UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-KSB

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(Mark One)



x
        Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2007.


OR



o
        Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________.


Commission File No. 0-50914

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BIOTEL INC.

(Name of Small business Issuer in its Charter)

Minnesota
        41-1427114(State or other jurisdiction of
        (I.R.S. Employerincorporation or organization)
        Identification No.)1285 Corporate Center Drive, Suite 150, Eagan, MN
        55121(Address of principal executive offices)
        (Zip Code)


Issuers Telephone Number, Including Area Code:  (651) 286-8620

Securities registered under  Section 12(b) of the Exchange Act:  None

Securities registered pursuant to Section 12(g) of the Exchange Act:  Common Stock, par value $0.01 per share

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Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act  o

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes  x   No  o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.  x

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  x

Issuers revenues for fiscal year ended June 30, 2007 were $11,233,397.

The aggregate market value of voting and non-voting common equity held by non-affiliates of registrant as of September 10, 2007 was approximately $6,344,800.

The number of shares outstanding of the registrants common stock, par value $0.01 per share, as of September 10, 2007 was 2,673,827.

DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement for the 2007 Annual Meeting of Shareholders is incorporated by reference into Part III of this annual report.

Transitional Small Business Disclosure Format (check one). Yes  o     No  x





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PART I

Item 1.    DESCRIPTION OF BUSINESS.

General

Biotel Inc. is a Minnesota corporation that was incorporated in 1982. From 1982 to 1998, Biotel developed and marketed digital Holter recorders and software. Since 1998 we have conducted business as a non-operating holding company through wholly-owned subsidiaries. The businesses of our subsidiaries consist of developing, manufacturing, testing and marketing medical devices and related software as described below:


        Braemar, Inc. is a North Carolina corporation based in Eagan, Minnesota. Braemar designs, manufactures and services non-invasive medical and other specialized monitoring products and fluid transport, flow measurement and ultrasound products for original equipment manufacturers (OEMs). Braemar was incorporated in 1997 and became a wholly-owned subsidiary of Biotel in 1998 through a series of merger and acquisition transactions. Effective July 1, 2006, Braemar acquired the assets of our Carolina Medical, Inc. subsidiary.



        Until July 1, 2006, the Companys King, North Carolina facility operated as Carolina Medical, Inc., a Minnesota corporation. This business designs, manufactures and services fluid transport, flow measurement and ultrasound products for OEMs. Carolina Medical was incorporated in 1959 and became a wholly owned subsidiary of Biotel in 1998 through a series of merger transactions. Effective July 1, 2006, the assets of Carolina Medical were acquired by our subsidiary, Braemar, Inc. and engineering and manufacturing operations continue at the King, North Carolina facility. Carolina Medical, Inc. was dissolved on November 8, 2006.



        Advanced Biosensor Inc. is a Delaware corporation. Advanced Biosensor  sells maintenance services, Holter recorders, Holter diagnostic software and Holter supplies to medical clinics and hospitals and their patients. In September, 2005 Advanced Biosensor abandoned development and sales activities on Holter diagnostic software technology of its own development, and began supplying software upgrades using software provided by others. Advanced Biosensor, which was incorporated in 1998, began operations in 1999 as a result of the roll-up of assets and operations of three companies.



        Agility Centralized Research Services, Inc. is a Minnesota corporation. Agility provides seven-day/24-hour electrocardiogram (ECG) data and management services to the medical device and pharmaceutical industries, contract research and academic research organizations worldwide for cardiac safety and therapeutic evaluation purposes within clinical trials. Biotel purchased the assets comprising Agilitys business in July 2004.


When we use the terms Biotel, we, us, our or similar words, unless the context otherwise requires, we are referring to Biotel and its subsidiaries. Biotels principal executive offices are located at 1285 Corporate Center Drive, Suite 150, Eagan, Minnesota  55121, and its telephone number is (651) 286-8620. Biotels Internet website address iswww.biotelinc.com.

Investment Considerations

Investors should consider all of the information contained in this report including the factors discussed under Item 1  Description of Business  Factors That May Affect Future Results, Item 6  Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 7  Financial Statements, before making an investment decision with regard to our securities.

Some of the statements made in this report in the sections listed above and elsewhere in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward-looking statements may be



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identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should or continue or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of our business, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors including, but not limited to, adverse economic conditions, intense competition, entry of new
competitors, inability to obtain sufficient financing to support our operations, progress in research and development activities, variations in costs that are beyond our control, adverse federal, state and local government regulation, unexpected costs, lower sales and net income (or higher net losses) than forecasted, price increases for equipment, inability to raise prices, failure to obtain new customers, the possible fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives and other specific risks that may be alluded to in this report.

Products and Services

Biotels development, manufacturing and marketing of medical devices falls into two business segments  sales and service to medical corporations and sales and service to clinics and hospitals. Two of our wholly-owned subsidiaries (Braemar and Agility) design, manufacture, test and sell medical devices and services primarily to medical corporations. Our other subsidiary (Advanced Biosensor) sells products and services to clinics and hospitals. Approximately 15% of our revenue is derived from servicing and repairing products, including providing spare parts.

Sales to Medical Corporations

Braemar, Inc.:  Braemar develops and manufactures specialty type medical devices marketed through OEM channels. Braemars primary product line consists of Holter and event recorders, which allow physicians to monitor and analyze a patients heart activity over a continuous period without the need for hospitalization. A Holter recorder is a portable, battery-powered diagnostic device that monitors heart functions, including electrocardiogram readings, over a continuous time period (typically 24 to 48 hours). Data is downloaded for analysis via a USB link or over the Internet. This product is named after its inventor.

Braemar produces both analog and digital Holter recorders, as well as tape playback systems for analog devices. Although Holter recorders were originally developed as analog devices incorporating a cassette tape to store data, the Holter recorder and cardiac event recorder industry is now dominated by digital devices. Braemar also manufactures digital cardiac event recorder products, which record heart functions over a month or longer time period in order to record infrequent events such as arrhythmia. Instead of providing continuous monitoring, specific events trigger the device to record heart functions. Data is downloaded for analysis in a manner similar to that for Holter recorders.

Braemars devices are used as components in the product lines of its customers and typically are manufactured to customer specifications and carry the customers private labels. In addition to competition from OEM suppliers, Braemars customers and prospective customers may elect to manufacture their own devices as an alternative to purchasing the products from Braemar (or other OEM suppliers). Braemar attempts to differentiate itself from its competitors, as well as dissuade its customers from producing the devices themselves, by stressing a combination of quality, cost effectiveness, and its ability to develop products quickly. Braemar sees continued future growth in digital battery powered cardiac devices, such as Holter recorders and cardiac event recorders, including opportunities to integrate wireless technology for recording, storing and sharing data.

Braemar is a registered device manufacturer with the United States Food and Drug Administration (FDA) and is required to meet the agencys Quality System Regulation. Braemars Eagan, Minnesota manufacturing facility is certified to and meets ISO 9001:2000, ISO 13485:2003 and EN46001 standards.



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Until July 1, 2006, the Companys King, North Carolina facility operated as Carolina Medical. Effective July 1, 2006, Braemar, Inc. acquired the assets of Carolina Medical, and Carolina Medical, Inc. was dissolved on November 8, 2006. At the King, North Carolina facility, Braemar develops, manufactures and services OEM components for fluid transport, flow measurement and ultrasound medical devices. Its leading products are used in the liposuction and cosmetic surgery industry, including pump components, tissue separators and fluid infiltration devices and in electromagnetic blood flow and blood pressure instruments, including blood flow sensors used in heart pumps. The King, North Carolina manufacturing facility is certified to and meets ISO 9001:2000, ISO 13485:2003 and EN46001 standards.

Agility Centralized Research Services, Inc.:Agility contracts with medical device and pharmaceutical companies, contract research and academic research organizations worldwide to provide 24-hour/day 7-day/week electrocardiogram (ECG) data and management services for cardiac safety and therapeutic evaluation purposes within clinical trials. Agility is based in Bannockburn, Illinois.

Sales to Clinics and Hospitals

Advanced Biosensor
Inc.: Advanced Biosensor, based in Columbia, South Carolina, is a service and repair facility of PC-based diagnostic
monitoring products marketed to clinics and hospitals. Its primary products are maintenance services for Holter devices, Holter
recorders supplied by Braemar, Holter diagnostic software supplied by other vendors and Holter supplies.

Marketing and Sales

Approximately 88% of Biotels revenues for fiscal 2007 were derived from sales to OEM manufacturers. Foreign sales, primarily to Europe, accounted for about 9% of our revenues during the year ended June 30, 2007.

Sales to Medical Corporations

Braemar manufactures products for use
in OEM-manufactured medical devices. OEM sales traditionally result in lower selling expenses due to fewer customers and fewer
sales-related employees and independent representatives. However, gross margins are lower for OEM sales and the customer base is
highly concentrated.

Agility markets its products to pharmaceutical companies, medical device manufacturers, and contract research and academic research organizations.

Sales to Clinics and Hospitals

Advanced Biosensor markets its
products to clinic and hospital end-users. It relies primarily on telemarketing and leads generated from existing customers. At
September 1, 2005 Advanced Biosensor abandoned marginal sales activity involving the distribution of the Advanced Biosensor Holter
diagnostic software platform to hospitals and clinics.

Significant Customers

The Company had three major customers which accounted for approximately 45% of the Companys consolidated revenues in the year ended June 30, 2007. The Company had two major customers which accounted for approximately 37% of the Companys consolidated revenues for the year ended June 30, 2006. The percentage of sales to each of these customers as a percentage of the Companys consolidated sales is as follows:

2007
        2006Customer A
        22%
        27%Customer B
        12%
        3%Customer C
        11%
        6%Customer D
        7%
        10%






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Backlog

Our product lines have no significant order backlog because we follow the industry practice of stocking finished goods to meet customer demand on a just-in-time basis. We believe that the ability to fill orders in a timely fashion is a competitive factor in the markets in which we operate.

Competition

The medical device market is highly competitive. We are subject to competition on the basis of price, delivery time, customer service and our ability to meet specialty needs. There are a number of firms that provide certain products and services similar to those provided by Biotel, and vary from small operations offering a certain similar subset of our products or services to large integrated product and service companies. Each of our businesses competes with at least one major competitor, and these competitors vary according to specific products within a business. Due to the diversity of our product lines as a whole, no single competitor competes with us across the entire spectrum of our product lines.

Braemar faces competition in its Holter recorder business from small private companies that produce OEM Holter recorders such as Datrix Corporation. In Braemars event recorder business, it faces competition including Instromedix, Inc., a division of Card Guard Technologies, Inc. In its component business for flow transport, flow measurement and ultrasound medical devices it faces competition from other companies, such as HEI, Inc. and Plexus Corp., each of which manufacture devices for medical companies. Agilitys primary competitors include eResearch Technology, Inc. and Biomedical Systems.

In most cases, our competitors are larger companies that undertake a greater diversity of product lines and services and have substantially more resources than we do. These large companies produce a wide variety of contract research, testing, engineering and manufacturing services, whether related to diagnostic and clinical testing, OEM equipment, or both. There are also a significant number of small and mid-size companies that generally compete in segments of the diagnostic and clinical testing industry or as OEM equipment vendors. As a result, contract research, testing, engineering and manufacturing in the diagnostic, clinical testing and OEM manufacturing industries is fragmented and segmented.

In addition to actual competitors, Biotel faces possible competition from its OEM customers, who could change their outsourcing strategy and elect to produce or undertake internally the product development, testing, and manufacturing services provided by Biotel.

We believe we enjoy strong customer relations resulting from our long participation in the industry, emphasis on customer service, commitment to quality control and reliability.

Research and Development

Our aggregate research and development expenses during the fiscal years ended June 30, 2007 and 2006 amounted to approximately $1.5 million and $1.2 million, respectively. We continually seek to develop new technologies that will offer accelerated and improved research, development, testing, and manufacturing operations options to our medical device and pharmaceutical company customers. In addition to internally developing new technologies, we may, when appropriate, pursue alliances and acquire technologies and products that we believe to be commercially viable and complementary to the core technologies of our operating companies.



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Employees

As of August 31, 2007, we had 53 employees. No employees are represented by labor organizations and there are no collective bargaining agreements. We consider relations with our employees to be good. Set forth below is a chart of our employment by business segment:



Sales to Medical Companies
        
        Sales to Clinics and HospitalsManufacturing/R&D
        
        38
        
        2Sales and Marketing
        
        3
        
        0General and Administrative
        
        9
        
        1Total
        
        50
        
        3




As the holding company for the subsidiaries, Biotel has a full time Chief Executive Officer and a Chief Financial Officer who also serves as the Chief Financial Officer and Vice President of Braemar.

Environmental Matters

Our manufacturing operations are subject to federal, state and local environmental laws and regulations relating to, among other things, the storage, handling, disposal, emission, transportation and discharge of hazardous substances, materials and waste products. We do not believe that compliance with environmental laws and regulations will have a material effect on the level of our capital expenditures or our business, financial condition, liquidity or results of operations. However, violation of, or non-compliance with, these laws, regulations or permit requirements, even if inadvertent, could result in an adverse impact on our operations, business, financial condition, liquidity or results of operations.

In June, 2006 Carolina Medical entered into a Termination of Lease, Release, Hold Harmless and Indemnification Agreement with landlord, King Investment Partners, related to any environmental matters or potential environmental matters at the King Investment Partners property located in King, North Carolina. In the Agreement, King Investment Partners acknowledges full and complete satisfaction of any and all past, present or future claims and causes of action, including any environmental claims related to the property. In connection with the Agreement, Carolina Medical paid King Investment Partners $45,000. Also in June, 2006, Biotel notified the State of Minnesota of its Intention to Dissolve Carolina Medical, Inc., a Minnesota Corporation. Carolina Medical, Inc. was dissolved in November, 2006.

Manufacturing

Most of the materials and components we use are available from a number of different suppliers. We generally maintain multiple sources for most items, but some components are single sourced. We are dependent upon our suppliers for timely delivery of quality components. To date, we have not experienced significant delays in the delivery of components. We do maintain designs, drawings, molds, tools, safety stock, alternate vendors, and other techniques to eliminate or mitigate the effects of the loss of a single source vendor.

Most products are built in response to specific customer purchase orders, while others are fabricated as standard products. The manufacturing process consists primarily of assembly and testing of custom and commercially available components from outside sources.

Product Warranties and Service

We provide warranties against defects in materials and workmanship in our products. Warranty periods for our products range from 90 days to one year. At the time a sale is recorded, we establish a provision for estimated expenses of providing service under these warranties. Non-warranty service is billed to the customer as performed. As of June 30, 2007 and 2006, our provision for warranty services was $75,906 and$97,471, respectively. The assumptions we use to estimate warranty accruals are evaluated periodically in light of actual experience,



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managements estimates of future claims and, when appropriate, the accruals are adjusted. Our determination of the appropriate level of warranty accrual is subjective and based on estimates and actual experience that can be different than our expectations.

Government and Other Regulation

Biotels subsidiaries, Braemar
and Advanced Biosensor, are registered device manufacturers with the United States Food and Drug Administration (the
FDA). The Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act (the Act) and regulations
issued or proposed thereunder, including the Safe Medical Devices Act of 1990, provide for regulation by the FDA of the marketing,
design, manufacturing, labeling, packaging and distribution of medical devices. These regulations apply to many of the products
that are outsourced to us for manufacture.

The Act and the regulations include requirements that manufacturers of medical products and devices register with and furnish lists of products and devices manufactured by them to the FDA. Prior to marketing a medical product or device, the FDA requires the company selling the product or device to obtain FDA clearance. Tests to be performed for approval range from bench-test data and engineering analysis to potentially expensive and time-consuming clinical trials. The types of tasks for a particular product submission are indicated by the classification of the device and previous approvals for similar devices. Braemar and Advanced Biosensor have registered with the FDA and have obtained FDA clearance for those products and devices requiring clearance.

Braemar and Advanced Biosensors procedures and records are also subject to ongoing review by the FDA from time to time, pursuant to the FDAs Quality System Regulation (QSR). The QSR for medical devices sets forth standards for the design and manufacturing processes that requires Braemar to maintain certain records and provides for unscheduled inspection of its facilities.

There are also certain requirements of other federal laws and of state, local and foreign governments, which may apply to the manufacture and marketing of our OEM and other products and services. In addition, European Community regulations also apply to products that are offered in European markets. Biotels OEM products are marketed in European markets and are subject to these regulations, and Biotel or its customers are required to complete testing programs prior to selling medical devices in the European Community. Biotel development and manufacturing divisions conduct planned periodic quality assessment in conjunction with European Community medical device regulations and are regularly inspected by authorized bodies. Biotel companies have met or exceeded the necessary quality system programs to permit distribution in the European Community, whether for its products or certain of
its customers products.

The ISO 9000 series of quality management and quality assurance standards has been adopted by over 90 countries. ISO standards require that a quality system be used to guide work to assure quality and to produce quality products and services. ISO 9001, the most comprehensive of the standards, covers 20 elements. These elements include management responsibility, design control, training, process control and servicing. ISO 9001 is the quality system standard used by companies providing design, development, manufacturing, installation and servicing. Biotels quality systems are ISO 9001, ISO 13485 and EN 46001 certified.

Intellectual Property

We try to protect our proprietary technology and know-how through established security practices and confidentiality, non-competition and invention assignment agreements with certain of our employees. We also rely on non-disclosure agreements with certain suppliers and customers. There can be no assurance that these agreements or procedures will provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.



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Management

Executive officers of Biotel are as follows:

Name
        Age
        PositionB. Steven Springrose
        58
        Chief Executive Officer of Biotel; Chief Executive Officer of Advanced Biosensor and Agility Centralized Research ServicesHarold A. Strandquist
        58
        President of BraemarJudy E. Naus
        62
        Chief Financial Officer of Biotel; Vice President and Chief Financial Officer of Braemar


B. Steven Springrosehas served as Biotels President and Chief Executive Officer since July 2003, as Secretary since 1982, and as a director since 1982. Mr. Springrose also serves as Carolina Medicals, Advanced Biosensors and Agilitys Chief Executive Officer. Mr. Springrose was employed in a management position with Biotel from 1982 through 1998 and in a management position with Braemar, Inc. from January 1999 to November 1999. Mr. Springrose served as an independent contractor with pacemaker sales from 2000 to 2004. Mr. Springrose earned his bachelor of science degree from the University of Minnesota and a master of science degree from Washington University in St. Louis, Missouri, in biomedical engineering. He also earned an MBA from the
University of St. Thomas, and holds three patents.

Harold A. Strandquisthas served as the President of Braemar Corporation since November 2002. He began working for Braemar in February 2002. Mr. Strandquist was Central Regional Sales Director for Ela Medical, Inc., Division of Sanofi Diagnostics Pasteur SA (of France), a pacemaker and ICD manufacturer, for approximately four years before coming to Braemar. Previously he had worked as Director of Sales and Marketing for Angeion Corporation, and joined Ela Medical, Inc. when it acquired Angeion in 1998. He also worked for Medtronic Inc. in various sales and marketing positions. Mr. Strandquist holds a bachelor of science degree with dual majors in chemistry and economics, as well as an MBA in management. In addition, he has Heart Rhythm Society (f/k/a North American Society for Pacing and Electrophysiology) certification in electro-physiology.

Judy E. Naushas served as the Chief Financial Officer of Biotel since November 2003. She also serves as the Chief Financial Officer and Vice President of Braemar, a position she has held since 1997. Ms. Naus holds a bachelor of arts degree in business administration/accounting from Augsburg College in Minneapolis, Minnesota and has been employed with Braemar since 1977.

Factors That May Affect Future Results

Factors that may affect our future results include, but are not limited to, the following items as well as the information in Item 6  Managements Discussion and Analysis of Financial Condition and Results of Operations.

The following risk factors should be considered carefully in addition to the other information contained in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in the forward-looking statements. Factors that may cause these differences include those discussed below as well as those discussed elsewhere in this report.

Three customers generated a significant portion of our revenues.One major customer accounted for 22.1% and 26.9% of our consolidated revenues in the fiscal years ended June 30, 2007 and 2006, respectively, and this customer will likely account for a significant percentage of our revenues during fiscal 2008. During the year ended June 30, 2007, two other customers accounted for 12.2% and 10.9%, respectively, of our consolidated revenues. Because these customers are not required to purchase any minimum amount of products from us, or any products at all, there is no assurance that we will be able to retain these major customers or continue to maintain the levels of sales to them. The loss of or reduction in demand for our products from a major customer could have a material adverse effect on operating results and cash flow from operations.



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We may be unable to raise additional capital to meet capital expenditure needs if our operations do not generate sufficient funds to do so.Our business is expected to have continuing capital expenditure needs. While we anticipate that our operations will generate sufficient funds to meet our capital expenditure needs for the foreseeable future, our ability to gain access to additional capital, if needed, cannot be assured, particularly in view of competitive factors and industry conditions. Competitive factors and industry conditions include quality, price, technological capability, proprietary rights, and the ability to develop and market products and processes. Any additional capital raised through the sale of equity may dilute the ownership percentage of holders of our common stock.

Our inability to compete with other manufacturers in the medical device industry could harm our business.The market for medical devices is highly competitive. Each of our subsidiary businesses compete with at least one major competitor. In addition, our OEM customers represent potential competition, in that one or more may decide not to outsource the design and manufacture of some or all components used in their products. We are subject to competition in many markets on the basis of price, delivery time, customer service and our ability to meet specialty needs. Some of our competitors are significantly larger and have greater resources, financial and other, than we do. There can be no assurance that we will be able to compete successfully with our existing competitors or with new competitors. Failure to compete successfully could have a material adverse
effect on our business.

If we fail to achieve and maintain the high manufacturing standards that our products and services require, our business could suffer.Our products and services require precise, high quality manufacturing. Our failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, design defects or component failures, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.

If we are unable to retain senior management, our business operations could be adversely affected.Our success and future prospects depend on the continued contributions of our senior management. There can be no assurances that we would be able to find qualified replacements for these individuals if their services were no longer available. The loss of services of one or more members of our senior management team could have a material adverse effect on our business.

Failure to protect our trade secrets, copyrights and other intellectual property and know-how could put us at a competitive disadvantage.Our intellectual property rights are and will continue to be a critical component of our success. A substantial portion of our intellectual property rights relating to our current products and those under development is in the form of trade secrets, rather than patents. In order to preserve certain proprietary information as trade secrets, we are required to restrict disclosure of information intended to constitute trade secrets to third parties. We protect our trade secrets and proprietary knowledge in part through confidentiality agreements with certain of our employees, consultants and other parties. Certain of our consultants and third parties with whom we have business relationships may also provide services to other
parties in the medical device industry, including companies, universities and research organizations that are developing competing products. In addition, some of our former employees may seek employment with, and become employed by, our competitors. We do not have confidentiality agreements with all of our employees, consultants and third-parties, and cannot assure that the confidentiality agreements that are in place with our employees, consultants and third parties will not be breached, that we will have adequate remedies for a breach, or that our trade secrets will not become known to or be independently developed by our competitors. Although we are not currently aware of any parties currently intending to pursue any infringement claims against us, the loss of trade secret protection for technologies or know-how could adversely affect our business prospects.

Companies in the medical device industry typically obtain patents and frequently engage in substantial intellectual property litigation. Our products and technologies could infringe on the rights of others. If a third party successfully asserts a claim for infringement against us, we may be liable for substantial damages, be unable to sell products using that technology, or have to seek a license or redesign the related product. These alternatives may be uneconomical or impossible. Patent litigation could be costly, result in product development delays and divert the efforts and attention of management from our business. We do not have any pending infringement claims against us, nor are we aware that any parties intend to pursue any infringement claims in the future.



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Product liability claims could damage our reputation and hurt our financial results.The use of medical products, even after regulatory approval, poses an inherent risk of product liability claims. We maintain limited product liability insurance coverage of $1,000,000 per occurrence and $2,000,000 of general aggregate liability, subject to deductibles and exclusions. Although we believe our present insurance coverage is adequate, we cannot be sure that product liability insurance will be available in the future or will be available on acceptable terms or at reasonable costs, or that such insurance will provide us with adequate coverage against potential liabilities. Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain physician endorsement of our products or expand our business. If we have to pay product
liability claims in excess of our insurance coverage, our financial condition could be adversely affected.

Our Agility subsidiary faces the risk of becoming involved in litigation as a result of injury or death to a clinical test subject.Agility provides ECG data collection and management services in connection with testing pharmaceutical and medical device products. A portion of the services Agility provides to the manufacturers involves monitoring ECG results of test patients. Agility does not provide diagnostic or other healthcare services to the patient. Although Agility does not have a contractual relationship with the test subjects and has taken steps to limit its liability in the case of patient injury or death, Agility could be named as a defendant in resulting litigation due to its role in the clinical testing. Agility is not a defendant in any litigation and is not aware of any circumstances under which it could be named as a defendant in a lawsuit in
the future. Involvement in litigation would likely be costly and time consuming to management, regardless of whether Agility ultimately prevailed in the litigation.

If our suppliers cannot provide the components we require, our ability to manufacture our products could be harmed.We rely on third party suppliers to provide us with certain components used in our products. These and other supply factors could make it more difficult for us to effectively and efficiently manufacture our products and could adversely impact our results of operations. Relying on third party suppliers makes us vulnerable to component part failures and to interruptions in supply, either of which could impair our ability to ship our products to our customers on a timely basis. Using third party vendors makes it difficult and sometimes impossible for us to test fully certain components, such as components on circuit boards, maintain quality control, manage inventory and production schedules and control production costs. Vendor lead times to
supply us with ordered components vary significantly. We cannot be sure that our suppliers will furnish us with required components when we need them. Although some suppliers may be the only source for a customized component, which makes us vulnerable to cost increases and supply interruptions, We maintain designs, drawings, molds, tools, safety stock, alternate vendors, and other techniques to eliminate or mitigate the effects of the loss of a single source vendor. As a result, we do not believe the loss of any vendor of single source components would have a material effect on our business. For example, if a supplier does not satisfactorily provide a customized product, we believe we have the ability to find a replacement supplier by retrieving the molds and providing them to a replacement supplier. If we are unable to retrieve the molds or they are destroyed, the molds can be reproduced.

Our business could be materially adversely impacted by risks inherent in international markets.During the 12 months ended June 30, 2007 and 2006, approximately 9.0% and 7.3%, respectively, of our revenues were generated by customers outside the United States. Over 90% of these customers are located in Europe. We expect that customers outside the United States will continue to account for a comparable portion of Biotels revenue in the future. Our international sales subject us to inherent risks related to changes in the economic, political, legal and business environments in the foreign countries in which we do business. Although Europe has historically been stable, we may still be subject to the following general risks relating to international sales:


        Fluctuations in currency exchange rates.



        Regulatory, product approval and reimbursement requirements.



        Tariffs and other trade barriers.



        Greater difficulty in accounts receivable collection and longer collection periods.



        Difficulties and costs of managing foreign distributors.



        Reduced protection for intellectual property rights in some countries.



        Burdens of complying with a wide variety of foreign laws.



        The impact of recessions in foreign economies.



        Political and economic instability.




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If we fail to successfully market and sell our products in international markets, our business, financial condition, results of operations and cash flows could be negatively affected.

Our common stock is subject to the SECs penny stock rules, which makes our shares more difficult to sell.The SEC rules regarding penny stocks may have the effect of reducing trading activity in our common stock and making it more difficult for investors to sell. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:


        Make a special written suitability determination for the purchaser.



        Receive the purchasers written agreement to a transaction prior to sale.



        Provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchasers legal remedies.



        Obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed.



        Give bid and offer quotations and broker and salesperson compensation information to the customer orally or in writing before or with the confirmation.


These rules may make it more difficult for broker-dealers to effectuate customer transactions and trading activity in our securities, resulting in a lower trading volume of our common stock and lower trading prices.

An active trading market may not develop for our common stock, and we cannot assure the market price for our common stock if a market does develop.Our common stock is quoted on the OTC Bulletin Board. However, there can be no assurance that an active market for our common stock will develop, or if any such market does develop, that it will continue. To the extent that brokerage firms act as market makers for our securities, they may be a dominating influence in any market that might develop, and the degree of participation by these firms may significantly affect the price and liquidity of our common stock. These firms may discontinue their market making activities at any time. The prices at which our common stock are traded in the market will be determined by these firms and by the purchasers and sellers of our securities, but the prices may not
necessarily relate to our assets, book value, results of operations or other established and quantifiable criteria of value. Securities quoted on the OTC Bulletin Board are often thinly traded, highly volatile and not followed by analysts. Consequently, investors may have difficulty reselling our common stock.

Our policy to forego paying dividends for the foreseeable future may hurt our stock price.We do not anticipate paying any dividends on our common stock for the foreseeable future, which may make our common stock an unattractive investment. Some institutional investors may only invest in dividend-paying equity securities or may operate under other restrictions that may prohibit or limit their ability to invest in our common stock.

Undesignated shares in our articles of incorporation could prevent or delay a change in control of us or otherwise negatively affect shareholders.Our articles of incorporation currently authorize the board of directors, without shareholder approval, to issue up to 12,000,000 shares of capital stock, of which up to 2,000,000 shares are designated as preferred stock and up to 10,000,000 shares are designated as common stock. We currently have 2,673,827 common shares outstanding. The board of directors may issue up to 2,000,000 preferred shares in one or more classes or series and with those provisions as it determines, without shareholder approval. The holders of our common stock do not have any preemptive rights. The issuance of stock with rights and preferences determined by the board of directors could make it more difficult for
a third party to acquire us, dilute the stock ownership or adversely effect the rights of holders of our common stock, including voting rights.



11

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Item 2.    DESCRIPTION OF PROPERTY.

We conduct our principal operations at
leased facilities described below. We believe that our existing facilities are suitable for their use and will be adequate to meet
our needs for the foreseeable future. We also believe that any additional space needed in the future will be available at
commercially reasonable rates.



Entity Name; Location
        
        Use
        
        SquareFeetLeased
        
        Term of LeaseBraemar, Inc.1285 Corporate Center Drive, Suite 150Eagan, MN 55121
        
        Production, manufacturing and administration
        
        17,314
        
        Lease expires August 31, 2011.Braemar, Inc.157 Industrial DriveKing, NC 27021
        
        Production, manufacturing and administration
        
        13,440
        
        Lease expires June 30, 2008.Advanced Biosensor Inc.400 Arbor Lake Drive,  Suite B450Columbia, SC 29223
        
        Administration
        
        2,903
        
        Lease expires April 30, 2009.Agility Centralized Research Services, Inc.2275 Half Day RoadSuite 133Bannockburn, IL 60015
        
        Service operations
        
        1,225
        
        Lease expires January 31, 2009.




Item 3.    LEGAL PROCEEDINGS.



Not Applicable.




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



Not applicable.



12

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PART II

|Item 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
|------- | ---------------------------------------------------------------------------------------------------------------

Our common stock is traded on the Over the Counter Bulletin Board under the symbol BTEL.OB. The reported high and low bid prices for the fiscal quarters for the past two fiscal years ending June 30, 2007 are set forth in the table below, as reported by MarketWatch.com. These quotations represent prices between dealers and do  not include retail markup, markdown or commission and may not represent actual transactions.



Quarter Ended2006  2007
        
        Low
        
        HighSeptember 30
        
        $
        1.60
        
        $
        2.50December 31
        
        $
        1.60
        
        $
        2.25March 31
        
        $
        1.70
        
        $
        2.13June 30
        
        $
        3.00
        
        $
        5.25Quarter Ended2005  2006
        
        
        Low
        
        
        HighSeptember 30
        
        $
        1.65
        
        $
        2.35December 31
        
        $
        1.50
        
        $
        2.35March 31
        
        $
        1.62
        
        $
        2.25June 30
        
        $
        1.90
        
        $
        3.00


As of June 30, 2007, we had approximately 400 shareholders of record of our common stock. We have not paid any cash or other dividends during our last three fiscal years, and we currently have no intention to pay dividends. The payment of dividends, if any, in the future, rests within the discretion of our board of directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition, as well as other relevant facts.

Unregistered Sales of Equity Securities and Use of Proceeds.Biotel did not issue any shares of capital stock during the quarter ended June 30, 2007.

Securities Authorized for Issuance Under Equity Compensation Plans.The following table sets forth certain information about Biotel common stock that may be issued upon exercise of options as of June 30, 2007, under the Biotel 2001 Incentive Compensation Plan, which is Biotels only equity compensation plan. The board of directors grants qualified and non-qualified stock options to purchase shares of Biotel common stock to all eligible participants, which includes officers, directors and employees. Option prices of grants are not less than the fair market value of Biotel common stock at grant dates.



Number of securities to be issued upon exercise of outstanding options, warrants and rights
        
        Weighted average exercise price of outstanding options, warrants and rights
        
        Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(a)
        
        
        (b)
        
        (c)Equity compensation plans approved by security holders
        
        301,000
        
        $
        1.2600
        
        349,000Equity compensation plans not approved by securities holders
        
        
        
        
        
        
        Total
        
        301,000
        
        $
        1.2600
        
        349,000






13

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|Item 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

Critical Accounting Policies

The consolidated financial statements of Biotel include the accounts of Biotel Inc. and its wholly-owned subsidiaries. Significant intercompany accounts and transactions are eliminated in consolidation.

Management uses estimates and assumptions in preparing financial statements, including those assumed in computing the allowance for doubtful receivable accounts, inventory valuation allowances and warranty reserves and deferred income tax valuation allowances. Those estimates and assumptions may affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported revenues and expenses. Actual results may vary from these estimates.

At times Biotel maintains bank deposits in excess of federally insured limit. Management monitors the soundness of these financial institutions and believes Biotels risk is negligible.

Biotel sells its products to customers on credit in the ordinary course of business. A customers credit history is reviewed and must meet certain standards before credit is extended. Biotel establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Biotel follows the policy of charging the costs of advertising, except for costs associated with direct response advertising, to operating expenses as incurred. The costs of direct response advertising are capitalized and amortized over the period during which future benefits are expected to be received.

Inventories are valued at lower of cost (using the average and first-in first-out cost methods) or market.

Property, equipment and leasehold
improvements are recorded at cost. Depreciation is calculated using the straight-line or declining-balance methods over estimated
useful lives of three to 10 years for equipment, three to five years for automobiles and two to five years for leasehold
improvements.

SFAS No. 142,Goodwill and Other Intangible Assets. Goodwill is deemed to have an indefinite useful life and is not amortized but is subject to impairment tests performed at least annually. During fiscal 2007 and 2006, we performed the required impairment tests of goodwill and determined our recorded goodwill had not been impaired.

Amounts billed to customers for service contracts are recognized as income over the term of the agreements, and the associated costs are recognized as incurred.

We warrant our products against defects in material and workmanship for 90 days for electromagnetic and ultrasound probes and one year for all other manufactured equipment. An accrual is provided for estimated future claims. Such accruals are based on historical experience and managements estimate of the level of future claims.

Revenues from product sales are recognized at date of shipment.

Research and development costs are charged to operations as incurred. These costs are for proprietary research and development activities that are expected to contribute to the future profitability.

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes relate primarily to differences between financial and income tax reporting for the basis of inventory, accounts receivable, property and equipment, and accrued liabilities. The deferred tax accounts represent future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes may also be recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.



14

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We consider all highly liquid short term investments purchased with an original maturity of three months or less to be cash equivalents.

Overview

Biotel has been implementing a strategy to expand its base of operations among medical companies who seek to outsource strategic items provided by various Biotel companies. From our operating subsidiaries located within the United States, we supply an array of products and services to provide for the research, development, testing, and manufacturing needs of our customers.

Biotel business units, Braemar, Inc. and Agility Centralized Research Services, Inc., sell medical devices, technology and research services to medical companies. They design, manufacture, and test 24- and 48-hour Holter recorders, 30-day ECG event recorders, tissue extraction components, and flow control devices; provide 24/7 clinical ECG research services and internet technologies; complete FDA, CE, and other regulatory testing; and develop, test, and manufacture other custom medical devices. These subsidiaries form a base of products and services which we believe are attractive to medical device and pharmaceutical companies, allowing accelerated and improved research, development, testing, and manufacturing operations for our customers.

Biotel business unit, Advanced Biosensor Inc., sells maintenance services, Holter recorders and event recorders manufactured by Braemar, diagnostic Holter software provided by others and Holter supplies to hospitals and clinics.

These subsidiaries have experienced improvements in their business activity as a result of marketing efforts to acquire new customers and to expand relationships among current customers.

Results of Operations

Biotels net revenues for the year ended June 30, 2007, were $11,233,000, 9.9% above net revenues of $10,223,000 for the year ended June 30, 2006. In the fiscal year ended June 30, 2007, 45% of Biotels revenues were derived from three customers. In the fiscal year ended June 30, 2006, 37% of Biotels revenues were derived from two customers. The loss of one or more of these customers would have immediate significant adverse effect on our financial results.

Gross profit margin increased to $4,782,000 (42.6%) for fiscal year 2007, compared to $4,137,000 (40.5%) in fiscal year 2006. Cost of sales and service increased to $6,451,000 for fiscal year 2007, compared to $6,087,000 for fiscal year 2006. The increase in cost of sales and service was primarily the result of the increase in sales. Gross profit margin increased as a result of product mix and cost control efforts, as well as increased sales at our clinical research service operation.

Selling, general and administrative expenses increased to  $2,363,000 (21.0% of sales) for the year ended June 30, 2007, compared to $2,145,000 (21.0% of sales) for the year ended June 30, 2006. This increase is primarily the result of the change in accounting for stock options expense in fiscal 2007, as well as general corporate legal services and selling expenses associated with increased sales activity. Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.

Research and development expenditures for fiscal year 2007 were $1,464,000, an increase of 19.9% compared to $1,221,000 in fiscal year 2006. The increase was primarily the result of extensive research and development efforts in fiscal year 2007 related to new Holter and event recorder products.

Interest expense decreased to $32,000 for the year ended June 30, 2007, compared to interest expenses of $64,000 for the year ended June 30, 2006. Interest expenditures decreased corresponding to the reduction in long term debt.

Net earnings for the years ended June
30, 2007, and June 30, 2006, were $520,000 and $452,000, respectively. Net earnings improved as a result of increased revenues and
cost control efforts.



15

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Off-Balance Sheet Arrangements

Biotel does not have any off-balance sheet financing arrangements.

Liquidity and Capital Resources

Working capital increased to $2,520,000 at June 30, 2007, compared to $2,131,000 at June 30, 2006. Increase in working capital was largely a result of the decrease in the balance of the revolving line of credit and elimination of the current portion of notes payable in conjunction with the payment of Biotels remaining long term debt.

Cash and cash equivalents were $508,000 at June 30, 2007, compared to $51,000 at June 30, 2006. The increase in cash was influenced by many factors, primarily operating activities and improvements in cost structures. The ratio of current assets to current liabilities (current ratio) increased to 2.72 to one at June 30, 2007, compared to 2.30 to one at June 30, 2006.

Accounts receivable decreased to $1,966,000 at June 30, 2007, versus $2,201,000 at June 30, 2006. The decrease in accounts receivable was related to strong collections and improved payment cycles of major customers. To the extent that credit terms are extended to customers, Biotels cash position is diminished and debt may be required to supplement cash flows. Accordingly, Biotel attempts to make timely collections from its customers in accordance with credit terms, extend credit only to credit worthy customers with a strong payment history, and to keep credit terms as short as is practicable.

In fiscal year 2007, $356,000 was used for capital expenditures, compared with $346,000 in fiscal year 2006. Biotel primarily invests in molds, tooling and fixtures for custom components used in its product lines. Levels of capital investment are expected to vary from year to year.

Inventory increased to  $1,122,000 for the year ended June 30, 2007, compared to $1,141,000 for the year ended June 30, 2006. This increase is a result of materials purchased to support increased sales levels and new product introductions. Biotels subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.

Current liabilities decreased to
$1,461,000 at June 30, 2007, compared to $1,642,000 on June 30, 2006. This decrease was primarily due to the decrease in the
balance of the revolving line of credit and elimination of the current portion of notes payable in conjunction with payment of
long term debt.

Long term liabilities were reduced to zero at June 30, 2007, compared to $242,000 at June 30, 2006, as a result of payment of the term loan and note payable.

As of June 30, 2007, stockholders equity had increased to $3,933,000 from $3,311,000 at June 30, 2006. The increase in stockholders equity was principally as a result of the increase in retained earnings.

Management believes that present cash balances, internally generated funds and its credit line should provide sufficient working capital to meet present and projected needs for the coming 12 months, including principal payments required under present debt instruments. There is no assurance that Biotel will be successful in obtaining additional working capital if more is required. Biotel believes it will be able to finance operations at its Agility subsidiary over the next 12 months using cash generated from Biotel operations and Biotel credit facilities.

|Item 7. | FINANCIAL STATEMENTS.
|------- | ---------------------

See Financial Statements beginning on page F-1.



16

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|Item 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------

Not applicable.

|Item 8A. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

As of June 30, 2007 an evaluation was performed by Biotels President and Chief Financial Officer of the effectiveness of the design and operation of the registrants disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon, and as of the date of that evaluation, the President and Chief Financial Officer concluded that Biotels disclosure controls and procedures were effective.

There were no changes in Biotels internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

|Item 8B. | OTHER INFORMATION.
|-------- | ------------------

Not applicable.

PART III

|Item 9. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
|------- | ---------------------------------------------------

Incorporated by reference from Biotels definitive proxy statement for the 2007 Annual Meeting of Shareholders.

|Item 10. | EXECUTIVE COMPENSATION.
|-------- | -----------------------

Incorporated by reference from Biotels definitive proxy statement for the 2007 Annual Meeting of Shareholders.

|Item 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------

Incorporated by reference from Biotels definitive proxy statement for the 2007 Annual Meeting of Shareholders.



|Item 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- | -----------------------------------------------

Incorporated by reference from Biotels definitive proxy statement for the 2007 Annual Meeting of Shareholders.

|Item 13. | EXHIBITS.
|-------- | ---------

For a list of Exhibits filed as a part of this report, see Exhibit Index page following the signature page to this annual report on Form 10-KSB.

|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------

Incorporated by reference from Biotels definitive proxy statement for the 2007 Annual Meeting of Shareholders.



17

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Biotel Inc.Date:   September 26, 2007
        
        By
        /s/   B. Steven SpringroseB. Steven Springrose, Presidentand Chief Executive Officer




Know all persons by these presents, that each person whose signature appears below hereby constitutes and appoints B. Steven Springrose and Judy E. Naus, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full powers and authority to do and perform each and every act and things requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



/s/   B. Steven Springrose
        
        
        September 26, 2007B. Steven Springrose(President, Chief Executive Officerand a Director)/s/   Judy E. Naus
        
        
        September 26, 2007Judy E. Naus(Chief Financial Officer and Chief Accounting Officer)/s/   C. Roger Jones
        
        
        September 26, 2007C. Roger Jones(Director)/s/   Stanley N. Bormann
        
        
        September 26, 2007Stanley N. Bormann(Director)/s/   L. John Ankney
        
        
        September 26, 2007L. John Ankney(Director)/s/   David A. Heiden
        
        
        September 26, 2007David A. Heiden(Director)/s/   Spencer M. Vawter
        
        
        September 26, 2007Spencer M. Vawter(Director)






18

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Exhibits:



Exhibit
Number
        Description of Document3.1
        Amended and Restated Articles of Incorporation of Biotel Inc.**3.2
        Bylaws of Biotel Inc. **4.1
        Specimen Common Stock Certificate. **10.1
        Lease Agreement dated March 1, 2006 between Braemar, Inc. and DB Quad Prairie Business Center, Inc. ****10.2
        Commercial Lease Agreement dated June 30, 2006 between Braemar, Inc. and King Investment Partners. *****10.3
        Lease Agreement dated October 1, 2005 between Advanced Biosensor, Inc. and AP Southeast Portfolio Partners, L.P., as amended. ****10.4
        Office Lease dated December 28, 2006 between Agility Centralized Research Services, Inc. and Bannockburn Executive Plaza, L.L.C. ******10.5
        Asset Purchase Agreement among Biotel Inc., ACRS Acquisition Company, Daniel Pawlik and Agility Centralized Research Services, LLC. **10.6
        OEM Purchase Agreement by and between Philips Medical Systems and Braemar, Inc. dated September 1, 2003.**10.7
        Termination of Lease, Release, Hold Harmless and Indemnification Agreement dated June 30, 2006. *****11.1
        Statement regarding computation of per share earnings. ***21.1
        Subsidiaries of Biotel Inc. *24.1
        Power of Attorney (included in signature page) *31.1
        Certification of Chief Executive Officer.*31.2
        Certification of Chief Financial Officer.*32.1
        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
**
        Filed herewith.
Previously filed with Form 10-SB on October 14, 2004, Commission File No. 0-50914.***
        Previously filed with Amendment No. 2 to Form 10-SB on December 27, 2004, Commission File No. 0-50914.****
*****
        Previously filed with Form 10-QSB on February 14, 2006, Commissions File NO. 0-50914.
Previously filed with Form 10-KSB on September 28,2006, Commission File No. 0-50914.******
        Previously filed with Form 10-QSB on December 31, 2006, Commission File No. 0-50914.






19

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REPORT ON CONSOLIDATED

FINANCIAL STATEMENTS



FOR THE YEARS ENDED

JUNE 30, 2007 AND 2006



F-1

---

BIOTEL INC. AND SUBSIDIARIES



CONTENTS





PAGEREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
        F-3FINANCIAL STATEMENTSConsolidated balance sheets
        F-4Consolidated statements of income
        F-5Consolidated statements of cash flows
        F-6Consolidated statements of stockholders equity
        F-7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        F-8  F-19






F-2

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of Directors and Stockholders

Biotel Inc. and Subsidiaries

Eagan, Minnesota



We have audited the accompanying consolidated balance sheets ofBiotel Inc. and Subsidiaries(the Company) as of June 30, 2007 and 2006, and the related consolidated statements of income, stockholders equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Biotel Inc. and Subsidiaries as of June 30, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



/s/ Elliott Davis, LLC



September 24, 2007

Columbia, South Carolina



F-3

---

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



June 30,2007
        
        2006ASSETSCURRENT ASSETSCash and cash equivalents
        
        $
        508,314
        
        $
        51,186Trade accounts receivable, net of allowance for doubtful accounts of $35,707 and $50,034at June 30, 2007 and June 30, 2006, respectively
        
        
        1,966,415
        
        
        2,200,817Inventories, net
        
        
        1,122,259
        
        
        1,141,289Deferred tax asset
        
        
        200,342
        
        
        290,094Prepaid expenses
        
        
        184,149
        
        
        87,607Other current assets
        
        
        
        
        
        1,800Total Current Assets
        
        
        3,981,479
        
        
        3,772,793PROPERTY & EQUIPMENT, Net
        
        
        704,327
        
        
        701,868OTHER ASSETSGoodwill
        
        
        695,551
        
        
        695,551Other assets
        
        
        12,400
        
        
        24,108Total Other Assets
        
        
        707,951
        
        
        719,659$
        5,393,757
        
        $
        5,194,320LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESRevolving line of credit
        
        $
        
        
        $
        110,000Current portion of notes payable
        
        
        
        
        
        268,717Trade accounts payable
        
        
        678,094
        
        
        484,605Accrued payroll and related liabilities
        
        
        243,766
        
        
        214,748Deferred service contract revenue
        
        
        177,969
        
        
        168,470Other accrued expenses
        
        
        277,488
        
        
        319,034Accrued income taxes
        
        
        83,940
        
        
        76,545Total Current Liabilities
        
        
        1,461,257
        
        
        1,642,119LONG-TERM LIABILITIES:Notes payable
        
        
        
        
        
        241,525COMMITMENTS AND CONTINGENCIES (See Notes 7 and 8)Total Liabilities
        
        
        1,461,257
        
        
        1,883,644STOCKHOLDERS' EQUITY:Preferred stock, $.01 stated value; 2,000,000 shares authorized; no shares issued
        
        
        
        
        
        Common stock, $.01 stated value; 10,000,000 shares authorized; 2,673,827 and2,649,827 shares issued at June 30, 2007 and 2006, respectively
        
        
        26,738
        
        
        26,498Additional paid-in capital
        
        
        2,043,175
        
        
        1,941,324Retained earnings
        
        
        1,862,587
        
        
        1,342,854Total Stockholders' Equity
        
        
        3,932,500
        
        
        3,310,676$
        5,393,757
        
        $
        5,194,320




See notes to consolidated financial statements which are an integral part of these statements.



F-4

---

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



For the years endedJune 30,2007
        
        2006SALES AND SERVICES
        
        $
        11,233,397
        
        $
        10,223,332COST OF SALES AND SERVICES
        
        
        6,451,223
        
        
        6,086,599GROSS PROFIT
        
        
        4,782,174
        
        
        4,136,733OPERATING EXPENSESSelling and administrative
        
        
        2,362,948
        
        
        2,144,768Research and development
        
        
        1,463,814
        
        
        1,220,742Total operating expenses
        
        
        3,826,762
        
        
        3,365,510INCOME FROM OPERATIONS
        
        
        955,412
        
        
        771,223OTHER INCOME (EXPENSE)Interest Income
        
        
        6,384
        
        
        Interest Expense
        
        
        (32,088
        )
        
        (63,736
        )Miscellaneous
        
        
        (10,563
        )
        
        (32,931
        )Total other income (expense)
        
        
        (36,267
        )
        
        (96,667
        )NET INCOME BEFORE PROVISION FOR INCOME TAXES
        
        
        919,145
        
        
        674,556PROVISION FOR INCOME TAXES
        
        
        399,412
        
        
        222,331NET INCOME
        
        $
        519,733
        
        $
        452,225NET INCOME PER COMMON SHAREBASIC
        
        $
        0.20
        
        $
        0.17DILUTED
        
        $
        0.19
        
        $
        0.16WEIGHTED AVERAGE NUMBER OF SHARES USEDTO COMPUTE NET INCOME PER COMMON SHARE:BASIC
        
        
        2,657,783
        
        
        2,649,827DILUTED
        
        
        2,798,591
        
        
        2,773,237




See notes to consolidated financial statements which are an integral part of these statements.



F-5

---

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



For the years endedJune 30,2007
        
        2006OPERATING ACTIVITIESNet income
        
        $
        519,733
        
        $
        452,225Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
        
        
        330,073
        
        
        288,197Stock-based compensation
        
        
        87,091
        
        
        Deferred income tax
        
        
        89,752
        
        
        73,623Decrease in allowance for doubtful accounts
        
        
        (14,327
        )
        
        (20,171
        )Increase (decrease) in inventory valuation allowance
        
        
        (136,238
        )
        
        183,224Loss (gain) on disposal of fixed assets
        
        
        9,897
        
        
        (9,856
        )Changes in deferred and accrued amountsTrade accounts receivable
        
        
        250,529
        
        
        (48,752
        )Prepaid expenses
        
        
        (96,542
        )
        
        16,186Inventories
        
        
        155,268
        
        
        143,926Other assets
        
        
        7,708
        
        
        8,863Trade accounts payable
        
        
        193,489
        
        
        (173,436
        )Accrued payroll and related liabilities
        
        
        29,018
        
        
        30,195Other accrued expenses
        
        
        (41,546
        )
        
        106,608Deferred service contract revenue
        
        
        9,499
        
        
        (18,553
        )Accrued income taxes
        
        
        7,395
        
        
        (14,117
        )Net cash provided by operating activities
        
        
        1,400,799
        
        
        1,018,162INVESTING ACTIVITIESPurchases of property and equipment
        
        
        (355,729
        )
        
        (345,928
        )Proceeds from sale of property and equipment
        
        
        17,300
        
        
        25,075Net cash used for investing activities
        
        
        (338,429
        )
        
        (320,853
        )FINANCING ACTIVITIESProceeds from issuance of common stock
        
        
        15,000
        
        
        Net change on line of credit
        
        
        (110,000
        )
        
        (462,012
        )Payments of long term debt
        
        
        (510,242
        )
        
        (201,156
        )Net cash used for financing activities
        
        
        (605,242
        )
        
        (663,168
        )Net increase in cash and cash equivalents
        
        
        457,128
        
        
        34,141CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
        
        
        51,186
        
        
        17,045CASH AND CASH EQUIVALENTS, END OF YEAR
        
        $
        508,314
        
        $
        51,186CASH PAID FORInterest
        
        $
        32,088
        
        $
        53,157Income Taxes
        
        $
        299,749
        
        $
        162,325NONCASH FINANCING ACTIVITYIncrease in note payable for accrued interest
        
        $
        
        
        $
        8,318




See notes to consolidated financial statements which are an integral part of these statements.



F-6

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BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the years ended June 30, 2007 and 2006



Common Stock
        
        AdditionalPaid-InCapital
        
        RetainedEarnings
        
        TotalAmount
        
        SharesBalance, June 30, 2005
        
        $
        26,498
        
        2,649,827
        
        $
        1,941,324
        
        $
        890,629
        
        $
        2,858,451Net Income
        
        
        
        
        
        
        
        
        
        
        452,225
        
        
        452,225Balance, June 30, 2006
        
        
        26,498
        
        2,649,827
        
        
        1,941,324
        
        
        1,342,854
        
        
        3,310,676Exercise of stock options
        
        
        240
        
        24,000
        
        
        14,760
        
        
        
        
        
        15,000Stock-based compensation
        
        
        
        
        
        
        
        87,091
        
        
        
        
        
        87,091Net Income
        
        
        
        
        
        
        
        
        
        
        519,733
        
        
        519,733Balance, June 30, 2007
        
        $
        26,738
        
        2,673,827
        
        $
        2,043,175
        
        $
        1,862,587
        
        $
        3,932,500








See notes to consolidated financial statements which are an integral part of these statements.



F-7

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BIOTEL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1  NATURE OF BUSINESS AND CORPORATE ORGANIZATION



Biotel Inc. (Parent Company) and Subsidiaries (the Company) includes the wholly owned subsidiaries of Braemar, Inc., Advanced Biosensor Inc., and Agility Centralized Research Services, Inc.Braemar, Inc. designs, manufactures and services diagnostic cardiology devices including 24- and 48-hour Holter recorders and 30-day cardiac ECG event recorders.  Braemar, through its acquisition of Carolina Medical (See Note 15), also manufactures and services components used in liposuction treatments and diagnostic equipment used in ultrasound imaging and blood flow measurement.  Braemar, Inc. primarily sells to original equipment manufacturing (OEM) customers who use the Companys products as components in their medical product lines.  Advanced Biosensor Inc. integrates diagnostic Holter software with Braemar recorders and
other cardiopulmonary diagnostic equipment and sells to end-users in hospitals and clinics.  Agility Centralized Research Services, Inc., which was acquired by Biotel Inc. on July 1, 2004, provides 24-hour/day 7-day/week electrocardiogram (ECG) data and management services to the medical device and pharmaceutical industries, contract research and academic research organizations worldwide for cardiac safety and therapeutic evaluation purposes within clinical trials.



The Companys sales consist of national and international sales.





NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Principles of consolidation


The consolidated financial statements include the accounts of Biotel Inc. and its wholly owned subsidiaries (collectively, the Company).  Significant intercompany accounts and transactions are eliminated in consolidation.



Management estimates

Management uses estimates and assumptions in preparing consolidated financial statements.  Those estimates and assumptions may affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and reported revenues and expenses.  Significant estimates used in preparing these consolidated financial statements include those assumed in computing the allowance for doubtful receivable accounts, inventory valuation allowances, warranty reserves and deferred income tax valuation allowances.  Actual results could differ from those estimates.



Concentrations of credit risk

At times the Company maintains bank deposits in excess of the federally insured limit.  Management monitors the soundness of these financial institutions and feels the Companys risk is negligible.



The Company sells its products to customers on credit in the ordinary course of business.  A customers credit history is reviewed and must meet certain standards before credit is extended.  The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.



Advertising and marketing

The Company follows the policy of charging the costs of advertising, except for costs associated with direct response advertising, to operating expenses as incurred.  During the years ending June 30, 2007 and 2006, advertising expenses totaled approximately $11,000 and $19,000, respectively.



F-8

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NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued



Inventories

Inventories are valued at the lower of cost (using the average and first-in first-out cost methods) or market.  Company management periodically reviews inventory for specific future usage, and estimates of impairment of individual inventory items are recorded as a reserve to reduce inventories to the lower of cost or market.



Property and equipment

Property, equipment and leasehold improvements are recorded at cost.  Depreciation is calculated using the straight-line or declining-balance methods over estimated useful lives of three to ten years for equipment, three to five years for automobiles and two to five years for leasehold improvements.  Maintenance and repairs which do not improve or extend the useful lives of assets are charged to expense as incurred.



Goodwill

The Company accounts for the purchase price in excess of tangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets.  The goodwill arose from the acquisition of Braemar, Inc.  Goodwill is deemed to have an indefinite useful life and is subject to impairment tests performed at least annually.  During 2007 and 2006, such test of goodwill determined the recorded goodwill had not been impaired.



Service contracts

Amounts billed to customers for service contracts are recognized as income over the term of the agreements, and the associated costs are recognized as incurred.  At June 30, 2007 and 2006, current liabilities include service contract revenue deferrals of approximately $178,000 and $168,000, respectively.



Warranty reserve

The Company offers warranties of up to a year to its customers depending on the specific product sold.  The Companys warranties require it to repair or replace defective products during the warranty period at no cost to the customer.  The Company records a liability for estimated costs that may be incurred under its warranties based on recorded sales.  Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts.  The Company periodically assesses the adequacy of its recorded liability and adjusts the balance as necessary.  At June 30, 2007 and 2006, the warranty reserve totaled $75,906and $97,471, respectively, and this amount is included in Other Accrued Expenses.  The following is a reconciliation of the aggregate
warranty liability as of June 30, 2007 and 2006:



2007
        
        2006Balance, beginning of year
        
        $
        97,471
        
        $
        79,062Claims paid
        
        
        (52,787
        )
        
        (75,176
        )Additional warranties issued and revisions in estimates of previously issued warranties
        
        
        31,222
        
        
        93,585Balance, end of year
        
        $
        75,906
        
        $
        97,471






Revenue recognition

Revenues from medical equipment and software sales are recognized at date of shipment when title passes to the customer.  There are no customer acceptance provisions, and the right to return exists only in cases of damaged product or non-compliance with customer specifications.



The Companys revenue recognition complies with the accounting and disclosure requirements of Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101.



F-9

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NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued



Net income per common share

Net income per common share amounts are calculated under the provisions of SFAS No. 128,Earnings per Share.  SFAS No. 128 requires the Company to report both basic net income per share, which is based on the weighted-average number of common shares outstanding, and diluted net income per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive shares outstanding.



Stock options plans

On July 1, 2006, the Company adopted the fair value recognition provision of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 123(R),Accounting for Stock-Based Compensation, to account for compensation costs under its stock option plan.  The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (as amended)(APB 25).  Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Companys stock options because the option exercise price in its plan equals the market price on the date of grant.  Prior to July 1, 2006, the Company only disclosed the pro forma effects on net income and earnings per
share as if the fair value recognition provisions of SFAS 123(R) had been utilized.



In adopting SFAS No 123(R), the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method.  Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant.  The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.



2007
        
        2006Net income, as reported
        
        $
        519,733
        
        $
        452,225Add:  Stock-based employee compensation expense
        
        
        87,091included in reported net income, net of related tax effectsDeduct:  Total stock-based employee compensationexpense determined under fair-value based methodfor all awards, net of related tax effects
        
        
        (87,091
        )
        
        (42,036
        )Pro forma net income
        
        $
        519,733
        
        $
        410,189Earnings per share:Basic  as reported
        
        $
        0.20
        
        $
        0.17Basic  pro forma
        
        $
        0.20
        
        $
        0.15Diluted  as reported
        
        $
        0.19
        
        $
        0.16Diluted  pro forma
        
        $
        0.19
        
        $
        0.14




Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.  For the options issued, the following weighted average assumptions were used for the year ending June 30, 2007 and 2006:  risk-free interest rates based on date of issuance of 3.72% to 4.32%, no expected dividends, a volatility factor of 26.27 and 21.64, respectively, an expected life of the options of 5-10 years (amortized over the vesting period) and expected vesting of the options at 100%.



F-10

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NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because the Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion the existing models do not necessarily provide a reliable single measure of the fair value of Biotel Inc.s options.



Research and Development

Research and development costs are charged to operations as incurred.  These costs are for proprietary research and development activities that are expected to contribute to the future profitability of the Company.



Income taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes.  Deferred taxes relate primarily to differences between financial and income tax reporting for the basis of inventory, accounts receivable, property and equipment and accrued liabilities.  The deferred tax accounts represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled.  Deferred taxes may also be recognized for operating losses that are available to offset future taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount management expects is more likely than not to be realized.



Cash and cash equivalents

The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents.



Recently issued accounting standards

The following is a summary of recent authoritative pronouncements that affect accounting, reporting and disclosure of financial information by the Company.



In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements.  SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities.  The standard also requires expanded disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company does not expect the adoption of Statement No. 157 to materially impact the Companys consolidated financial statements.



In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment to SFAS No. 115.  This statement permit, but does not require, entities to measure many financial instruments at fair value.  The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings.  This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is
irrevocable and 5) applies only to entire instruments.  One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value.  With respect to SFAS No. 115, available for sale and held to maturity securities at the effective date are eligible for the fair value option at that date.  If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in



F-11

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NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued



SFAS No. 159 is effective for the Company on January 1, 2008.  Earlier adoption is permitted in 2007 if the  Company also elects to apply the provisions of SFAS No. 157.  The Company did not early adopt SFAS No. 159 and believes that it is unlikely that it will expand its use of fair value accounting upon the January 1, 2008, effective date.



In September 2006, the FASB ratified the consensus reached related to EITF No. 06-5,Accounting for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.  EITF No. 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy, other than the cash surrender value, in determining the amount that could be realized under the insurance contract.  EITF No. 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy).  EITF No. 06-5 is effective for fiscal years beginning after December
15, 2007.  Although the Company does not believe the adoption of EITF No. 06-5 will have a material impact on the Companys consolidated financial statements, management is currently analyzing the impact of adoption.



In June 2006, the FASB issued FASB Interpretation No. (FIN) 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.  FIN 48 established a single model to address accounting for uncertain tax positions.  FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on de-recognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for the Company for fiscal years beginning after December 15, 2006.  The adoption of FIN 48 is not expected to have a material effect on the Companys financial position, results of operation or cash flows.



Other accounting standards that have been issued or proposed by the PCAOB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.



NOTE 3   INVENTORIES



As of June 30, 2007 and 2006, inventories consist of the following:



2007
        
        2006Raw materials and supplies
        
        $
        1,154,869
        
        $
        1,296,078Finished Goods
        
        
        337,216
        
        
        351,340Evaluation units and replacements
        
        
        7,147
        
        
        7,0821,499,232
        
        
        1,654,500Valuation Allowance
        
        
        (376,973
        )
        
        (513,211
        )$
        1,122,259
        
        $
        1,141,289






F-12

---

NOTE 4  PROPERTY AND EQUIPMENT



As of June 30, 2007 and 2006, property and equipment consist of the following:



2007
        
        2006Machinery and equipment
        
        $
        2,956,662
        
        $
        2,669,884Vehicles
        
        
        
        
        
        4,680Furniture and fixtures
        
        
        34,791
        
        
        34,791Leasehold improvements
        
        
        54,237
        
        
        54,2373,045,690
        
        
        2,763,592Accumulated depreciation
        
        
        (2,341,363
        )
        
        (2,061,724
        )$
        704,327
        
        $
        701,868






Depreciation expense for the years ended June 30, 2007 and 2006 totaled $330,073 and $288,197, respectively.



NOTE 5  LONG TERM DEBT



As of June 30, 2007 and 2006, long-term debt consists of the following:



2007
        
        2006BANKTerm loan with bank, payable in monthly installments of $20,527 including interest at the prime rate (8.0% at May 18, 2007) plus 1.0%, due March 26, 2008. This loan is collateralized by a first lien on principally all Company assets and a $35,000 personal guarantee by the Company's Chief Executive Officer.  This loan was paid in full on May 18, 2007.
        
        $
        
        
        $
        455,711OTHERNote payable to stockholder, annual interest of 7.0%, due September 30, 2007. This note was paid in full on October 31, 2006.
        
        
        
        
        
        54,531
        
        
        510,242Less current maturities
        
        
        
        
        
        (268,717
        )$
        
        
        $
        241,525






The Company has a $1,500,000 credit line with a bank.  The line bears interest at the banks prime rate (8.25% at June 30, 2007) plus .25% and expires on February 5, 2008.  There was no outstanding balance on this line of credit as of June 30, 2007.  The outstanding credit line balance as of June 30, 2006 was $110,000.



F-13

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NOTE 6  RELATED PARTY TRANSACTIONS



Interest expense for related party obligations for the years ended June 30, 2007 and 2006, was $1,272 and $6,951, respectively.  Accrued interest payable to related parties was zero as of June 30, 2007 and $2,863 as of June 30, 2006.  This related party obligation was paid in full on October 31, 2006.



Braemar, Inc. leases its land and building in King, North Carolina, from King Investment Partners, a  partnership which is partially owned by Company stockholders, under a lease agreement which expires June 30, 2008.  Total rent expense to the affiliated partnership was $50,400 for each of the years ended June 30, 2007 and 2006, respectively.  (See Notes 7 and 8.)



NOTE 7  LEASE OBLIGATIONS



Advanced Biosensor Inc. leases its facility under a 42-month lease agreement which will expire April 30, 2009.




Braemar, Inc. leases its Minnesota facility under a 66-month lease agreement which will expire August 31, 2011.  The lease for office and manufacturing space includes costs allocated by the lessor for property taxes, insurance and maintenance.



Braemar, Inc. leases its facility in King, North Carolina, under a two-year lease agreement which will expire June 30, 2008.



Agility Centralized Research Services, Inc. leases its facility under a two-year lease agreement which will expire January 31, 2009.



Future minimum lease payments due under these non-cancelable operating leases as of June 30, 2007 are as follows:



2008
        
        $
        217,9032009
        
        
        153,6802010
        
        
        109,3682011
        
        
        112,8342012
        
        
        18,902$
        612,687




Total rent expense for leased space was$262,660 and $280,602for the years ended June 30, 2007 and 2006, respectively.



F-14

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NOTE 8  COMMITMENTS AND CONTINGENCIES



Carolina Medical, Inc. has been subject to environmental oversight by the North Carolina Division of Environmental and Natural Resources (DENR) in Surry County, North Carolina, involving alleged ground water contamination coming from property that had been previously owned/or leased by Carolina Medical, Inc.  In June, 2006, Carolina Medical entered into a Termination of Lease, Release, Hold Harmless and Indemnification Agreement with the landlord, King Investment Partners, related to any environmental matters or potential environmental matters at the King Investment Partners property located in King, North Carolina.  In the Agreement, King Investment Partners acknowledges full and complete satisfaction of any and all past, present or future claims and causes of action, including any environmental claims related to the property.  In connection with the Agreement, Carolina Medical
paid King Investment Partners $45,000. Also in June, 2006, Biotel notified the State of Minnesota of its Intention to Dissolve
Carolina Medical, Inc., a Minnesota Corporation. (See Note 15.) Carolina Medical, Inc. was dissolved on November 8, 2006.



Biotel Inc. maintains product liability insurance covering its subsidiaries.  There are no known product liability claims, and management presently believes that there is no material risk of loss from product liability claims.



NOTE 9  SIGNIFICANT CUSTOMER CONCENTRATIONS



Credit sales are made to the Companys customers in the ordinary course of business.  Generally, these sales are unsecured.  The Company had three major customers which accounted for approximately 45% of the Companys consolidated revenues in the year ended June 30, 2007.  The Company had two major customers which accounted for approximately 37% of the Companys consolidated revenues for the year ended June 30, 2006.  The percentage of sales to each of these customers as a percentage of the Companys consolidated sales is as follows:





2007
        2006Customer A
        22%
        27%Customer B
        12%
        3%Customer C
        11%
        6%Customer D
        7%
        10%






Accounts receivable due from these customers at June 30, 2007 and 2006 totaled approximately $1,021,000 and $1,691,000, respectively.



F-15

---

NOTE 10  STOCK OPTIONS



Biotel Inc. adopted an incentive
compensation plan for board designated personnel on November 15, 2001, by amending the Biosensor Corporation 1999 Incentive
Compensation Plan. Options to purchase shares of the Companys common stock are granted at a price not less than 100%
of the fair market value of the common stock, as determined by the Board of Directors using the best available market data, on the
date the options are granted. As of June 30, 2007 and 2006, Biotel Inc. had 301,000 and 328,000 outstanding options, respectively.
Currently, option prices range from $.375 to $2.00 per share with a weighted average remaining contract life of 1.9 years. During
the year ended June 30, 2007, 24,000 options were exercised, and no options were exercised during the year ended June 30,
2006.Option vesting and expiration is determined by the
Board of Directors at the time they are awarded. No options may be awarded with an expiration greater than 10 years.



A summary of the activity under the Companys plan is as follows:



Outstanding
        
        ExercisableSharesAvailable
        
        Numberof Shares
        
        WeightedAverageExercisePrice
        
        Numberof Shares
        
        WeightedAverageExercisePriceBalance at June 30, 2005
        
        296,000
        
        354,000
        
        $
        1.1379
        
        185,750
        
        $
        0.9040Granted
        
        (10,000
        )
        10,000Expired
        
        36,000
        
        (36,000
        )Balance at June 30, 2006
        
        322,000
        
        328,000
        
        $
        1.1898
        
        230,000
        
        $
        1.0510Granted
        
        (10,000
        )
        10,000Exercised
        
        24,000
        
        (24,000
        )Expired
        
        13,000
        
        (13,000
        )Balance at June 30, 2007
        
        349,000
        
        301,000
        
        $
        1.2600
        
        254,500
        
        $
        1.2230






F-16

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NOTE 11  INCOME TAXES



The components of the provision for income taxes are as follows for the years ended June 30, 2007 and 2006:




2007
        
        2006Current provision for taxes
        
        $
        309,660
        
        $
        148,708Change in net deferred tax asset
        
        
        146,277
        
        
        59,623Increase (decrease) in valuation allowance
        
        
        (56,525
        )
        
        14,000Total provision
        
        $
        399,412
        
        $
        222,331






A reconciliation of income tax at the statutory rate to the Companys effective rate is as follows:




2007
        
        2006Computed at the federal statutory rate
        
        34.0
        %
        34.0
        %State income taxes
        
        3.3
        %
        3.3
        %Reduction in state net operating losses due to changesin Corporate structure
        
        6.1
        %
        Increase (decrease) in valuation allowance
        
        -6.1
        %
        2.1
        %Other
        
        6.2
        %
        -6.4
        %43.5
        %
        33.0
        %




The tax effects of temporary differences that give rise to significant portions of the deferred tax accounts as of June 30, 2007 and 2006 are presented below:





2007
        
        2006Deferred tax assets applicable to:Allowance for doubtful accounts
        
        $
        13,900
        
        $
        19,500Inventory reserves
        
        
        147,000
        
        
        200,200Warranty reserves
        
        
        29,600
        
        
        38,000Net operating loss carryforwards
        
        
        211,800
        
        
        266,000AMT tax credit
        
        
        
        
        
        42,730Other
        
        
        (60,483
        )
        
        (78,336
        )341,817
        
        
        488,094Less valuation allowance
        
        
        141,475
        
        
        198,000Deferred tax asset
        
        $
        200,342
        
        $
        290,094






F-17

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NOTE 11  INCOME TAXES, Continued



Valuation allowances are established when necessary to reduce deferred tax assets to the amount management expects is more likely than not to be realized.  This determination is made annually by management based on the anticipated level of taxable income in future years.  During the years ended June 30, 2007 and 2006, management concluded that the deferred tax asset of $200,342 and $290,094, respectively, was more likely than not to be realized in future periods.  The valuation allowance at June 30, 2007 and 2006, related to a portion of the federal and state net operating loss carryforwards from which the Company was not expecting to realize the benefit due to various federal and state limitations.



At June 30, 2007, the Company had federal net operating loss carryforwards totaling $367,000, which expire on various dates through 2017.  The Company also had state net operating loss carryforwards totaling $1,370,000, which expire on various dates through 2025.



NOTE 12  NET INCOME PER SHARE OF COMMON STOCK



The weighted average number of shares used in the computation of basic and diluted net income per common share as of June 30, 2007, was 2,657,783 and 2,798,591, respectively.  The weighted average number of shares used in the computation of basic and diluted net income per common share as of June 30, 2006, was 2,649,827 and 2,773,237, respectively.



NOTE 13  EMPLOYEE BENEFITS PLANS



Biotel Inc. has a 401(k) plan covering substantially all of its employees.  Company contributions for the fiscal years ended June 30, 2007 and 2006, totaled $59,917 and $48,047, respectively.



NOTE 14  OPERATIONS AND INDUSTRY SEGMENTS



The Company reports on two segments of business:  OEM Medical Equipment Sales and Direct Medical Equipment Sales.  The industry segment information corresponds with the Companys different customer and product types and therefore complies with the requirements of SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information.



In calculating segment information, certain corporate operating expenses incurred for the benefit of all segments are included on an allocated basis.  The corporate profit amount includes non-allocable general corporate expenses, interest expense and other income.



F-18

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NOTE 14  OPERATIONS AND INDUSTRY SEGMENTS, Continued



2007OEMMedicalSales & Service
        
        DirectMedicalSales & Service
        
        Corporate
        
        TotalsDomestic Revenues
        
        $
        9,506,665
        
        $
        711,375
        
        $
        
        
        $
        10,218,040International Revenues
        
        
        848,941
        
        
        166,416
        
        
        
        
        
        1,015,357Revenues from external customers
        
        
        10,355,606
        
        
        877,791
        
        
        
        
        
        11,233,397Intersegment revenues
        
        
        178,114
        
        
        (178,114
        )
        
        
        
        
        Interest expense
        
        
        1,272
        
        
        
        
        
        30,816
        
        
        32,088Income tax expense
        
        
        330,639
        
        
        68,087
        
        
        686
        
        
        399,412Depreciation
        
        
        300,228
        
        
        8,934
        
        
        20,911
        
        
        330,073Segment profit
        
        
        417,937
        
        
        107,350
        
        
        (5,554
        )
        
        519,733Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,402,420
        
        
        162,556
        
        
        828,781
        
        
        5,393,757Purchase of property and equipment
        
        
        354,227
        
        
        
        
        
        1,502
        
        
        355,7292006OEMMedicalSales & Service
        
        DirectMedicalSales & Service
        
        Corporate
        
        TotalsDomestic Revenues
        
        $
        8,553,423
        
        $
        920,902
        
        $
        
        
        $
        9,474,325International Revenues
        
        
        653,490
        
        
        95,517
        
        
        
        
        
        749,007Revenues from external customers
        
        
        9,206,913
        
        
        1,016,419
        
        
        
        
        
        10,223,332Intersegment revenues
        
        
        194,822
        
        
        (194,822
        )
        
        
        
        
        Interest expense
        
        
        6,951
        
        
        
        
        
        56,785
        
        
        63,736Income tax expense
        
        
        157,670
        
        
        60,025
        
        
        4,636
        
        
        222,331Depreciation
        
        
        259,291
        
        
        8,138
        
        
        20,768
        
        
        288,197Segment profit
        
        
        206,888
        
        
        252,841
        
        
        (7,504
        )
        
        452,225Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,591,726
        
        
        209,076
        
        
        393,518
        
        
        5,194,320Purchase of property and equipment
        
        
        310,350
        
        
        26,078
        
        
        9,500
        
        
        345,928




NOTE 15  DISSOLUTION OF SUBSIDIARY



Effective July 1, 2006, the Companys Braemar, Inc. subsidiary acquired the assets of Carolina Medical, Inc. and is conducting engineering and manufacturing operations at the King, North Carolina facility previously leased by Carolina Medical.  The Carolina Medical corporation was dissolved on November 8, 2006.



F-19

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