentive Stock Option Plan, as amended.

+10.9  (1)    Form of Incentive Stock Option and related exercise documents.

+10.10 (1)    The Company's 1985 Non-Qualified Stock Option Plan, as amended.

+10.11 (1)    Form of Non-Qualified Stock Option and related exercise
              documents.

+10.12 (1)    The Company's 1984 Incentive Stock Option Plan, as amended.

+10.13 (1)    Form of Incentive Stock Option and related exercise documents.

 10.17 (1)    Option Agreement dated July 16, 1986 between the Company and
              Quantum Design, Inc.

 10.22 (1)    Agreement to subordinate debt of S.H.E. GmbH.

+10.36 (1)    Form of Indemnification Agreements for directors and officers.

 10.39 (2)    Purchase and Distributorship Agreement dated January 22, 1990
              between the Company and Sumitomo Metal Industries, Ltd.
              (with certain confidential portions omitted).

 10.40 (2)    Two Sets Purchase Agreement dated January 22, 1990 between the
              Company and Sumitomo Metal Industries, Ltd. (with certain 
              confidential portions omitted).

 10.41 (2)    License and R & D Agreement dated January 22, 1990 between the
              Company and Sumitomo Metal Industries, Ltd.

 10.42 (2)    Stock Purchase Agreement dated January 22, 1990 between the
              Company and Sumitomo Metal Industries, Ltd.

 10.43 (2)    Registration Rights Agreement dated January 22, 1990 between the
              Company and Sumitomo Metal Industries, Ltd.

 10.45 (3)    Memorandum of Understanding dated January 18, 1991 between the
              Company and Sumitomo Metal Industries, Ltd. (with certain 
              confidential portions omitted).

 10.46 (3)    New R & D Program for Small MSR (Supplementary Agreement to
              License and R & D  Agreement) dated February 28, 1991 between 
              the Company and Sumitomo Metal Industries,   Ltd., and Memorandum
              (not dated) modifying the agreement.

 10.48 (3)    Exclusive Patent and Technology License Agreement dated July 15,
              1991 between the Company and Stanford University (with certain
              confidential portions omitted).


                                       31
<PAGE>

No.                                Description of Document

+10.49 (7)    Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan.
              Exhibit 

+10.55 (6)    Employment Agreement, dated July 12, 1993, between the Company 
              and James V. Schumacher.

+10.56 (6)    Form of Trust Agreement between the Company and James V.
              Schumacher.

+10.57 (8)    Amendment to Option Agreements between the Company and Stephen O.
              James (numbered originally as Exhibit 10.3). 

 10.58 (6)    Real Estate Lease, dated April 3, 1989, between the Company and
              Cornerstone Income Properties, plus First and Second Amendments
              to the Real Estate Lease.

 10.64 (9)    Form of Purchase Option Agreement, as amended.

 10.67 (9)    Magnetically Shielded Room (MSR) Development and Production
              Program Agreement, dated June 6, 1994 (with certain 
              confidential portions omitted).

 10.68 (6)    Letter Agreement between the Company and Dassesta International
              S.A. regarding the  purchase of 25,000,000 Shares of Common 
              Stock of the Company.

 10.69 (6)    Loan and Security Agreement with a bank dated December 13, 1994.

 10.70 (6)    Schedule to Loan and Security Agreement dated December 13, 1994.

 10.71 (11)   Offshore Subscription Agreement between the Company and Dassesta
              International S.A. (Numbered originally as Exhibit 2.1).

 10.72 (11)   Form of Offer Letter to Holders of 10% Secured Promissory Notes 
              (Numbered originally as Exhibit 2.2).

 10.73        Offshore Note Purchase Agreement between the Company and Dassesta
              International, S.A. dated  August 13, 1996.

 10.74        Convertible Advance Promissory Note  with Dassesta 
              International S.A.

        21    Subsidiary of the Company (Biomagnetic Technologies GmbH).

        23    Consent of Independent Accountants. 

        24    Power of Attorney.

        27    Financial Data Schedule.

     99.1     Annual Report of the Biomagnetic Technologies, Inc. 1992 Employee
              Stock Purchase Plan.



                                       32



<PAGE>

(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.

(2) 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 Fiscal 1990 Form 10-K.


(3) These exhibits were previously filed as a part of, and are hereby
    incorporated by reference to, the same numbered exhibits (except as
    otherwise indicated) in the Fiscal 1991 Form 10-K.

(4) 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 Fiscal 1992 Form 10-K.

(5) 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 Fiscal 1993 Form 10-K.

(6) 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 Fiscal 1994 Form 10-K.

(7) 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. 33-46758,
    filed March 26, 1992, as amended by Amendment No. 1, filed May 8, 1992.

(8) 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-8, Registration Statement No. 33-68136
    filed August 27, 1993.

(9) 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. 33-81294,
    filed July 8, 1994.

(10)These exhibits were previously filed as part of, and are hereby
    incorporated by reference to, the same numbered exhibits (except as
    otherwise indicated) in Fiscal 1995 Form 10-K

(11)These exhibits were previously filed as part of, and are hereby
    incorporated by reference to, the same numbered exhibits (except as
    otherwise indicated) in form 8-K, filed April 14, 1995.

+   Management contract or compensatory plan or arrangement.

SUPPLEMENTAL INFORMATION

Proxy materials have not been sent to shareholders as of the date of this 
report.  The Proxy materials will be furnished to the Company's shareholders 
subsequent to the filing of this report and the Company will furnish such 
material to the Securities and Exchange Commission at that time.

                                       33
<PAGE>

                                      SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.



By  /S/JAMES V. SCHUMACHER                            JANUARY 21, 1997
    ----------------------                            ----------------
    James V. Schumacher                                      Date 
    Chairman, Chief Executive Officer

















                                       34

<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this 
report has been signed below by the following persons on behalf of the 
registrant and in the capacities and on the dates indicated.


By  /S/  JAMES V. SCHUMACHER                          JANUARY 21, 1997
    -----------------------------                     ----------------
    James V. Schumacher, Chairman,                           Date
     Chief Executive Officer and Director
    


By  /S/ HERMAN BERGMAN                                JANUARY 21, 1997  
    -----------------------------                     ----------------
    Herman Bergman,                                          Date
     Vice President Finance, Chief 
     Financial Officer, Corporate Secretary
               

By       *                                            JANUARY 21, 1997  
    -----------------------------                     ----------------
    R. Scott Asen, Director                                  Date


               
By       *                                            JANUARY 21, 1997   
    -----------------------------                     ----------------
    Jerry C. Benjamin, Director                              Date

                   
By       *                                            JANUARY 21, 1997  
    -----------------------------                     ----------------
    William C. Black, Jr., Director                          Date

                   
By       *                                            JANUARY 21, 1997    
    -----------------------------                     ----------------
    Martin P. Egli, Director                                 Date


               
By       *                                            JANUARY 21, 1997
    -----------------------------                     ----------------
    Gerald D. Knudson, Director                              Date

                   
By       *                                       
                                                      JANUARY 21, 1997 
    -----------------------------                     ----------------
    Enrique Maso, Director                                   Date


*By 
    ----------------------------- 
    James V. Schumacher
    (Attorney-in-Fact)



                                       35

<PAGE>


                          REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.:

In our opinion, the consolidated financial statements listed in the index 
appearing under Item 14 (a) (1) and (2) on page 30 present fairly, in all 
material respects, the financial position of Biomagnetic Technologies, Inc. 
and its subsidiary at September 30, 1996 and 1995,  and the results of their 
operations and their cash flows for each of the three years in the period 
ended September 30, 1996,  in conformity with generally accepted accounting 
principles.  These financial statements are the responsibility of the 
Company's management; our responsibility is to express an opinion on these 
financial statements based on our audits.  We conducted our audits of these 
statements in accordance with generally accepted auditing standards which 
require that we plan and perform the audit to obtain reasonable assurance 
about whether the financial statements are free of material misstatement.  An 
audit includes examining, on a test basis, evidence supporting the amounts 
and disclosures in the financial statements, assessing the accounting 
principles used and significant estimates made by management, and evaluating 
the overall financial statement presentation. We believe that our audits 
provide a reasonable basis for the opinion  expressed above.

The accompanying consolidated financial statements have been prepared 
assuming that the Company will continue as a going concern.  As discussed in 
Note 2 to the consolidated financial statements, the Company has suffered 
recurring losses from operations and has an accumulated deficit that raise 
substantial doubt about its ability to continue as a going concern.  
Management's plans in regard to these matters are also described in Note 2.  
The consolidated financial statements do not include any adjustments that 
might result from the outcome of this uncertainty.

/s/ PRICE WATERHOUSE LLP

San Diego, California
January 10, 1997


                                        36

<PAGE>


                                BIOMAGNETIC TECHNOLOGIES, INC.
                                  CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                              September 30,
                                                       -------------------------
                                                           1996          1995
                                                       -----------   -----------
<S>                                                     <C>           <C> 
    ASSETS
    Cash and cash equivalents                           $1,752,092    $2,313,928 
    Short-term investments                                 744,138     7,894,280 
    Restricted cash and short-term investments           6,084,555     2,621,422 
    Accounts receivable (less allowance for doubtful
    accounts: 1996, $10,420; 1995, $20,115)                 16,731       774,619 
    Inventories                                          5,627,515     2,476,794 
    Prepaid expenses and other current assets              337,792       456,106 
                                                       -----------   -----------
    Total current assets                                14,562,823    16,537,149 

    Property and equipment -- at cost                    9,477,775     9,818,678 
    Less accumulated depreciation and amortization      (8,569,811)   (7,894,133)
                                                       -----------   -----------
    Net property and equipment                             907,964     1,924,545 
    Restricted cash                                        500,000     1,100,000 
    Other assets                                           278,814       562,556 
                                                       -----------   -----------
    TOTAL ASSETS                                       $16,249,601   $20,124,250 
                                                       ===========   ===========
    LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
    Accounts payable                                    $2,632,917      $786,553 
    Accrued liabilities                                  1,896,245     1,009,430 
    Accrued salaries and employee benefits                 860,155       610,573 
    Customer deposits                                    9,204,326     3,856,187 
    Note payable-related party                           3,000,000 
                                                       -----------   -----------
    Total current liabilities                           17,593,643     6,262,743 
    Other liabilities                                       48,070       493,413 
                                                       -----------   -----------
    Total liabilities                                   17,641,713     6,756,156 

    COMMITMENTS AND CONTINGENCIES (Notes 2, 7 and 9)

    SHAREHOLDERS' (DEFICIT) EQUITY
    Common stock -- no par value, 60,000,000 shares 
    authorized; 39,974,222 and 39,921,174 shares 
    issued and outstanding                              78,467,197     78,415,590 
    Accumulated deficit                                (79,863,309)   (65,047,496)
                                                       -----------   -----------
    Total shareholders' (deficit) equity                (1,396,112)    13,368,094 
                                                       -----------   -----------
 
   TOTAL LIABILITIES AND SHAREHOLDERS' 
     (DEFICIT) EQUITY                                 $ 16,245,601   $ 20,124,250 
                                                      ============   ============
</TABLE>

                    See Notes to Consolidated Financial Statements.


                                            37


<PAGE>

                             BIOMAGNETIC TECHNOLOGIES, INC.
                           CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                               Years Ended September 30,
                                      ------------------------------------------
                                           1996          1995           1994
                                      ------------    ------------  ------------
<S>                                   <C>            <C>            <C>
Product sales                           $  167,684     $8,771,502     $2,956,125
Service revenue                            564,921        209,756        162,851
Interest income                            524,895        528,987        175,742
Other income (expense)                     164,623       (314,234)        49,414
                                      ------------    ------------  ------------
Total revenues                           1,422,123      9,196,011      3,344,132

Production  costs                        2,565,454      4,454,992      2,513,590
Service costs                              111,173         68,854         58,117
Research and development                 7,767,199      5,507,054      6,735,130
Marketing and sales                      2,798,248      2,369,974      1,629,823
General and administrative               2,957,571      2,299,974      2,329,124
Interest expense                            38,291        573,261        391,460
                                      ------------    ------------  ------------
Total expenses                          16,237,936     15,274,109     13,657,244
                                      ------------    ------------  ------------
Loss before extraordinary loss         (14,815,813)    (6,078,098)   (10,313,112)
                                      ============    ===========   ============
Extraordinary loss from extinguishment  
     of short-term debt                                  (594,715)
                                      ------------    ------------  ------------
NET LOSS                              $(14,815,813)   $(6,672,813)  $(10,313,112)
                                      ============    ===========   ============

NET LOSS PER SHARE
     Loss before extraordinary loss          $(.37)         $(.25)        $(1.03)
     Extraordinary loss                                      (.02)
                                      ------------    ------------  ------------
     Net loss                                $(.37)         $(.27)        $(1.03)
                                      ============    ===========   ============

WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING          39,950,047     24,782,800      9,977,192
                                      ============    ===========   ============

</TABLE>

                    See Notes to Consolidated Financial Statements.

                                          38


<PAGE>


                              BIOMAGNETIC TECHNOLOGIES, INC.
                     CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY

<TABLE>
<CAPTION>
                                                              Common Stock  
                                                      ---------------------------     Accumulated
                                                         Shares           Amount        Deficit             Total
                                                      ------------    -------------   -------------     ------------
<S>                                                   <C>              <C>            <C>               <C>
BALANCE, SEPTEMBER 30, 1993                              9,924,356      $60,031,699   $(48,061,571)     $ 11,970,128
Exercise of stock options                                   15,573           20,687                           20,687
Stock issued to Employee Stock Purchase  
 Plan participants                                          87,768          205,158                          205,158
Issuance of options to purchase equity securities                           400,000                          400,000
Net loss                                                                               (10,313,112)      (10,313,112)
                                                      ------------    -------------   -------------     ------------

BALANCE, SEPTEMBER 30, 1994                             10,027,697       60,657,544    (58,374,683)        2,282,861
Exercise of stock options                                   33,000           18,480                           18,480
Sale of common stock, net of issuance costs             25,000,000       14,790,880                       14,790,880
Common stock issued upon debt extinguishment             4,860,477        2,948,686                        2,948,686
Net loss                                                                                (6,672,813)       (6,672,813)

                                                       ------------      -----------   ------------      ------------
BALANCE, SEPTEMBER 30, 1995                             39,921,174       78,415,590    (65,047,496)       13,368,094
Exercise of stock options                                   26,765           17,965                             17,965
Stock issued to Employee Stock Purchase
  Plan participants                                         26,283           33,642                             33,642
Net loss                                                                               (14,815,813)      (14,815,813)
                                                      ------------    -------------   -------------     ------------
BALANCE, SEPTEMBER 30, 1996                             39,974,222      $78,467,197   $(79,863,309)     $ (1,396,112)
                                                      ============    =============   =============
</TABLE>

                                See Notes to Consolidated Financial Statements.


                                                     39

<PAGE>


                                 BIOMAGNETIC TECHNOLOGIES , INC.
                              CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                         Years ended September 30,  
                                                              -----------------------------------------------
                                                                   1996              1995            1994
                                                              -------------     ------------     ------------
<S>                                                           <C>               <C>              <C> 
OPERATING ACTIVITIES
Net loss                                                       $(14,815,813)     $ (6,672,813)    $(10,313,112)
Adjustments to reconcile net loss to net
   cash used by operating activities:
         Loss on write-off of assets                                345,677
         Extraordinary loss                                                           594,715 
         Depreciation and amortization                            1,248,141         1,275,891        1,944,423 
         Amortization of debt issue costs                                             265,000          135,000 
         Changes in operating assets and liabilities:
               Restricted cash                                   (5,484,555)       (1,104,583)      (1,516,839)
               Accounts receivable                                  757,888          (651,757)         362,261 
               Inventories                                       (3,150,721)         (279,117)       1,694,965 
               Prepaid expenses and other current assets            118,314           (36,668)        (208,699)
               Other assets                                         283,742           (51,215)         (31,607)
               Accounts payable                                   2,435,363          (303,897)         620,216 
               Accrued salaries and employee benefits               249,582            82,262           60,496 
               Accrued liabilities                                 (311,674)          146,031          226,771 
               Customer deposits                                  5,352,139         2,299,951        1,556,236 
               Other liabilities                                    164,147            33,960         (190,571)
                                                              -------------      ------------     ------------
Net cash used for operating activities                          (12,807,770)       (4,402,240)      (5,660,460)
INVESTING ACTIVITIES
Change in short-term investments, net                             9,771,564        (7,894,280)       3,925,251 
Payments for property and equipment                                (577,237)         (452,732)        (941,691)
                                                               -------------     ------------     ------------
Net cash provided by (used for) investing activities               9,194,327       (8,347,012)       2,983,560 
FINANCING ACTIVITIES
Proceeds from issuance  of common stock, net of issuance costs        51,607       14,809,360          225,845 
Proceeds from notes payable                                        3,000,000        2,318,182        2,710,000 
Principal repayments on notes payable                                              (2,818,182)         (45,734)
Net cash provided by financing activities                          3,051,607       14,309,360        2,890,111 
                                                               -------------     ------------     ------------
NET (DECREASE) INCREASE  IN CASH 
   AND CASH EQUIVALENTS                                             (561,836)       1,560,108          213,211 

CASH AND CASH EQUIVALENTS AT
    BEGINNING OF PERIOD                                            2,313,928          753,820          540,609 
                                                               -------------     ------------     ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $ 1,752,092     $  2,313,928     $    753,820
                                                               =============     ============     ============
</TABLE>


                    See Notes to Consolidated Financial Statements.



                                           40


<PAGE>


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

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, for sale 
currently to medical research centers located in the United States, Europe 
and Asia.  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.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and 
Biomagnetic Technologies GmbH, a wholly owned foreign subsidiary located in 
Germany.  The subsidiary was formed in 1978 primarily to market the Company's 
products.  All material intercompany balances and transactions have been 
eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions 
that effect 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 those estimates.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations 
of credit risk consist  primarily of cash equivalents, short-term 
investments, trade accounts receivable and financial instruments used in 
hedging activities. The Company places its cash equivalents and short-term 
investments with high quality financial institutions, and such instruments 
are invested primarily in high grade short-term investments. Concentrations 
of credit risk with respect to trade accounts receivable are limited due to 
the geographically diverse customers that comprise the Company's customer 
base, thus spreading the trade credit risk.  The counterparties to the 
agreements relating to the Company's foreign exchange instruments consist of 
a high credit quality financial institution.  While the notional amounts of 
financial instruments are often used to express the volume of these 
transactions, the potential accounting loss on these transactions, if any, is 
limited to the fluctuation in the applicable foreign currency exchange rate.

                                      41

<PAGE>

FOREIGN CURRENCY REMEASUREMENT

The functional currency of the Company's foreign subsidiary is the U.S. 
dollar. The monetary assets and liabilities of the foreign subsidiary are 
translated into U.S. dollars at the exchange rate in effect at the balance 
sheet date while nonmonetary items are translated at historical rates.  
Revenue and expenses are translated at the average exchange rate for the 
period, except cost of sales and depreciation, which are translated at 
historical rates.  Remeasurement gains or losses of the foreign subsidiary 
are recognized currently in consolidated operations.  For the years ended 
September 30, 1996, 1995 and 1994 such gains (losses) totaled approximately 
$136,000, $(96,400) and $4,600, respectively.

OFF-BALANCE SHEET RISK

The Company has a $5,000,000 letter of credit and foreign exchange credit 
facility with a bank which is secured by restricted cash and short-term 
investments.  The Company utilizes standby letters of credit to secure 
European bank guarantees issued to European customers for advance deposits on 
sales.  At September 30, 1996 and 1995 there were outstanding letters of 
credit amounting to approximately $3,128,000 and $2,621,000, respectively. 
These amounts are secured by an equal amount included in restricted cash and 
short-term investments.

The Company periodically enters into forward exchange contracts to hedge 
foreign currency exposure associated with certain identifiable foreign 
currency commitments entered into in the ordinary course of business.  Gains 
and losses incurred on forward contracts associated with sales orders are 
deferred and included in the basis of the underlying sales transaction. Gains 
and losses are recognized when the offsetting gains and losses are recognized 
in the related hedged items.  At September 30, 1996 and 1995, the Company had 
forward exchange contracts to purchase approximately $5,995,000 and 
$5,289,000 respectively, with Deutsche marks and  French francs at varying 
maturities generally within one year and had incurred $100,136 in unrealized 
gains and $197,000 in unrealized losses which had been deferred at 
September 30, 1996 and 1995, respectively.   

CASH AND CASH EQUIVALENTS 

Cash and cash equivalents consist of short-term highly liquid investments 
purchased with a maturity of three  months or less.  Cash equivalents are 
stated at cost, which approximates market value.

INVESTMENT SECURITIES

Management determines the appropriate classification of its debt securities 
at the time of purchase and reevaluates such designation as of each balance 
sheet date.  The Company has classified its debt securities as 
"available-for-sale" at September 30, 1996 and "held-to maturity" at 
September 30, 1995 and has recorded them at fair value and amortized cost, 
respectively.  At September 30, 1996 and 1995, the Company had classified 
$3,872,271 and $10,515,702 in debt securities as available-for-sale and 
held-to- 

                                       42

<PAGE>

maturity, respectively.  Gross unrealized gains and losses on the 
Company's available-for-sale securities were not significant.

INVENTORIES

Inventories are carried at the lower of cost or market.  Cost is determined 
on the first-in, first-out basis.

LONG-LIVED ASSETS

The Company assesses potential impairments to its long-lived assets on an 
exception basis when there is evidence that events or changes in 
circumstances have made recovery of the asset's carrying value unlikely.  An 
impairment loss would be recognized when the sum of the expected future net 
cash flows is less than the carrying amount of the asset.

REVENUE RECOGNITION

Revenue from product sales is generally recognized at the time of customer 
acceptance.  Standard terms of sale include a one year service period 
following the sale.  The Company defers and recognizes service revenues over 
the related service period.
 
INCOME TAXES

Current income tax expense is the amount of income taxes expected to be 
payable for the current year.  A deferred income tax asset or liability is 
established for the expected future consequences resulting from the 
differences in the financial reporting and tax basis of assets and 
liabilities.  Deferred income tax expense is the change during the year in 
the deferred income tax asset or liability (Note 5).  Valuation allowances 
are established when necessary, to reduce deferred tax assets to the amount 
more likely than not to be realized.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation. 
Depreciation is generally computed using the straight-line  method over 
estimated useful lives of three to ten years.  Leasehold improvements are 
amortized over the related lease term.

FAIR VALUE OF FINANCIAL INSTRUMENTS

It is management's belief that the carrying amounts shown for the Company's 
financial instruments are reasonable estimates of their related fair values.

                                  43

<PAGE>

STOCK-BASED COMPENSATION ACCOUNTING

In 1995, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for 
Stock-Based Compensation."  The Company has not elected early adoption of 
FAS 123.  Upon adoption of FAS 123, the Company will continue to measure  
compensation expenses for its stock-based employee compensation plans using 
the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for 
Stock Issued to Employees" and will provide pro forma disclosures as if the 
fair value based method prescribed by FAS 123 had been utilized.  The 
disclosures under this standard will be required beginning in 1997.

NET LOSS PER SHARE
 
Net loss per share is based on the weighted average number of shares of 
common stock outstanding.  Common stock equivalents are antidilutive and are 
excluded from the computation of net loss per share.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to current year 
presentation. 

Note 2.  OPERATIONS AND CAPITAL RESOURCES

The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000 
for the years ended September 30, 1996, 1995, and 1994, respectively.  In 
addition, at September 30, 1996 the Company has an accumulated deficit of 
$79,863,000 and its current liabilities exceed its current assets, resulting 
in a working capital deficiency.  Management anticipates that capital and 
working capital expenditures in fiscal 1997 will substantially exceed cash 
generated from operations.

Management is currently concentrating on completing installation of and 
obtaining final customer acceptances for its Magnes 2500 WH systems; however, 
there is no assurance that this will be achieved. In the event that such 
final acceptances are not obtained, the Company will experience further 
negative effects on usable cash resources of the Company.  Management is also 
continuing to seek additional sources of debt or equity financing. The 
Company anticipates that existing capital resources, the reduction in the 
scope of its operations, and the additional debt or equity financing, will be 
sufficient to provide operating capital required to meet its obligations in 
the normal course of business through fiscal 1997; however, there can be no 
assurances that the Company will be able to obtain the additional debt or 
equity financing that is required.  If such additional debt or equity 
financing  is not obtained, the Company will be required to further reduce 
the scope of its operations.  The consolidated financial statements do not 
include any adjustments that might result from the outcome of this 
uncertainty.

                                  44

<PAGE>

NOTE 3.  SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in one industry segment which includes developing, 
manufacturing and selling magnetic source imaging products.  The following 
represents information about operations in different geographic areas. 
Information under the caption "U.S." represents domestic operations and 
information under the caption "Europe" represents the activities of the 
Company's foreign subsidiary.  Revenues under the captions "Asia"  represent 
export sales from the Company's domestic operations. 

Sales to Sumitomo Metal Industries, Ltd., the Company's exclusive distributor 
for certain portions of the Asian market, represented approximately 8%, 19%, 
and 28% of total Company sales for fiscal years 1996, 1995 and 1994, 
respectively.     Years Ended September 30,     1996 1995 1994
 
Revenues
    U.S.                   $    198,351    $    318,630     $    53,129
    Europe                      449,895       7,062,483       2,137,144
    Asia                         84,359       1,600,145         928,703
    Interest                    524,895         528,987         175,742
    Other income (expense)      164,623        (314,234)         49,414
                           ------------    ------------     ------------
                           $  1,422,123    $  9,196,011     $ 3,344,132
                           ============    ============     ============ 
Net loss 
    U.S.                   $(13,143,993)   $ (6,439,051)    $ (9,938,530)
    Europe                   (1,671,820)       (233,762)        (374,582)
                           ------------    ------------     ------------
                           $(14,815,813)   $ (6,672,813)    $(10,313,112)
                           ============    ============     ============
Identifiable assets          
              
    U.S.                    $11,628,478     $17,041,388      $ 6,823,137
    Europe                    4,621,123       3,082,862        2,596,231
                           ------------    ------------     ------------
                            $16,249,601     $20,124,250      $ 9,419,368
                           ============    ============     ============

                                          45


<PAGE>


NOTE 4.       FINANCIAL STATEMENT INFORMATION
    
The composition of certain financial statement captions are summarized 
below.


Inventories:

                                         1996          1995
                                     ----------     ----------
Finished goods                       $1,725,052       $620,990
Work-in-process                       3,356,106      1,620,147
Raw materials                           546,357        235,657
                                     ----------     ----------
                                     $5,627,515     $2,476,794
                                     ==========     ==========

Inventories include an allowance for obsolescence of approximately $1,650,659 
and $1,016,000 at September 30, 1996 and 1995, respectively.  At September 
30, 1996, $3,330,816 of the total inventory balance was related to Magnes 
2500 WH systems located at customer sites pending final customer system 
acceptance.  The Company has not  recognized revenue on these systems.

Property and equipment:
                                         1996          1995
                                     ----------     ----------
Machinery and equipment              $8,880,428     $6,578,793
Office furniture and equipment          253,328      2,880,774
Leasehold improvements                  341,801        340,313
Construction-in-process                   2,218         18,798
                                     ----------     ----------
                                     $9,477,775     $9,818,678
                                     ==========     ==========
Accrued liabilities:
                                          1996         1995
                                     ----------     ----------
Deferred revenue                     $   84,257     $  401,269
Customer obligations                    112,216        319,336
Accrued employment agreement costs      600,000   
Other                                 1,099,772        288,825
                                     ----------     ----------
                                     $1,896,245     $1,009,430
                                     ==========     ==========

Supplemental Disclosure of Cash Flow Information:

In fiscal 1995, the Company issued 4,882,477 shares of common stock and 
options to purchase common stock in a non-cash transaction to certain holders 
of short-term debt in exchange for extinguishment of the obligations under 
the debt instruments (Note 6).

During the years ended September 30, 1996, 1995 and 1994, the Company paid 
interest of $38,166, $94,430 and $251,270 respectively.

                                     46

<PAGE>

NOTE 5.  INCOME TAXES

The Company has not recorded provisions for income taxes in fiscal 1996, 1995 
and 1994 due to net operating losses for reporting purposes. 

The components of deferred tax assets at September 30, 1996 and 1995 are as
follows:

                                                       1996            1995
                                                   ------------    -----------
    Net operating loss carryforwards               $  9,321,000    $ 4,302,000
    Research and development credits                    672,000        528,000
    Capitalized research and development costs        1,491,000        896,000
    Allowances                                        1,055,000        524,000
    Other                                               554,000        525,000
                                                   ------------    -----------
                                                     13,093,000      6,775,000
    Valuation allowance                             (13,093,000)    (6,775,000)
                                                   ------------    -----------
    Deferred tax assets                           $     --        $     --
                                                   ------------    -----------

A full valuation allowance for deferred tax assets has been provided because 
realization of such future tax benefits cannot be assured.  The Company has 
approximately $24,273,000 and $13,609,000 of Federal and State net operating 
loss carryforwards which will begin to expire in 1997 if not utilized. As a 
result of an ownership change (as defined by Section 382 of the Internal 
Revenue Code of 1986, as amended) which occurred in fiscal 1995, the 
Company's tax loss carryforwards were limited to a total $11,964,213 of which 
approximately $556,000 can be utilized per year.  As a result of this 
limitation , net operating loss carryforwards were reduced by $12,171,749 and 
research and development credits were reduced by $1,663,903 in fiscal 1995.

NOTE 6.  DEBT 

In August 1996, the Company entered into a loan agreement with Dassesta 
International S.A. ("Dassesta")  for $3,000,000 that bears interest at 9% per 
annum and matures in February 1997.  The note plus accrued interest is 
convertible into common shares at the option of the Company at $.40 per share 
at any time and under certain conditions at the option of Dassesta.  As of 
September 30, 1996 the Company had borrowed the entire $3,000,000 ( Note 10).

In March and April 1995, the Company executed agreements with the holders of 
$2,210,000 of short-term notes (including $850,000 to related parties) 
providing for the extinguishment of the note principal plus accrued interest 
in exchange for the issuance of common stock in connection with the 
completion of the sale of common stock to Dassesta (Note 8).  The conversion 
agreements provided for i) a 10% increase in the principal balance of the 
notes for purposes of conversion to common stock, ii) issuance of common 
stock at a price per share utilized in the Dassesta financing less 10% and 
iii) a 10% increase in the number of shares of common stock subject to 
purchase under previously issued option agreements. 

                                     47

<PAGE>

In April 1995, the Company issued 4,882,477 shares of common stock in 
accordance with the conversion agreements.  In fiscal 1995, the Company 
recorded an extraordinary loss of $594,715, representing the excess of the 
fair value of common stock and options issued in connection with the 
conversion over the net carrying value of the notes at conversion.

NOTE 7.  LEASE OBLIGATIONS

The Company leases its office and production facilities and certain equipment 
under noncancelable operating leases.  In March 1993, the Company 
renegotiated certain portions of the facility lease, extended the term 
through February 1998 and received an allowance for leasehold improvements.  
Under the previous facility lease, the Company recorded a deferred credit to 
reflect the excess of rent expense incurred over cash payments due to certain 
rent free periods.  The amount of the deferred rent credit at March 1993, 
totaling approximately $306,000, is being amortized over the remaining lease 
term as a reduction of future rent expense.  The new facility lease agreement 
contains two renewal options of five years each.

Future minimum cash payments under operating leases are as follows:

    Years Ending September 30,
            1997                       $552,469
            1998                        228,565
                                       --------
                                       $781,034
                                       ========
Total rent expense under noncancelable operating leases was $607,192, 
$579,706 and $535,508  for the years ended September 30, 1996, 1995 and 1994, 
respectively.

NOTE 8.  SHAREHOLDERS' EQUITY

COMMON STOCK

In March 1995, the Company completed the private sale of 25 million shares of 
common stock to Dassesta resulting in net proceeds of $14,790,880 after 
deducting $209,120 of issuance costs.  Dassesta provided a $1,500,000 
short-term loan prior to the completion of the stock sale, which was repaid 
at the closing of the transaction.

In April 1995, the Company issued 4,882,477 shares of common stock and 
certain options to purchase common stock in connection with the 
extinguishment of $2,210,000 of short-term debt (Note 6).  The Company issued 
five-year options to purchase 486,200 shares of common stock of the Company 
at $0.60 per share that replace options previously issued in connection with 
the issuance of short-term debt in fiscal 1994.  At September 30, 1996, 
options to purchase 464,200  shares of common stock remain outstanding and 
exercisable.

                                   48

<PAGE>

STOCK OPTION PLANS

The Company has various incentive and non-qualified stock option plans which 
provide that options to purchase up to 5,000,000 shares of common stock may 
be granted to key employees and others at an option price of at least fair 
market value at the date of grant which vest over a maximum period of four 
years from date of grant.  The exercise period for each option is not to 
exceed 10 years from the date of grant.  At September 30, 1996 options to 
purchase 1,146,248 shares of the Company's common stock are exercisable and 
509,130 shares are available for future grants under the plans.    

The following table summarizes common stock option plan activity:

<TABLE>
<CAPTION>
                                                    Years Ended September 30,
                                       --------------------------------------------
                                           1996           1995            1994
                                       ------------   ------------    -------------
<S>                                    <C>            <C>             <C>

Outstanding at beginning of period        1,854,966      1,389,097        1,452,763
Granted                                   2,480,400      1,606,238           20,500
Canceled                                    (75,134)    (1,140,369)         (68,593)
Exercised                                    (4,765)       ----             (15,573)
Outstanding at end of period              4,255,467      1,854,966        1,389,097
                                       ------------   ------------    -------------

Price range of options exercised        $1.00-$1.50       ------       $1.20- $1.50                   

Price range of outstanding options      $1.00-$1.50    $1.00-$6.75     $1.20-$11.50

</TABLE>
                                             49



<PAGE>

EMPLOYEE STOCK PURCHASE PLAN

The Company has established an Employee Stock Purchase Plan in which eligible 
employees may use funds from accumulated payroll deductions to purchase 
shares of common stock at the end of designated purchase periods.  Employees 
may contribute up to 15% of their base salary toward such purchases, not to 
exceed $25,000 per calendar year.  The purchase price is the lesser of 85% of 
the fair market value of common stock determined at the beginning or end of 
the purchase period.  For the purchase period ended March 31, 1994 the 
Company issued 87,768 shares of common stock to employees at an average price 
of $2.34 per share.  For purchase period ended March 31, 1996 the Company 
issued 26,283 shares of common stock to employees at an average price of 
$1.28 per share.  A total of 212,232 shares of common stock have been 
authorized for future purchases under the Employee Stock Purchase Plan. 

NOTE 9.  EMPLOYMENT AGREEMENT

In June 1993, the Board of Directors and the Chief Executive Officer and then 
President agreed to certain terms of employment.  The agreement includes a 
potential future payment to the Chief Executive Officer of up to $600,000 in 
June 1997 based upon the price of the Company's common stock at that date and 
the realized and unrealized gains  on stock options granted to him.  The 
Company accrued compensation of approximately $256,500, $150,000 and $163,000 
during fiscal 1996, 1995 and 1994, respectively, which represents the 
estimated value of compensation earned based upon the price of the Company's 
common stock during the fiscal year.  As of September 30, 1996 and 1995,  
$600,000 and $343,750 in accrued compensation was included in accrued 
liabilities and other liabilities, respectively.  In addition, the employment 
agreement provides for the continuation of base salary payments for two years 
under certain circumstances. Pursuant to terms of the employment agreement, 
the Company secured these potential future payments by placing $1,100,000 in 
a trust established on behalf of the Chief Executive Officer which is 
reported as restricted cash in the financial statements.  The $600,000 of 
potential future payout to the Chief Executive Officer in June 1997 is 
included in the restricted cash and short-term investments balance as of 
September 30, 1996.

NOTE 10. SUBSEQUENT EVENT

On December 31, 1996, the Company exercised its option to convert the 
$3,000,000 related party note payable plus accrued interest into 7,717,602 
shares of common stock. 

                               50 

<PAGE>




BIOMAGNETIC TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II
<TABLE>
<CAPTION>
                                 Balance at        Charged to                        Balance at
                                 Beginning         Costs and                           End of
DESCRIPTION                      OF PERIOD          EXPENSES        DEDUCTIONS         PERIOD
                              -------------       -----------      -----------       -----------
<S>                           <C>                 <C>              <C>               <C>

Allowance for doubtful
  accounts on accounts
  receivable:

Fiscal Year 1996                  $20,115             ---            $9,695(A)        $10,420

Fiscal Year 1995                  $11,886           $9,695           $1,466(A)        $20,115

Fiscal Year 1994                  $17,216             ---           $ 5,330(A)        $11,886


(A)   Uncollectible accounts charged against allowance


_______________

Allowance for obsolete
  and slow moving
  inventory:

Fiscal Year 1996                  $1,015,692      $918,522         $283,555(B)     $1,650,659

Fiscal Year 1995                    $656,149      $499,281         $139,738(B)     $1,015,692

Fiscal Year 1994                    $592,149      $134,882          $70,882(B)       $656,149

</TABLE>
(B)   Sale or disposal of items under allowance

                                              51