<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
                         
For the fiscal year ended          September 30, 1997
                         -------------------------------------------------------

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

For the transition period from                       to
                              -----------------------  -------------------------
                      
Commission File Number                        1-10285
                      ----------------------------------------------------------

                            BIOMAGNETIC TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
                (Exact name of registrant as specified in its charter)

     California                                        95-2647755
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation          (I.R.S. Employer
     or organization)                                   Identification Number)

     9727 Pacific Heights Boulevard, San Diego, California         92121-3719
--------------------------------------------------------------------------------
(Address of principal executive offices)                           (zip code)

                                                  
Registrant's telephone number, including area code     (619) 453-6300
                                                  ------------------------------

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,
1997 was $25,605,179, based on the closing price on that date on the Nasdaq Over
the Counter Bulletin Board.

The number of shares outstanding of the registrant's Common Stock, no par value,
as of December 31, 1997 was  53,344,123  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 are incorporated by reference into Part III of this
     report.
2.   Items contained in the above-referenced document 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, 1997
                                        INDEX



                                                                            PAGE
                                                                            ----
PART I

Item  1.  Business . . . . . . . . . . . . . . . . . . . . . . . . . . .     1
Item  2.  Properties . . . . . . . . . . . . . . . . . . . . . . . . . .    19
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 7A.  Quantitative and Qualitative Disclosure About Market Risk. . .    29
Item  8.  Financial Statements and Supplementary Data. . . . . . . . . .    29
Item  9.  Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure . . . . . . . . . . . . . . . . . . .    29


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 . . . . . . . . . . . . . . . . . . . . . . . . . .    30
Item 13.  Certain Relationships and Related Transactions . . . . . . . .    30


PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form
           8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    31
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    36


<PAGE>

                                        PART I

ITEM 1.   BUSINESS.

Except for the historical information contained herein, the following discussion
may contain forward-looking statements that involve substantial 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.

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") systems. Since 1984, the primary business of the
Company has been the development of MSI systems to assist in the noninvasive
diagnosis of a broad range of medical disorders.

The MSI systems developed by the Company use 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 technology for 
potential commercial market applications such as mapping of functional cortex 
at risk during surgery for tumors and other lesions, and the diagnosis and 
planning for surgical treatment of epilepsy. The Company is continuing to 
investigate the potential applications of its technology for problems of the 
heart, brain, spine, and gastrointestinal system.

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 brain.  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 capture transient physiological events.  Anatomically
oriented diagnostic methods such as computed tomography ("CT") and magnetic
resonance imaging ("MRI") produce images showing cross-sectional slices of
various parts of the body. The Company's MSI system, when used in conjunction
with anatomically 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.

According to the latest available 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


                                          1
<PAGE>

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 various clinical applications
for MSI may be developed in addition to the area of epilepsy.  The potential
commercial clinical market in the U.S. for epilepsy alone consists of more than
100 large hospitals and independent imaging centers. Notwithstanding the size of
this potential market, there is no assurance that the Company's  MSI systems
will be accepted for commercial use in these hospitals and imaging centers.

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 clinical applications, either
independently or in collaboration with BTi.  Since the first third-party
reimbursement was received in September 1993,  more than 100 insurance companies
and other health care providers have approved reimbursement for certain MSI
procedures performed with the Company's Magnes MSI systems. Magnes systems were
installed in 21 medical and research institutions worldwide as of September 30,
1997.  Nine of these sites operate the Company's latest 148 channel Magnes 2500
WH systems including the Scripps Clinic & Research Foundation in La Jolla,
California ("Scripps"), New York University Medical Center ("NYU"), the
Institute of Medicine in Julich, Germany,  the University of Magdeburg in
Magdeburg, Germany,  the Max Planck Institute in Leipzig, Germany,  the
University of Konstantz in Konstantz, Germany, the Communications Research
Laboratory in Tokyo, Japan, Herman Hospital at the University of Texas, Houston,
and the Institute for Research in Neurosciences and Psychiatry in Rouffach,
France.  Patients have been referred to collaborating domestic sites from more
than 50 leading medical institutions throughout the United States. The other 12
sites located in the United States, Europe and Japan operate the Company's 37
channel Magnes I and the 74 channel Magnes II systems.

The Company's Magnes I, Magnes II, and Magnes 2500 WH MSI systems are 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 systems are
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 systems include
stroke, trauma, psychiatric learning disorders and spinal cord evaluation.  The
Company's MSI systems have 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.  A new model of the Company's systems, the Magnes 1300C, was developed
specifically for measurements of heart function.  Preliminary studies using the
Magnes 1300C indicate that it may also be useful for measurements of
gastrointestinal and spinal cord activity.

The Company has received 510 (k) premarket notification clearance from the Food
and Drug Administration, ("FDA")  for its Magnes I, Magnes II and Magnes 2500 WH
systems allowing their use in the United States for clinical applications
involving the brain. In addition, the Company has received similar clearance for
sale of these systems as a clinical device from the Japanese Ministry of Health
and Welfare. The Company has not yet applied to the FDA or similar regulatory
agencies for clearance on the clinical use of the Magnes 1300C.


                                          2
<PAGE>

In December 1996, the Company reported a restructuring of its operations due to
lower short-term market projections for its MSI systems. The restructuring
resulted in a reduction of 44 employees by 1997  after completion of the final
development phases of its Magnes 2500 WH system.  As part of the restructuring,
D. Scott Buchanan, Ph.D., assumed the responsibilities of President and CEO.

In June 1997,  BTi  entered into a collaboration with Quantum Magnetics, Inc., a
privately owned San Diego company specializing in advanced magnetic
instrumentation and systems, to form a new Company called Magnesensors Inc. BTi
and Quantum Magnetics each own 38% of the outstanding stock of the new company
and 24% of the outstanding stock is owned by the management of Magnesensors.
Magnesensors' mission is to continue the development of applications and
products utilizing high temperature superconductors.  Magnesensors is privately
owned by U.S. citizens and entities and is thus eligible for a variety of
government research and development contracts and grants  to fund operations.
BTi licensed certain technology, assigned certain patents and contributed cash
and certain fixed assets in connection with the formation of Magnesensors. BTi
will receive royalty-free licenses to any technology developed by Magnesensors
for use in its medical equipment.

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, the spine 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 where certain radioactively labeled substances have
accumulated after having 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.


                                          3
<PAGE>

Functional Magnetic Resonance Imaging (fMRI) is used to create images related to
localized changes in blood flow and oxygenation  in the brain.  While fMRI has
an 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.

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 sometimes inserted into the body in an
attempt to obtain accurate localization of functional abnormalities in the brain
prior to surgery or heart prior to ablation procedures.  This procedure is
invasive, very costly and involves risk and discomfort to the patient.

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 resolution 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 costly invasive procedures.

THE MAGNES MSI SYSTEMS

The Company's current MSI systems, the single sensor Magnes I, the dual sensor
Magnes II, the whole-head Magnes 2500  and the cardiothoracic Magnes 1300C, 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 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".


                                          4
<PAGE>

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 Magnes 1300C system employs 67 magnetic detectors installed in a sensor with
a shallow concave lower surface designed to fit the human chest, abdomen or
lower back.

The Company has received 510(k) premarket notification clearance from the United
States Food and Drug Administration (the"FDA")  for its Magnes I, Magnes II and
Magnes 2500 WH systems for applications relating to the brain. In addition, the
Magnes I, Magnes II and Magnes 2500 WH  systems have received approval from the
Japanese Ministry of Health and Welfare ("JMHW") for sale in Japan as a clinical
device. The Company  has not yet applied to the FDA or similar regulatory
agencies for clearance on the clinical use of the Magnes 1300C. There can be no
assurance that such clearance will be obtained, when applied for.

MEDICAL APPLICATIONS

The Company believes its Magnes systems have  commercial potential in the
diagnosis and treatment of neurological and other disorders.  However, as a
developing medical technology, the Magnes systems face several challenges to
commercial success.  Medical applications for the Magnes systems must be
developed that result in better patient care than existing technologies. The
Company has regulatory approval to sell its Magnes I, Magnes II and Magnes 2500
WH systems as clinical devices for applications relating to the brain. However,
in general, reimbursement for MSI procedures must be obtained from third party
payors and the Magnes systems must, therefore, provide a demonstrated economic
benefit to the health care provider.

Currently, the Company believes there are two medically accepted applications
for its Magnes systems, namely,  presurgical functional mapping of the brain and
assistance in the diagnosis and surgical treatment planning for epilepsy.
Reimbursement from more than 100 insurance companies has been obtained for both
of these procedures combined on a case - by- case basis. However, the expected
volume of such procedures at most hospitals under current standard treatment
practices may not provide sufficient operating revenue to completely offset the
investment and operating cost of a Magnes system.

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. The Company is currently focused primarily
on establishing the clinical and functional efficacy of MSI applications for
functional mapping and for epilepsy.  The Company is also pursuing programs to
increase awareness of MSI technology to its target market of neurosurgeons,
neurocardiologists, neurologists, psychologists, epileptologists, and
gastroenterologists. 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.


                                          5
<PAGE>

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.  However, by
relating information about the primary sensory function areas provided by the
Company's MSI systems to MRI-generated anatomical images,  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 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.  It is estimated that 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 were being performed yearly due to the limited
facilities which are available and are 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


                                          6
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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 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
assess the severity and potential consequences of the physical damage and to
help determine the appropriate course of treatment.

ISCHEMIC DISORDERS, STROKE AND OTHER BRAIN APPLICATIONS: 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. As an indicator of neurological function, MSI
may be useful to monitor rehabilitation and treatment of stroke patients.
Recent research has also suggested that the Company's MSI systems could be
beneficial in the diagnosis of brain disorders such as Alzheimer's disease,
dyslexia, autism and schizophrenia.

CARDIOTHORACIC AND OTHER  APPLICATIONS IN THE BODY

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 Magnes 1300C system can help address both challenges.
In addition, the newly developed Magnes 1300 C system might be beneficial in
evaluating other parts of the body, including applications to gastrointestinal
ischemia, spinal cord function and fetal heart monitoring. The Company has not
yet applied for clearance for clinical use of the Magnes 1300C to the FDA or
similar regulatory agencies.

CLINICAL COLLABORATIONS

The Company's primary near term objective is to accelerate the development, use
and commercialization of its MSI systems by cooperating with researchers and
physicians at key medical


                                          7
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centers. 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.

As of September 30, 1997, the Company's MSI systems are installed for
neurological use at twenty (20) sites and nonneurological use at one (1) site
worldwide, listed in Table 1. 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
               NAME OF INSTITUTION                                 LOCATION
               -------------------                                 --------
     The Scripps Clinic & Research Foundation (1)                United States
     U.C. San Francisco Medical Center                           United States
     New York University Medical Center                          United States
     University of Texas, Houston                                United States
     University of Tokyo Hospital                                Japan
     National Institute for Physiological Sciences               Japan
     Kyushu University Hospital                                  Japan
     National Epilepsy Center                                    Japan
     Communications Research Laboratory                          Japan
     National Chubu Hospital                                     Japan
     University of Muenster                                      Germany
     University of Bochum (2)                                    Germany
     Institute of Medicine-KFA Juelich                           Germany
     University of Erlangen                                      Germany
     University of Konstantz                                     Germany
     Max Planck Institute, Leipzig                               Germany
     University of Magdeburg                                     Germany
     University of Vienna General Hospital                       Austria
     University of Rennes                                        France
     FORENAP Institute for Research in Neurosciences
     and Psychiatry (Pending final customer acceptance)          France
     Karolinska Hospital                                         Sweden
          (1) Represents equipment on loan under a
              collaboration agreement.
          (2) Represents nonneurological site for Magnes 1300C


                                          8
<PAGE>

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 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 each with 500 or more beds
and approximately 780 hospitals each 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 further
regulatory approvals are obtained, adequate third-party reimbursement for MSI
tests becomes routine, MSI procedure costs decline and physician and decision
makers in medical institutions conclude that MSI procedures are more beneficial
and economical than existing diagnosis and treatment methods. If the company is
unable to gain general market acceptance of its MSI systems, the Company's
business, financial condition and results of operations will be materially
adversely affected.

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


                                          9
<PAGE>

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 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 Company's Magnes systems 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, (v) public relations activities, and (vi) 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 systems in the United States.  The European and
Asian markets are served, respectively, by the Company's branch office 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.  This distribution agreement with SMI was extended for an additional
five (5) years on January 23, 1997 with the modification that SMI's distribution
rights outside of Japan would be non-exclusive. BTi is currently seeking
additional representation in other areas of Asia such as Korea and China.


                                          10
<PAGE>

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,  EPILEPSIA, ANNALS OF NEUROLOGY and THE JOURNAL OF
EPILEPSY AND BRAIN  among  others. The data has 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
100 insurance companies and other healthcare providers have now approved
reimbursement for certain MSI procedures.  Although initial results are
encouraging and a number of 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 the
Company's Magnes I and Magnes II systems received approval from the JMHW for
sales in Japan as clinical devices, Japanese public and private hospitals may
purchase the systems for clinical use on patients.  Reimbursement is not yet
available from the Japanese government or Japanese third-party payors, but
private Japanese hospitals are allowed to charge individual patients privately
for procedures with the Magnes systems.  The Kyushu University Magnes I system
and the National Epilepsy Center Magnes II 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 Japan.

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


                                          11
<PAGE>

PRODUCT PRICES AND  TERMS OF SALE

The current prices for the Company's MSI systems range from $1.0-$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.  For European customers who receive their funding
from governmental agencies, the Company is generally required to provide a bank
guarantee for the amount of the deposit which is usually released upon shipment
and/or acceptance by the customer. The time between placement of an order and
installation typically ranges between six and twelve months.  The Company  also
enters into special collaboration and sale arrangements with certain medical
centers to promote clinical applications development.

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 branch office in Germany, both of which maintain customer service
departments 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 areas.

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 competing
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 two current active competitors for the
currently limited number of whole head systems being purchased worldwide.  This
aggressive competition is likely to affect future profit margins on sales of the
Company's whole head system, the extent of which is not presently determinable.


                                          12
<PAGE>

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. Neuromag Ltd. has received FDA
clearance for marketing one of its systems as a clinical device in the United
States.  It is being marketed by Picker, Inc. in the United States and Europe,
and by Elekta in Asia. An MSI system produced by CTF Systems, Inc. has been
cleared for sale as a clinical device in Japan by the JMHW.  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 an MSI
system by a consortium of Japanese companies coordinated by the Japan Ministry
of International Trade and Industry ("MITI")  This program terminated in 1996
without the introduction of a developed MSI system.  Other large multinational
corporations, 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, many of which have significantly greater financial, manufacturing,
distribution, and technical resources than the Company, will depend upon various
factors, including BTi's ability to continue its technological and market
development leadership role and raise necessary capital for further development
and commercialization.

BACKLOG

As of September 30, 1997, the aggregate amount of firm backlog orders for the
Company's products was $4,763,000, of which the Company expects to fill
approximately $4,100,000  before September 30, 1998. The backlog is composed
primarily of an order for a Magnes 2500 WH shipped, but not accepted by the
customer prior to September 30, 1997, an order for an expanded 248-channel
sensor, and service revenues on systems shipped before September 30, 1997. As of
September 30, 1997, the Company has received related advanced payments from
customers totaling $ 3,050,000. 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 timing of orders received,
installations completed and customer acceptances received 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.


                                          13
<PAGE>

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.  Because of this innovation, 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 competitive advantage for the
Company's future MSI systems. This construction technique and subsequent system
design have received U.S. patent numbers 4,827,217; 5,494,101; 5,494,033;
5,497,828; 5,441,107; 5,471,985 and Canadian patent number 2,155,076.  The
Company has applied for additional patents covering innovative work.

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 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. The use of those processes has been licensed to
Magnesensors for applications other than in medical equipment.

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


                                          14
<PAGE>

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
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.

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 product research and development primarily through
public and private sales of stock,  and revenues from product sales and
product-related services. During fiscal 1997, 1996


                                          15
<PAGE>

and 1995, the Company's research and development expenses totaled $2,953,000,
$7,767,000 and $5,507,000, respectively. The Company  substantially completed
the design of its Magnes 2500 WH system in fiscal 1996 and decreased
expenditures in 1997 as part of the Company's restructuring.

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 production requirements.  However, through the
Company's joint ownership of Magnesensors, Inc., the Company has the ability 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 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 systems 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 California Health
Services.  In particular, the FDA and California Health Services have
promulgated regulations to which the Company must adhere including, but not
limited to, minimum manufacturing standards, product operating effectiveness and
functional 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,  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.


                                          16
<PAGE>

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 devices 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 Magnes 2500 WH system has
been found to be substantially equivalent  to the Magnes II system. The
Company's Magnes MSI systems are classified as Class II devices, and therefore
are subject to the general controls of Class I devices and to performance
standards that have not yet been defined for Class II devices. The Company
believes that its Magnes 1300C system will be found substantially equivalent to
previous Magnes devices.  However, no such determination has been made by the
FDA.

The Company has filed, and subsequently received clearance for, Section 510(k)
premarket notifications  with the FDA for applications of the Magnes I, Magnes
II and Magnes 2500 WH systems relating to the brain. That clearance enables the
Company to market the Magnes I , Magnes II and Magnes 2500 WH systems as
diagnostic devices for clinical use relating to applications of the brain rather
than research equipment. The Company has not yet applied for clearance for
clinical use to the FDA or similar regulatory agencies for the Magnes 1300C.

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 rights, 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 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 for compliance with 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 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


                                          17
<PAGE>

export the Magnes systems 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 and maintain regulatory acceptance for marketing for
clinical use.  There can be no assurance that the Company will be able to obtain
and maintain such approvals.  The Magnes I system received approval in Japan
from the JMHW in 1992 for sale as a clinical device, the Magnes II system
received JMHW approval in 1995 and the Magnes 2500 WH received JMHW approval in
May 1997.

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, 1997, the Company held 43 patents in the United States. One of
these had counterpart patents issued in the United Kingdom, France, Germany, the
Netherlands and Canada and four others have counterpart patents granted by the
European Patent Organization and one other in Japan.  As of September 30, 1997
the Company had filed 5 U.S. patent applications that are in various stages of
the patent prosecution process.  The Company has also filed 6 applications with
the European Patent Organization for patent protection in Western Europe, 13
applications in Japan and 2 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.

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. Rights to
certain of the Company's patents associated with the application of so-called
high temperature superconductors  have been assigned to Magnesensors, Inc.,
partially owned by BTi and Quantum Magnetics.

Magnes-Registered Trademark- and Biomagnetic Technologies-TM- (with and without
the design) and BTi-TM- are registered  trademarks of the Company  by
registration with the State of California and by registration with the U.S.
Patent and Trademark Office.


                                          18
<PAGE>

HUMAN RESOURCES

As of September 30, 1997, the Company employed 58 full-time employees at its
facilities in San Diego, California and Germany.  None of the Company's
employees are 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. Beginning in December 1996, the Company
restructured its operations due to lower short-term market projections for its
MSI systems, reducing its workforce by 44 full-time employees during fiscal
1997.

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 a five year lease agreement which expires in February 2003.
Average monthly lease payments over the term of the lease approximate $50,700.

The Company's branch office in Germany leases approximately 3,000 square feet at
Gruener Weg 82, D-5100 Aachen, Germany pursuant to a year-to-year lease
agreement which expires in December 1998.  Monthly lease payments are
approximately $1,900.  Sales and service for the Company's European operations
are conducted from the German facility.

ITEM 3.   LEGAL PROCEEDINGS.

Neither the Company nor its German 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 or 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, formerly traded on the Nasdaq National Market under
the symbol "BTIX",  was delisted as of March 10, 1997 for lack of compliance
with the net tangible assets requirement of $4 million dollars. It is currently
trading on the Nasdaq Over the Counter Bulletin Board. The following table sets
forth the range of high and low closing sales prices by quarter for the
Company's Common Stock.

          Fiscal Year 1997          High                 Low
          ----------------          ----                 ---
            1st Quarter            $ 1.00              $  .47
            2nd Quarter            $  .44              $  .16
            3rd Quarter            $  .73              $  .20
            4th Quarter            $  .74              $  .36



          Fiscal Year 1996          High                 Low
          ----------------          ----                 ---
            1st Quarter            $ 1.88              $ 1.00
            2nd Quarter            $ 1.94              $ 1.31
            3rd Quarter            $ 1.53              $ 1.03
            4th Quarter            $ 1.44              $  .75


As of December 31, 1997, there were approximately 273 holders of record of the
Company's Common Stock. The last reported closing price for the Company's Common
Stock on the Nasdaq Over the Counter Bulletin Board on January 12, 1998 was $.48
per share.

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 earnings, if any, for the development
of its business.


                                          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, 1997 and with respect to the consolidated balance sheets at
September 30, 1997 and 1996, 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, 1994 and 1993 and the balance
sheet data at September 30, 1995, 1994 and 1993 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.

                                             Years Ended September 30,
                              --------------------------------------------------

STATEMENT OF OPERATIONS DATA:      1997      1996      1995      1994      1993
                                   ----      ----      ----      ----      ----
                                          (restated)
Total revenues                  $10,592    $  733  $  8,981  $  3,119   $ 3,891
Net loss                         (5,242)  (15,566)   (6,673)  (10,313) ( 10,989)
Net loss per share                 (.11)     (.39)     (.27)  (  1.03)  (  1.11)
Shares used in computing
    net loss per share           45,790    39,950    24,783     9,977     9,912


                                               September 30,
                              --------------------------------------------------
BALANCE SHEET DATA:                1997      1996      1995      1994      1993
                                   ----      ----      ----      ----      ----
                                          (restated)
Working (deficiency) capital    $(2,284)    $(785)  $10,274  $( 2,114) $  7,115
Total assets                      6,002    16,250    20,124     9,419    14,434
Long term obligations               219        48       493       459       650
Shareholders' (deficit) equity   (1,286)      854    13,368     2,283    11,970

See Note 12 of notes to consolidated financial statements included in Part II,
Item 8 regarding restatement of 1996 data.


                                          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 may contain forward-looking statements that involve risks and 
uncertainties. The Company's future results could differ materially from 
those discussed here. Factors that could cause or contribute to such 
differences include, but are not specifically limited to, failure to satisfy 
performance obligations, timely product development, changes in economic 
conditions in various markets the Company serves, 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 systems on large potential commercial market
applications such as brain surgery, the diagnosis and surgical planning for
treatment of epilepsy and life-threatening cardiac arrhythmias.

Twenty-one Magnes systems were installed in medical and research institutions
worldwide at the end of fiscal 1997.  To date, more than 5,000 MSI examinations
have been performed on patients and control subjects at the Company's
application development sites. Related findings by BTi and its collaborators
have been published in more than 75 scientific and medical papers.  Since the
first reimbursement for MSI procedures was received in September 1993, more than
100 insurance companies have approved reimbursement on a case-by-case basis for
certain MSI procedures performed with the Company's Magnes MSI systems.

In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion of
the existing Magnes I and Magnes II systems product line.  Development of the
Magnes 2500 WH hardware was substantially completed in fiscal year 1996. The
Magnes 2500 WH allows simultaneous examination of the entire brain and is
designed for evaluating ambulatory or critically ill patients in a seated or
fully reclined position. As of September 30, 1997 the Company had shipped eight
Magnes 2500 WH systems and received seven final acceptances from customers.

The current price of BTi's MSI systems ranges from approximately $1.0 to $2.5
million, depending upon system configuration.  A significant portion of the
Company's sales have been in foreign markets.  The Company generally prices its
European sales in the currency of the country in which the product is sold and
the prices of such products in dollars will vary as the value of the dollar
fluctuates against the


                                          22
<PAGE>

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 partially
hedge such foreign currency exposure.

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

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 CEO.  The restructuring also resulted in a reduction of 44
employees.

The Company believes that the relatively small number of proven medical 
applications for the Magnes systems, the lack of routine reimbursement for 
MSI procedures and the uncertainty of product acceptance in the U.S. market 
have limited system sales through fiscal 1997.  Additionally, it is not 
possible to reliably predict the timing and extent of future product sales 
due to the uncertainties of medical applications, reimbursement and product 
acceptance. The Company does not anticipate multiple sales to the same 
end-user and at current sales volumes, the sale of one Magnes system may have 
a significant impact on the Company's financial position and results of 
operations during any reporting period.  As a result, quarterly and annual 
operating performance will continue to fluctuate.

RESULTS OF OPERATIONS

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

FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996

Results of operations improved in fiscal 1997 compared to fiscal  1996 primarily
due to the receipt of seven final customer acceptances of Magnes 2500 WH systems
and the Company's restructuring which began in December 1996. The restructuring
reduced headcount by 44 employees, resulting in scaling back and cost savings in
general and administrative, marketing and sales, and research and development
expenses.

Product revenues for fiscal 1997 totaled $10,131,000 as compared to $168,000 in
fiscal 1996. Increased product revenues in fiscal 1997 resulted primarily from
customer acceptances of seven Magnes 2500 WH systems. The Company's product
revenues in fiscal 1996 consisted solely of Magnes components as no Magnes
systems were accepted by customers.


                                          23
<PAGE>

Service revenues for fiscal  1997 totaled $395,000 as compared to $565,000 in
fiscal 1996, a decrease of 30%. The reduction in service revenue is the result
of first year service contracts on Magnes I and Magnes II systems having been
substantially completed in 1996 for units shipped in 1995.  Service contracts
pertaining to the Magnes 2500 WH systems did not commence until final customer
acceptances were received in the second quarter of fiscal 1997.

Product costs totaled $6,333,000 in fiscal 1997 as compared to  $2,565,000 in
fiscal 1996. Product costs increased due to sales of seven Magnes systems in
fiscal 1997 as compared to no system sales in fiscal 1996.

Research and development expenses totaled  $2,953,000 as compared to $7,767,000
in fiscal 1996.  The decrease of 62% is related to substantial completion of
the development of the Magnes 2500 WH system in fiscal 1996 and the Company's
restructuring in fiscal 1997 which resulted in reduced payroll and related
research and development costs.

Marketing and sales expenses totaled  $1,902,000 in fiscal 1997 as compared to
$2,798,000 in fiscal 1996, a decrease of 32%. The decrease was primarily due to
the restructuring of operations, including a reduction in marketing and sales
personnel, which commenced in December 1996.

General and administrative expenses totaled $2,190,000 for fiscal 1997 as
compared to $2,958,000 for fiscal 1996, a decrease of 26% attributed to the
restructuring of the Company's operations and reduction of administrative
personnel.

Interest expense totaled $2,339,000 for fiscal 1997 as compared to $788,000 
for fiscal 1996. Interest expense consisted primarily of a non-cash cost of 
$2,250,000 and $750,000 in fiscal 1997 and 1996 respectively, pertaining to 
the conversion feature of a note payable to shareholder. (See Note 12 to 
consolidated financial statements included in Part II, Item 8).

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
$8,893,000 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 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.


                                          24
<PAGE>

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 components revenue and four Magnes
II systems sales.  Sales to SMI represented approximately  6% 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 resume production of Magnes II systems
in the future if orders are received. However, 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.

Interest expense increased 38% in fiscal 1996 to $788,000 from  $573,000 in
fiscal 1995 as the net result of a $750,000 non-cash interest charge in 1996
related to the conversion feature of the note payable to shareholder entered
into in August 1996, and the conversion of short-term notes in exchange for the
issuance of common stock that occurred in fiscal 1995.

The Company recorded a net loss of $15,566,000 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.

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


                                          25
<PAGE>

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 49%, 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 52% and 127% 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

At September 30, 1997, the Company's current liabilities exceeded current
assets, resulting in a working capital deficiency of $2,284,000. At September
30, 1996, the Company had a working capital deficiency of $785,000. The net
increase in the working capital deficiency is primarily due to the release of
customer deposits that were being held as restricted cash until the final
acceptances of the Magnes 2500 WH systems which reduced the deficiency, offset
by negative cash flows from operations and the $2,250,000 of debt discount
amortization on the convertible note payable to shareholder, which increased the
deficiency.  Restricted cash similarly decreased from $6,585,000 to $692,000 as
a result of these final acceptances and payment of executive termination costs.
Cash and cash equivalents and short-term investments, exclusive of any
restricted cash, declined by $1,267,000 to $1,229,000 at September 30, 1997. The
Company's operations were funded by existing cash and short-term


                                          26
<PAGE>

investment resources, the release of restricted cash, and a working capital loan
from Dassesta, a principal shareholder.

Capital equipment expenditures totaled $145,000 in fiscal 1997 compared to
$577,000 in fiscal 1996. The Company anticipates that capital equipment
expenditures will amount to less than $100,000 in fiscal 1998.

BTi has financed its operations largely through private and public sales of
equity and debt securities. In August 1996, the Company entered into a loan
agreement with Dassesta International S.A. ("Dassesta") for $3,000,000 bearing
interest at 9% per annum, maturing in February 1997.  Under the terms of the
agreement , the note plus accrued interest was convertible at the option of the
company into common shares upon execution of the agreement at $.40 per share or
by Dassesta upon the earlier of maturity, default, or significant change in
ownership of BTi at $.40 per share.  The Company converted the $3,000,000 loan
principal and related accrued interest of $87,040 into 7,717,602 shares of the
Company's common stock on December 31, 1996.

In May 1997, the Company entered into a loan facility with Dassesta
International, S.A. ("Dassesta"), the Company's then controlling shareholder.
The loan facility provides for maximum borrowings of $1,700,000 and expires on
December 31, 1998.  Interest accrues on outstanding principal at 10% and is
payable on December 31, 1997 and 1998.  The loan is collateralized by certain of
the Company's accounts receivable and requires principal repayment upon
collection of such receivables.  As of September 30, 1997, the Company had
$975,000 outstanding under the loan which was repaid subsequent to year end.
(see Notes 1 and 8 to consolidated financial statements included in Part II,
Item 8.)

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

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, 1998 are 
expected to substantially exceed cash projected to be generated from 
operations. Management is currently negotiating with several private overseas 
investors, including Dassesta and members of the Company's Board of Directors 
to obtain further equity financing.  The Company hopes to raise such 
additional equity financing and anticipates meeting its obligations in the 
normal course of business through fiscal 1998.  However, there can be no 
assurance that the Company will be able to obtain such additional financing.  
Without such additional financing, there is substantial doubt concerning the 
Company's ability to operate as a going concern. The Company believes that 
its current cash including the proceeds from the December 1997 sale of 
5,500,000 unregistered shares of common stock is sufficient to support its 
operating needs through February 1998. The consolidated financial statements 
do not include any adjustments that might result from the outcome of this 
uncertainty and

                                          27
<PAGE>

asset and liability carrying amounts do not purport to represent realizable
settlement values. (See "Risks and Uncertainties")

RISKS AND UNCERTAINTIES

To date the Company has been engaged principally in research and development
activities, and has made only low volume sales to medical research institutions.
The Company incurred net losses of $5,242,000, $15,566,000, and $6,673,000 in
fiscal 1997, 1996, and 1995, respectively and has reported losses in every year
since 1982.  The Company also has negative cash flows from operations of
$2,032,000, $12,808,000 and $4,402,000 in fiscal 1997, 1996, and 1995,
respectively. At September 30 1997, the Company has an accumulated deficit of
$85,855,000 and a working capital deficiency of $2,284,000. Management
anticipates that capital and working capital requirements in fiscal 1998 will
substantially exceed cash projected to be generated by operations.

The Company currently anticipates that its existing capital resources, including
the net proceeds from the December 1997 sales of stock to Dassesta and Bank Leu
and the reduction in the scope of its operations will be sufficient to provide
operating capital required to meet its obligations in the normal course of
business through February 1998.

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

The Company's commercial success is also highly dependent on the availability of
reimbursement for procedures using the MSI system.  To date reimbursements from
third party payors are on a case-by-case basis.  As of December 31, 1997, there
have been limited reimbursements from  third party payors in the U.S. Although
the number of third party payors making reimbursements has increased,  there is
no assurance that third party reimbursements will become widely available.
Reimbursements are not currently provided for MSI procedures by the United
States government, nor is there any assurance that the U.S. government will
authorize or budget for such procedures in the future. If widespread
availability of reimbursement from government and private insurers is not
achieved, the Company's financial position, results of operations and cash
flows would be materially adversely affected. The Company also cannot predict
what legislation relating to its business or the health care industry may be
enacted in the future, including legislation relating to third party
reimbursement, or what effect such legislation may have on its financial
position, results of operations and cash flows.

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


                                          28
<PAGE>

provide or be perceived as providing greater value than the Company's products.
Any such development could have a material adverse effect on  the Company's
financial condition, results of operations and cash flows.

Additionally, there has been recently, and continues to be, ongoing significant
price competition from the Company's competitors for the currently limited
number of whole head systems being purchased worldwide.  This aggressive
competition is likely to affect future profitability of the Company's Magnes
2500 WH system, the extent of which is not presently determinable.



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Company's consolidated financial statements as of September 30, 1997 and
1996, and for each of the three years in the period ended September 30, 1997 and
the reports of independent accountants are included in this report as listed in
the index on page 31 of this report ( Item 14 (a)).

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

Information required for this item is set forth in Form 8-K dated September 26,
1997 and filed with the Securities and Exchange Commission on October 2, 1997
and is incorporated by reference as part of this report.

                                       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
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement and Notice of Annual Meeting of Shareholders "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.


                                          29
<PAGE>

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.


                                          30
<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 Public Accountants. . . . . . . .   38

               Report of Independent Accountants . . . . . . . . . . . . 39

               Report of Independent Accountants on Financial
               Statement Schedule. . . . . . . . . . . . . . . . . . . . 40

               Consolidated Balance Sheets at September 30, 1997 and
               1996. . . . . . . . . . . . . . . . . . . . . . . . . . . 41

               Consolidated Statements of Operations for the three years
               ended September 30, 1997. . . . . . . . . . . . . . . . . 42

               Consolidated Statement of Shareholders' (Deficit) Equity
               for the three years ended September 30, 1997. . . . . . . 43

               Consolidated Statements of Cash Flows for the three years
               ended September 30, 1997. . . . . . . . . . . . . . . . . 44

               Notes to Consolidated Financial Statements. . . . . . . . 45

          (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:

          A Current Report on Form 8-K dated September 26, 1997 was filed by the
          Company on October 2, 1997 reporting the change in the Company's
          independent accountants.

     (c)  Exhibits

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


                                          31
<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.


                                          32
<PAGE>

     No.       Description of Document

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

+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(12)  Offshore Note Purchase Agreement between the Company and Dassesta
           International, S.A. dated  August 13, 1996.

10.74(12)  Convertible Advance Promissory Note  with Dassesta International
           S.A.

10.75      Extension of Sumitomo Metal Industries, Ltd. dated January 23, 1997.

   21     Subsidiary of the Company (Biomagnetic Technologies, Gmbh)

   23.1   Consent of Arthur Andersen LLP

   23.2   Consent of Price Waterhouse LLP

   24     Power of Attorney.

   27.1   Financial Data Schedule-1997

   27.2   Financial Data Schedule-1996 (restated)


                                          33
<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 the Company's Current Report on Form 8-K, filed
     April 14, 1995.

(12) 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 1996 Form 10-K

+    Management contract or compensatory plan or arrangement.


                                          34
<PAGE>

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.


                                          35
<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/ D. Scott Buchanan                                    January 14, 1998
     ---------------------                                    ----------------
     D. Scott Buchanan                                        Date
     President, Chief Executive Officer


                                          36
<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/ D. Scott Buchanan                             January 14, 1998
     ---------------------                             ----------------
     D. Scott Buchanan                                 Date
     President, Chief Executive Officer
     Director


By   /s/ Herman Bergman                                January 14, 1998
     ------------------                                ----------------
     Herman Bergman                                    Date
     Vice President Finance, Chief Financial Officer,
     Chief Accounting Officer, Corporate Secretary



By             *                                       January 14, 1998
                                                       ----------------
     Jerry C. Benjamin, Director                       Date


By             *                                       January 14, 1998
                                                       ----------------
     Martin P. Egli, Director                          Date


By             *                                       January 14, 1998
                                                       ----------------
     Enrique Maso, Chairman of the Board               Date



By             *                                       January 14, 1998
                                                       ----------------
     James V. Schumacher, Director                     Date



*By  /s/ D. Scott Buchanan
     ---------------------
     D. Scott Buchanan
     (Attorney-in-Fact)


                                          37

<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated balance sheet of Biomagnetic 
Technologies, Inc. (a California corporation) and subsidiary as of September 
30, 1997, and the related consolidated statements of operations, 
shareholders' (deficit) equity and cash flows for the year then ended.  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 audit.

We conducted our audit in accordance with generally accepted auditing 
standards.  Those standards 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.  
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audit provides a 
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of Biomagnetic Technologies, 
Inc. and subsidiary as of September 30, 1997, and the results of their 
operations and their cash flows for the year then ended in conformity with 
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the 
Company will continue as a going concern.  As discussed in Note 1 to the 
financial statements, the Company has incurred recurring losses from 
operations, has net capital and working capital deficiencies and short-term 
liquidity concerns 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 1.  The financial statements do  not include any 
adjustments that might result from the outcome of this uncertainty.

Our audit was made for the purpose of forming an opinion on the basic 
financial statements taken as a whole.  Schedule II-Valuation and Qualifying 
Accounts is presented for purposes of complying with the Securities and 
Exchange Commission's rules and is not part of the basic financial 
statements. The schedule has been subjected to the auditing procedures 
applied in the audit of the basic financial statements and, in our opinion, 
fairly states in all material respects, as of and for the year ended 
September 30, 1997, the financial data required to be set forth therein in 
relation to the basic financial statements taken as a  whole.


San Diego, California                                  /s/ ARTHUR ANDERSEN LLP
December 19, 1997

                                      38
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated balance sheets and the related consolidated 
statements of operations, of changes in shareholders' (deficit) equity and of 
cash flows as of and for each of the two years in the period ended September 
30, 1996 (appearing on pages 41 through 44 of the Biomagnetic Technologies, 
Inc. Form 10-K) present fairly, in all material respects, the financial 
position, results of operations and cash flows of Biomagnetic Technologies, 
Inc. and its subsidiary as of and for each of the two 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.  We have not 
audited the consolidated financial statements of Biomagnetic Technologies, 
Inc. for any period subsequent to September 30, 1996.

The accompanying consolidated financial statements referred to above have 
been prepared assuming that the Company will continue as a going concern.  As 
discussed in Note 1 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 discussed in Note 1. 
The consolidated financial statements referred to above do not include any 
adjustments that might result form the outcome of this uncertainty.

As discussed in Note 12 to the consolidated financial statements, the Company 
has restated certain 1996 balances to comply with a March 1997 announcement 
by the staff of the Securities and Exchange Commission on accounting for 
convertible securities having beneficial conversion features.


/s/ PRICE WATERHOUSE LLP

San Diego, California
January 10, 1997, except as to Note 12, which is as of December 19, 1997

                                      39
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS
                       ON FINANCIAL STATEMENT SCHEDULE


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

Our audits of the consolidated financial statements of Biomagnetic 
Technologies, Inc. and its subsidiary referred to in our report dated January 
10, 1997, except as to Note 12, which is as of December 19, 1997, appearing 
on page 39 also included an audit of the Financial Statement Schedule II of 
Biomagnetic Technologies, Inc. and its subsidiary as of and for each of the 
two years in the period ended September 30, 1996 appearing on page 60.  In 
our opinion, this Financial Statement Schedule of Biomagnetic Technologies, 
Inc. and its subsidiary present fairly, in all material respects, the 
information set forth therein when read in conjunction with the related 
consolidated financial statements.



/s/ PRICE WATERHOUSE LLP

San Diego, California
January 10, 1997, except as to Note 12, which is as of December 19, 1997

                                      40
<PAGE>

                        BIOMAGNETIC TECHNOLOGIES, INC.
                         CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                             September 30,
                                                                        1997               1996
                                                                                    (Restated Note 12)
                                                                   --------------   ------------------
<S>                                                                 <C>                 <C>
ASSETS
Cash and cash equivalents                                           $  1,228,734        $  1,752,092
Short-term investments                                                         -             744,138
Restricted cash and short-term investments                               500,181           6,084,555
Accounts receivable, less allowance for doubtful
  accounts of  $10,420 in 1997 and 1996                                  398,454              16,731
Inventories                                                            2,387,975           5,627,515
Prepaid expenses and other current assets                                269,457             337,792
                                                                   --------------   ------------------
Total current assets                                                   4,784,801          14,562,823
                                                                   --------------   ------------------
Net property and equipment                                               526,444             907,964
Investment in Magnesensors                                               160,000                   -
Restricted cash                                                          192,020             500,000
Other assets                                                             339,063             278,814
                                                                   --------------   ------------------
TOTAL ASSETS                                                        $  6,002,328        $ 16,249,601
                                                                   --------------   ------------------
                                                                   --------------   ------------------

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Accounts payable                                                    $  1,340,992        $  2,632,917
Accrued liabilities                                                      934,012           1,896,245
Accrued salaries and employee benefits                                   511,843             860,155
Customer deposits                                                      2,172,160           9,208,326
Deferred revenue                                                       1,134,938                   -
Note payable to shareholder                                              975,000             750,000
                                                                   --------------   ------------------
Total current liabilities                                              7,068,945          15,347,643
Other long-term liabilities                                              219,489              48,070
                                                                   --------------   ------------------
Total liabilities                                                      7,288,434          15,395,713
                                                                   --------------   ------------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' (DEFICIT) EQUITY
Common stock -- no par value, 100,000,000 shares authorized;
Shares issued and outstanding 47,720,887 in 1997 and
39,974,222 in 1996                                                    81,568,769          78,467,197
Additional paid-in capital                                             3,000,000           3,000,000
Accumulated deficit                                                  (85,854,875)        (80,613,309)
                                                                   --------------   ------------------
Total shareholders' (deficit) equity                                  (1,286,106)            853,888
                                                                   --------------   ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT (EQUITY)                $  6,002,328        $ 16,249,601
                                                                   --------------   ------------------
                                                                   --------------   ------------------
</TABLE>

               See Notes to Consolidated Financial Statements.
                                      41
<PAGE>

                        BIOMAGNETIC TECHNOLOGIES, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                            Years Ended September 30,
                                                1997                  1996                  1995
                                                               (Restated, Note 12)
                                          ----------------     -----------------      ----------------
<S>                                        <C>                   <C>                     <C>
REVENUES
  Products                                 $  10,130,727         $      167,684          $  8,771,502
  Product services                               395,327                564,921               209,756
  Contract research                               65,838                      -                     -
                                          ----------------     -----------------      ----------------
                                              10,591,892                732,605             8,981,258

COST OF REVENUES
  Product                                      6,333,270              2,565,454             4,454,992
  Product  services                              466,763                111,173                68,854
  Contract research                               64,771                      -                     -
                                          ----------------     -----------------      ----------------
                                               6,864,804              2,676,627             4,523,846

                                          ----------------     -----------------      ----------------
GROSS MARGIN                                   3,727,088             (1,944,022)            4,457,412

OPERATING EXPENSES
  Research and development                     2,953,009              7,767,199             5,507,054
  Marketing and sales                          1,902,157              2,798,248             2,369,974
  General and administrative                   2,189,878              2,957,571             2,299,974
                                          ----------------     -----------------      ----------------
                                               7,045,044             13,523,018            10,177,002
                                          ----------------     -----------------      ----------------
OPERATING LOSS                                (3,317,956)           (15,467,040)           (5,719,590)

  Interest expense                            (2,339,439)              (788,291)             (573,261)
  Interest income                                223,565                524,895               528,987
  Other income (expense), net                    193,064                164,623              (314,234)
                                          ----------------     -----------------      ----------------

LOSS BEFORE EXTRAORDINARY LOSS                (5,240,766)           (15,565,813)           (6,078,098)

  Extraordinary loss                                   -                      -              (594,715)
                                          ----------------     -----------------      ----------------

LOSS BEFORE PROVISION FOR INCOME TAXES        (5,240,766)           (15,565,813)           (6,672,813)
  Provision for Income Taxes                         800                      -                     -
                                          ----------------     -----------------      ----------------

NET LOSS                                   $  (5,241,566)        $  (15,565,813)         $ (6,672,813)
                                          ----------------     -----------------      ----------------
                                          ----------------     -----------------      ----------------

NET LOSS PER SHARE
  Loss before extraordinary loss                   $(.11)                 $(.39)                $(.25)
  Extraordinary loss                                   -                      -                  (.02)
                                          ----------------     -----------------      ----------------
  Net loss                                         $(.11)                 $(.39)                $(.27)
                                          ----------------     -----------------      ----------------
                                          ----------------     -----------------      ----------------

Weighted Average Number of
  Common Shares Outstanding                   45,789,916             39,950,047            24,782,800
                                          ----------------     -----------------      ----------------
                                          ----------------     -----------------      ----------------
</TABLE>

                             See Notes to Consolidated Financial Statements.
                                                   42
<PAGE>

                        BIOMAGNETIC TECHNOLOGIES, INC.
             CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
                                                                    Common Stock     Additional       Accumulated
                                                       Shares          Amount      Paid-In Capital      Deficit           Total
                                                   --------------  --------------  ---------------  ---------------  --------------
<S>                                                    <C>          <C>               <C>            <C>              <C>
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
Interest cost for conversion feature of note
  payable to shareholder (Restated,  Note 12)                   -               -        3,000,000               -       3,000,000
Net loss (Restated,  Note 12)                                   -               -                -     (15,565,813)    (15,565,813)
                                                   --------------  --------------  ---------------  ---------------  --------------
BALANCE, SEPTEMBER 30, 1996
  (RESTATED,  NOTE 12)                                 39,974,222      78,467,197        3,000,000     (80,613,309)        853,888
Exercise of stock options                                  29,063          14,532                -               -          14,532
Conversion of note payable to shareholder
  and related accrued interest to common stock          7,717,602       3,087,040                -               -       3,087,040
Net loss                                                        -               -                -      (5,241,566)     (5,241,566)
                                                   --------------  --------------  ---------------  ---------------  --------------
BALANCE, SEPTEMBER 30, 1997                            47,720,887   $  81,568,769     $  3,000,000   $ (85,854,875)   $ (1,286,106)
                                                   --------------  --------------  ---------------  ---------------  --------------
                                                   --------------  --------------  ---------------  ---------------  --------------
</TABLE>

                              See Notes to Consolidated Financial Statements
                                                    43
<PAGE>


                           BIOMAGNETIC TECHNOLOGIES, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                              Years ended September 30,
                                                                    1997                1996             1995
                                                                                (Restated, Note 12)
                                                                -----------     -------------------  ------------
<S>                                                             <C>             <C>                  <C>
OPERATING ACTIVITIES
Net loss                                                        $(5,241,566)       $(15,565,813)     $ (6,672,813)
Adjustments to reconcile net loss to net                                                                          
 cash used in operating activities:                                                                               
    Interest cost for conversion feature                                                                          
      of note payable to shareholder                              2,250,000             750,000                 - 
    Loss on disposition of assets                                     9,401             345,677                 - 
    Extraordinary loss                                                    -                   -           594,715 
    Depreciation and amortization                                   437,552           1,248,141         1,275,891 
    Amortization of debt issue costs                                      -                   -           265,000 
    Changes in operating assets and liabilities:
      Restricted cash                                             5,892,354          (5,484,555)       (1,104,583)
      Accounts receivable                                          (381,723)            757,888          (651,757)
      Inventories                                                 3,239,540          (3,150,721)         (279,117)
      Prepaid expenses and other current assets                      68,335             118,314           (36,668)
      Other assets                                                  (60,249)            283,742           (51,215)
      Accounts payable                                           (1,291,925)          2,435,363          (303,897)
      Accrued liabilities                                          (875,193)           (311,674)          146,031 
      Accrued salaries and employee benefits                       (348,312)            249,582            82,262 
      Customer deposits                                          (7,036,166)          5,352,139         2,299,951 
      Deferred revenue                                            1,344,938                   -                 - 
      Other liabilities                                             (38,581)            164,147            33,960 
                                                                -----------         -----------      ------------
Net cash used in operating activities                            (2,031,595)        (12,807,770)       (4,402,240)
                                                                -----------         -----------      ------------
INVESTING ACTIVITIES                                                                                              
Investment in Magnesensors                                          (80,000)                  -                 - 
Change in short-term investments, net                               744,138           9,771,564        (7,894,280)
Payments for property and equipment                                (145,433)           (577,237)         (452,732)
                                                                -----------         -----------      ------------
Net cash provided by (used in) investing activities                 518,705           9,194,327        (8,347,012)
                                                                -----------         -----------      ------------
FINANCING ACTIVITIES                                                                                              
Proceeds from issuance  of common stock,                                                                          
   net of issuance costs                                             14,532              51,607        14,809,360 
Proceeds from notes payable to shareholder                          975,000           3,000,000         2,318,182 
Principal repayments on notes payable to shareholder                      -                   -        (2,818,182)
                                                                -----------         -----------      ------------
Net cash provided by financing activities                           989,532           3,051,607        14,309,360 
                                                                -----------         -----------      ------------
                                                                                                                  
NET (DECREASE) INCREASE  IN CASH                                   (523,358)           (561,836)        1,560,108 
AND CASH EQUIVALENTS                                                                                              
                                                                                                                  
CASH AND CASH EQUIVALENTS AT                                      1,752,092           2,313,928           753,820 
BEGINNING OF YEAR                                                                                                 
                                                                                                                  
CASH AND CASH EQUIVALENTS AT                                    -----------         -----------      ------------
END OF YEAR                                                     $ 1,228,734        $  1,752,092       $ 2,313,928 
                                                                -----------         -----------      ------------
                                                                -----------         -----------      ------------

</TABLE>

            See Notes to Consolidated Financial Statements.

                                     44

<PAGE>

NOTE 1.  BUSINESS, RISKS AND UNCERTAINTIES

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

To date the Company has been engaged principally in research and development 
activities, and has made only low volume sales to medical research 
institutions.  The Company is dependent on its current Magnes 2500WH system 
as its principal product for which there are currently limited clinical 
applications.  Additional clinical applications development needs to be 
conducted with the MSI system at major medical centers before the Company can 
begin to penetrate the commercial clinical market.  There can be no assurance 
that a commercial market will develop for diagnostic or monitoring uses of 
the MSI system.  A continued lack of clinical applications and commercial 
market for the Company's Magnes 2500WH system would have a material adverse 
impact on the Company's financial position, results of operations and cash 
flows.

The Company's commercial success is also highly dependent on the availability 
of reimbursement for procedures using the MSI system.  To date reimbursements 
from third party payors are on a case-by-case basis.  As of December 31, 
1997, there have been limited reimbursement from third party payors in the US 
Although the number of third party payors making reimbursements has 
increased, there is no assurance that third party reimbursements will become 
widely available.  Reimbursements are not currently provided for MSI 
procedures by the United States government, nor is there any assurance that 
the US government will authorize or budget for such procedures in the future. 
 If widespread availability of reimbursement from the government and private 
insurers is not achieved, the Company's financial position, results of 
operations and cash flows would be materially adversely affected.  The 
Company also cannot predict what legislation relating to its business or the 
health care industry may be enacted in the future, including legislation 
relating to third party reimbursement, or what effect such legislation may 
have on its financial position, results of operations and cash flows.

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

Additionally, there has been recently, and continues to be, ongoing 
significant price competition from the Company's competitors for the 
currently limited number of whole head systems being purchased worldwide.  
This aggressive competition is likely to affect potential future 
profitability of the Company's Magnes 2500WH system, the extent of which is 
not presently determinable.

                                        45
<PAGE>

The Company incurred net losses of $5,242,000, $15,566,000, and $6,673,000 in 
fiscal 1997, 1996, and 1995, respectively, and has reported losses in every 
year since 1982.  The Company also has negative cash flows from operations of 
$2,032,000, $12,808,000, and $4,402,000 in fiscal 1997, 1996 and 1995, 
respectively.  At September 30, 1997 the Company has an accumulated deficit 
of $85,855,000, a net capital deficit of $1,286,000 and a working capital 
deficiency of $2,284,000.  Management anticipates that capital and working 
capital requirements in fiscal 1998 will substantially exceed cash projected 
to be generated by operations.

Management is currently in negotiations with several private investors to 
obtain additional equity financing which would be effected through the sale 
of unregistered shares of common stock of the Company under Regulation S. 
Dassesta International S.A. and certain members of the Company's Board of 
Directors have expressed an interest in participating in the proposed sale of 
shares.  There is no assurance that Dassesta or such individuals will provide 
any financing to the Company or provide financing on terms acceptable to the 
Company.  Additionally, there is no assurance that equity or other forms of 
financing from other sources will be available to the Company, or on terms 
acceptable to the Company.

Management currently expects, and is operating under the assumption that, the 
Company will be able to obtain such additional financing on acceptable terms. 
Management intends to use the additional financing, if obtained, to fund 
working capital needs and to manufacture and place additional Magnes 2500 
Whole Head systems in leading medical institutions.  Such medical 
institutions, in conjunction with the Company, will continue the development 
of clinical applications for the Magnes 2500WH system and perform clinical 
research to prove its efficacy and economic viability for the epilepsy 
market.  The objective of such development and research is the attainment of 
wide spread acceptance of the Company's MSI technology by medical 
professionals and general reimbursement authorization for MSI epilepsy 
procedures by government insurance programs including Medicare and Medicaid 
and by private insurers.

In May 1997, the Company entered into a loan facility with Dassesta 
International, S.A. ("Dassesta"), the Company's then controlling shareholder. 
The loan facility provides for maximum borrowings of $1,700,000 and expires 
on December 31, 1998.  Interest accrues on outstanding principal at 10% and 
is payable on December 31, 1997 and 1998.  The loan is collateralized by 
certain of the Company's accounts receivable and requires principal repayment 
upon collection of such receivables.  As of September 30, 1997, the Company 
had $975,000 outstanding under the loan which was repaid subsequent to year 
end. (see Note 8)

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

                                       46
<PAGE>

The Company currently anticipates that its existing cash resources, including
the proceeds from the December 1997 sale of 5,500,000 unregistered shares of
common stock will be sufficient to provide operating capital required to meet
its obligations in the normal course of business through February 1998.

The Company's current financial condition, the uncertainty regarding its
ability to raise additional capital and the uncertainty and risks associated
with future operations raise substantial doubt about the Company's ability to
operate as a going concern.  The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties and asset and liability carrying amounts do not purport to
represent realizable settlement values.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.  All material intercompany balances and transactions have been
eliminated in consolidation. As of October 1, 1997, the subsidiary  was
dissolved as a separate legal entity but continues to operate as a branch
office.

CASH AND CASH EQUIVALENTS

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

SHORT-TERM INVESTMENTS

Management determines the appropriate classification of its short-term
investments at the time of purchase and reevaluates such designation as of each
balance sheet date.  The Company has classified its short-term investments as
"available-for-sale" at September 30, 1996.  Gross realized gains and losses on
the Company's available-for-sale securities were not significant.

RESTRICTED CASH

Restricted cash consists of cash balances required to be held under contractual
obligation to provide future services pertaining to sales of MSI systems and
amounts held in trust for executive termination costs.

                                        47

<PAGE>
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.

INVENTORIES

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

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 lesser of estimated useful life or the related lease term.
Maintenance and repairs are charged to expense as incurred and the costs of
additions and betterments that increase the useful lives of related assets are
capitalized.

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.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes. " Deferred income tax assets or liabilities are
recognized based on the temporary differences between financial statement and
income tax bases of assets and liabilities using  enacted tax rates in effect
for the years  in which the differences are expected to reverse.  Deferred
income tax expenses or credits are based on the changes in the deferred income
tax assets or liabilities from period to period.

REVENUE RECOGNITION

Standard terms of product sales typically provide for payment of 40% of the
purchase price upon placement of the order, 40% upon shipment and the remaining
20% upon final customer acceptance.  Revenue from product sales is recognized
at the time of customer acceptance.  Standard terms of sale also include a one
year service period following the sale.  The Company defers and recognizes
service revenues over the related service period.

                                      48
<PAGE>

STOCK-BASED COMPENSATION ACCOUNTING

In 1995, the Financial Accounting Standards Board issued SFAS No. 123 ,
"Accounting for Stock-Based Compensation. "  The Company adopted SFAS No. 123
in fiscal 1997. The Company has elected to measure compensation expense 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 has provided pro forma disclosures as if the fair value based method
prescribed by SFAS No. 123 had been utilized.

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.

FOREIGN CURRENCY REMEASUREMENT

The functional currency of the Company's foreign subsidiary is the US dollar.
The monetary assets and liabilities of the foreign subsidiary are translated
into US 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, 1997, 1996 and 1995
such gains (losses) totaled approximately $(17,000),  $136,000, and $(96,000),
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 at September 30, 1997.  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 there were outstanding
letters of credit amounting to $3,128,000.

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 1997, the Company did not have 
any open forward exchange contracts. At September 30, 1996 the Company had 
forward exchange contracts to purchase approximately $5,995,000 of Deutsche 
marks and French francs.

<PAGE>

RECENT AUTHORITATIVE PRONOUNCEMENTS

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share" and SFAS No.
129 "Disclosure of Information About Capital Structure."  SFAS No. 128 revises
the computation of earnings per share and requires certain additional
disclosures.  SFAS No. 129 requires additional disclosure regarding the
Company's capital structure.  Both standards will be adopted in the fourth
quarter of fiscal 1998.  The adoption of these standards will not have a
material effect on the Company's financial position or results of operations as
they pertain to disclosure only.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting of comprehensive income and its components in a full set of
general purpose financial statements. SFAS No. 131 requires reporting certain
information about operating segments in condensed financial statements of
interim periods issued to shareholders.  Both standards are required to be
adopted during fiscal 1998.  The adoption of these standards will not have a
material effect  on the Company's financial position or results of operations
as they pertain to disclosure only.

USE OF ESTIMATES

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

RECLASSIFICATIONS

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

NOTE 3.  SEGMENT AND GEOGRAPHIC INFORMATION

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


                                   50
<PAGE>

                                 Years Ended September 30,
                             1997           1996           1995
                         -----------   ------------    -----------
Revenues 
  United States          $ 2,401,984   $    198,351    $   318,630
  Germany                  6,995,299        449,895      7,062,483
  Japan                    1,194,609         84,359      1,600,145
                         -----------   ------------    -----------
                         $10,591,892   $    732,605    $ 8,981,258
                         -----------   ------------    -----------
Net loss
  United States          $(5,588,919)  $(13,893,993)   $(6,439,051)
  Germany                    347,353     (1,671,820)      (233,762)
                         -----------   ------------    -----------
                         $(5,241,566)  $(15,565,813)   $(6,672,813)
                         -----------   ------------    -----------
Identifiable assets
  United States          $ 3,162,666   $ 11,628,478    $17,041,388
  Germany                  2,839,662      4,621,123      3,082,862
                         -----------   ------------    -----------
                         $ 6,002,328   $ 16,249,601    $20,124,250
                         -----------   ------------    -----------

NOTE 4.      CUSTOMER CONCENTRATIONS

On average, the Company's MSI systems sell for approximately $1.0 - $2.5
million, resulting in significant concentrations of revenues and accounts
receivable.  As of September 30, 1997, 84% of accounts receivable pertained to
2 customers.  For the years ended September 30, 1997 and 1995, total product
revenues were derived from 9 and 4 customers, respectively.

NOTE 5.       FINANCIAL STATEMENT INFORMATION

Inventories consist of the following:
                                                    1997           1996
                                                 ----------     ----------
  Finished goods                                 $  578,702     $1,725,052
  Work-in-process                                 1,527,828      3,356,106
  Raw materials                                     281,445        546,357
                                                 ----------     ----------
                                                 $2,387,975     $5,627,515
                                                 ----------     ----------

Net property and equipment consists of the following:
                                                    1997           1996
                                                 ----------     ----------
 Machinery and equipment                         $7,192,248     $8,880,428
 Office furniture and equipment                     258,376        253,328
 Leasehold improvements                             357,480        341,801
 Construction-in-process                                  -          2,218
                                                 ----------     ----------
                                                  7,808,104      9,477,775
 Less Accumulated Depreciation                   (7,281,660)    (8,569,811)
                                                 ----------     ----------
                                                 $  526,444     $  907,964
                                                 ----------     ----------

                                        51
<PAGE>

Accrued liabilities consist of the following:
                                                     1997          1996
                                                   --------     ----------
 Warranty allowance                                $350,000     $        -
 Customer obligations                               450,000        196,473
 Accrued employment agreement costs                       -        600,000
 Other                                              134,012      1,099,772
                                                   --------     ----------
                                                   $934,012     $1,896,245
                                                   --------     ----------

Included in accounts payable at September 30, 1997 is $219,000 due Dassesta
International S.A., the Company's former controlling shareholder, for expenses
pertaining to capital financing activities and Board of Directors services.

Supplemental Disclosure of Cash Flow Information:

On December 31, 1996, the Company converted principal outstanding under a note
payable to shareholder of $3,000,000 and related accrued interest of $87,040
into 7,717,602 shares of common stock.

In June 1997, the Company contributed property and equipment with a net book
value of $80,000 as part of its investment in Magnesensors.

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.

During the years ended September 30, 1997, 1996 and 1995, the Company paid
approximately the following for :

                                           1997         1996        1995
                                         -------      -------     -------
 Interest                                $89,000      $38,000     $94,000
 Income Taxes                            $   800      $   800     $   800

NOTE 6.   INVESTMENT IN MAGNESENSORS

In June 1997, BTi entered into a collaboration with Quantum Magnetics, Inc., a
private company, to form a new company called Magnesensors, Inc.  BTi and
Quantum Magnetics each own 38% of the outstanding stock of the new company and
24% of the outstanding stock is owned by the management of Magnesensors.  BTi
licensed certain technology, assigned certain patents and contributed cash and
certain property and equipment in connection with the formation of
Magnesensors.  Magnesensors will continue the development of applications and
products using high temperature superconductors.  BTi will receive royalty-free
licenses to any technology developed by Magnesensors.

BTi accounts for its investment in Magnesensors under the equity method. 
During fiscal 1997, BTi paid Magnesensors $36,000 for certain services 
rendered.  BTi and Quantum Magnetics have agreed to

                                      52
<PAGE>

guarantee a working capital line of credit up to $200,000 for a period of 
three and one-half years upon the attainment of such line of credit by 
Magnesensors.

NOTE 7.   INCOME TAXES

The Company's provision for income taxes in fiscal 1997, 1996 and 1995 consists
of minimum state taxes.

The components of deferred tax assets at September 30, 1997 and 1996 are as
follows:

                                                        1997           1996
                                                    -----------   ------------
 Net operating loss carryforwards                   $ 5,330,000   $  9,321,000
 Tax credits                                            780,000        672,000
 Capitalized research and development costs           1,771,000      1,491,000
 Allowances                                           1,063,000      1,055,000
 Other                                                  397,000        554,000
                                                    -----------   ------------
                                                      9,341,000     13,093,000
 Valuation allowance                                 (9,341,000)   (13,093,000)
                                                    -----------   ------------
 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 $14,000,000 and $4,650,000 of Federal and State net operating
loss carryforwards which will expire at various dates through 2012. As a result
of ownership changes  (as defined by Section 382 of the Internal Revenue Code
of 1986, as amended) which occurred in fiscal 1995 and fiscal 1997, the
Company's tax loss carryforwards have been limited to a total of approximately
$18,650,000 of which approximately $930,000 can be utilized per year as of
September 30, 1997.

The provision for income taxes reconciles to the amount computed by applying
the federal statutory rate to income before taxes as follows:

<TABLE>
<CAPTION>
                                                          1997            1996             1995
                                                      -----------     -----------      ------------
<S>                                                   <C>             <C>              <C>
 Computed expected federal tax benefit                $(1,834,268)    $(5,448,035)     $ (2,127,334)
 State taxes, net of federal benefit                     (319,687)     (1,266,451)       (1,161,143)
 Changes in valuation reserve                          (3,730,000)      6,318,000       (18,024,000)
 Limitation of net operating loss
  carryforwards                                         4,719,000               -        20,064,203
 Limitation of federal research and
  development credit                                            -               -         1,254,000
 Interest cost for conversion feature
  of note payable to shareholder                          924,750         332,250                 -
 Other                                                    241,005          64,236            (5,726)
                                                      -----------     -----------      ------------
 Provision for income taxes                           $       800     $         -      $          -
                                                      -----------     -----------      ------------

</TABLE>
                                           53
<PAGE>


NOTE 8.  DEBT

In May 1997, the Company entered into a loan facility with Dassesta
International, S.A. ("Dassesta"), the Company's then controlling shareholder.
The loan facility provides for maximum borrowings of $1,700,000 and expires on
December 31, 1998.  Interest accrues on outstanding principal at 10% and is
payable on December 31, 1997 and 1998.  The loan is collateralized by certain
of the Company's accounts receivable and requires principal repayment upon
collection of such receivables.  As of September 30, 1997, the Company had
$975,000 outstanding under the loan which was repaid subsequent to year end.
(see Note 1)

In August 1996, the Company entered into a loan agreement with Dassesta for
$3,000,000 bearing interest at 9% per annum, maturing in February 1997.  Under
the terms of the agreement , the note plus accrued interest was convertible at
the option of the Company  into common shares upon execution of the agreement
at $.40 per share or by Dassesta upon the earlier of maturity, default, or
significant change in ownership of BTi at $.40 per share.  This conversion
price represented a discount from the quoted market price of the Company's
common stock on the date of debt issuance. The Company converted the $3,000,000
loan principal and related accrued interest of $87,040 into 7,717,602 shares of
the Company's common stock on December 31, 1996.  (see Note 12)

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 10).  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.  In April 1995, the Company issued 4,882,477 shares
of common stock and certain options to purchase 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 9.  LEASE OBLIGATIONS

The Company leases its office and production facilities and certain equipment
under noncancelable operating leases expiring at various dates through February
2003.  The Company's main facility lease agreement expires in February 2003.

Future minimum cash payments under operating leases are as follows:

                                      54

<PAGE>



   Year Ending September 30,
            1998                   $  580,000
            1999                      608,000
            2000                      608,000
            2001                      608,000
            2002                      608,000
            Thereafter                253,000
                                   ----------
                                   $3,265,000

Total rent expense under noncancelable operating leases was $508,000, $608,000
and $580,000  for the years ended September 30, 1997, 1996 and 1995,
respectively.

NOTE 10. SHAREHOLDERS' EQUITY

COMMON STOCK

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

During August 1996, the Company completed negotiations with its then
controlling shareholder,  Dassesta for an unsecured working capital loan of
$3,000,000 which was to mature on February 14, 1997, bearing  interest at 9%
per annum. The principal amount of the loan and any accrued interest was
convertible at the option of the Company upon execution of the agreement at
$.40 per share or at the option of Dassesta upon the earlier of maturity,
default, or significant change in ownership of BTi at $.40 per share.  The
Company elected to convert the $3,000,000 loan and related accrued interest of
$87,040 into 7,717,602 shares of common stock on December 31, 1996. (see Notes
8 and  12)

In March 1995, the Company completed the private sale of 25 million shares of
common stock at $.60 per share  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 (see Note 8).  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, 1997, options to purchase
464,200 shares of common stock remain outstanding and exercisable.

                                       55
<PAGE>

STOCK OPTION PLANS

The Company has various incentive and non-qualified stock option plans which 
provide that options to purchase 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. On December 31, 1996,  the Company's 1987 Incentive Stock 
Option Plan which provided options to purchase up to 5,000,000 shares of 
common stock expired.  At January 1, 1997, a new 1997 Incentive Stock Option 
Plan was approved by the Board of Directors, authorizing options to purchase 
3,000,000 shares of common stock.  At September 30 1997, options to purchase 
4,327,477 shares of the Company's common stock are exercisable and 2,875,600 
shares are available for future grants under the plans.

On December 18 1996, the Board of Directors authorized the revaluation of all 
outstanding options under its stock option plans to an exercise price of $.50 
per share, the closing market value of the Company's stock on that day.

The following table summarizes common stock option plan activity:

                                                             Weighted Average
                                              Options         Exercise Price
                                           -----------       ----------------
Outstanding at September 30, 1994            1,389,097           $  5.45
 Granted                                     1,606,238              1.00
 Canceled                                  (1,140,369)              4.76
                                           -----------       ----------------

Outstanding at September 30, 1995            1,854,966           $  1.64
 Granted                                     2,480,400              1.33
 Canceled                                     (75,134)              1.38
 Exercised                                     (4,765)              1.50
                                           -----------       ----------------


Outstanding at September 30, 1996            4,255,467           $  1.46
 Granted                                     1,510,400               .50
 Canceled                                  (1,409,327)              1.25
 Exercised                                    (29,063)              1.00
                                           -----------       ----------------

Outstanding at September 30, 1997            4,327,477           $  1.18
                                           -----------       ----------------

The Company has adopted the disclosure-only provisions of SFAS No. 123, 
"Accounting for Stock-Based Compensation" under which no compensation cost 
has been recognized.  If the Company had elected to recognize compensation 
costs based on the fair value on the date of grant for awards in 1997 and 
1996, consistent with the provisions of SFAS No.  123, net loss and net loss 
per share would have been increased to the following amounts:

                                       56
<PAGE>

                                                1997           1996
                                             -----------   ------------
  Pro forma net loss                         $(6,138,480)  $(16,124,427)
  Pro forma net loss per share               $    (  .13)  $     (  .40)
     

The pro forma effect on net loss for fiscal years 1997 and 1996 may not be 
representative of the pro forma effect on net loss of future years because 
the SFAS No. 123 method of accounting for pro forma compensation expense has 
not been applied to options granted prior to fiscal 1996.

The weighted-average fair values at date of grant for options granted during 
fiscal 1997 and 1996 were between $.31 and $1.56 and were estimated using the 
Black-Scholes option pricing model.  The following assumptions were applied: 
(i) expected dividend yield of 0%, (ii) expected volatility rate of 2.08, 
(iii) expected life of 8 years, and (iv) risk-free interest rates ranging 
from 5.96% to 6.88%.

The Black-Scholes option valuation model was developed for use in estimating 
the fair value of traded options which have no vesting restrictions and are 
fully transferable.  Option valuation models also require the input of highly 
subjective assumptions such as expected option life and expected stock price 
volatility.  Because the Company's employee stock-based compensation plan has 
characteristics significantly different from those of traded options and 
because changes in the subjective input assumptions can materially affect the 
fair value estimate, the Company believes that the existing option valuation 
models do not necessarily provide a reliable single measure of the fair value 
of awards  from those plans.

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, 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 11. EMPLOYMENT AGREEMENT

In June 1993, the Company and its former Chief Executive Officer agreed to 
certain terms of employment.  The agreement included a potential future 
payment to the former Chief Executive Officer of up to $600,000 based upon 
the price of the Company's common stock and the realized and unrealized gains 
on stock options granted to him.  In addition, the employment agreement 
provided for the continuation of base salary payments for two years under 
certain circumstances. Pursuant to terms of the employment agreement, the 
Company secured potential future payments in a trust fund established

                                      57
<PAGE>

on behalf of the Chief Executive Officer.  The $600,000 of potential future 
payout to the Chief Executive Officer is included in accrued liabilities and 
the related trust fund balance is included in the restricted cash and 
short-term  investments balance as of September 30, 1996.  As of September 
30, 1997, the related compensation payments had been made.  At September 30, 
1997 the Company is contingently liable for approximately $265,000 of 
continuation salary which if paid would be incurred beginning in March 1998.

NOTE 12.  RESTATEMENT OF CERTAIN 1996 BALANCES

The accompanying consolidated financial statements as of and for the year 
ended September 30, 1996 have been restated to account for the convertible 
note payable issued to Dassesta during August 1996 in accordance with Topic 
D-60, announced by the Securities and Exchange Commission staff during March 
1997.

In Topic D-60, the Securities and Exchange Commission staff stated that for 
debt convertible to equity at a price per share discounted from the then 
quoted market price of the related stock, the discounted amount reflects an 
incremental yield (beneficial conversion feature) at the time of issuance, 
which should be recognized as additional interest expense.  Based on the 
quoted market price of the Company's common stock on the date of issuance, 
the note payable to Dassesta had a beneficial conversion feature of 
$3,000,000.  This beneficial conversion feature has been accounted for as 
debt discount at the date of issuance and $750,000 was amortized through 
September 30, 1996. The beneficial conversion feature was not included in the 
Company's previously filed Form 10-K/A for the year ended September 30, 1996. 
In accordance with Topic D-60, the Company has restated certain balances in 
its  1996 financial statements, with the net effect reflecting a non-cash 
charge in the determination of the Company's net loss and net loss per share.

The effect of the restatement is as follows:

                                     As Previously
Year Ended September 30, 1996          Reported            As Restated
                                     -------------        -------------
Balance Sheet:
 Note payable to shareholder          $  3,000,000         $    750,000
 Additional paid-in capital           $      --            $  3,000,000
 Accumulated deficit                  $(79,863,309)        $(80,613,309)

Statement of Operations:
 Interest expense                     $     38,291         $    788,291
 Net loss                             $(14,815,813)        $(15,565,813)
 Net loss per share                   $       (.37)        $       (.39)


                                      58
<PAGE>

NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)

Quarterly data, unaudited, for fiscal 1997 is presented below:

<TABLE>
<CAPTION>
                                       First            Second              Third         Fourth
                                      Quarter           Quarter            Quarter        Quarter
 1997                                 -------           -------            -------        -------
 ----
 <S>                               <C>                 <C>                <C>            <C>
 Net revenues                      $  168,000          $1,555,000         $5,289,000     $3,580,000
 Gross profit                          68,000             499,000          2,385,000        775,000
 Net income (loss)             (i) (4,615,000)  (ii)   (1,178,000)           766,000       (215,000)
 Net income (loss) per share   (i)       (.12)  (ii)         (.03)               .02            .00
</TABLE>

  The following adjustments reconcile amounts reported above to the Company's
     previously filed reports on Form 10-Q:

  ( i)   Reflects $250,000 of executive termination costs charged to
         operations in the fourth quarter of 1997 which should have been 
         expensed in the first quarter of 1997, and $2,250,000 of non-cash 
         interest cost for conversion of note payable to shareholder not 
         previously recorded  (see Note 12).
  (ii)   Reverses $220,000 of gain on sale of assets to related party reported
         in the second quarter of 1997.

                                      59

<PAGE>

BIOMAGNETIC TECHNOLOGIES, INC.

SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS


<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 1997                                          $10,420           ----        ----        $10,420

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

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

</TABLE>

(A)   Uncollectible accounts charged against allowance

_______________

<TABLE>
<CAPTION>
<S>                                                    <C>              <C>         <C>             <C>
Allowance for obsolete
  and slow moving
  inventory:

Fiscal Year 1997                                       $1,650,659       $ 60,000        ----        $1,710,659

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
</TABLE>

(B)   Sale or disposal of items under allowance



                                           60