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

---

FORM 10-K



---

(Mark One)


|   |                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|x  | Annual
 report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the fiscal year ended June 30, 2010.                    
|   |                                                                                                                                                    
|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

---

BIOTEL INC.(Exact name of
registrant as specified in its Charter)

|                                                   |  |                    
|-------------------------------------------------- |  | -------------------
|Minnesota                                          |  | 41-1427114         
|(State or other
 jurisdiction of                   |  | (I.R.S. Employer   
|incorporation 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

---

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.YesoNox

Indicate
by check mark if the registrant is required to file reports pursuant to Section
13 or 15(d) of the Exchange Act.     YesxNoo

Indicate
by check mark if the registrant: (1) has 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 xNoo

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.     o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one)

| |                           |                            
| | ------------------------- | ---------------------------
| | Large accelerated filer o | Accelerated filer o        
| |                           |                            
| | Non-accelerated filer o   | Smaller reporting company x

Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).     Yes oNox

Issuers
revenues for fiscal year ended June 30, 2010 were $11,012,350.

The
aggregate market value of voting and non-voting common equity held by
non-affiliates of registrant as of September 24, 2010 was approximately
$2,515,426.

The
number of shares outstanding of the registrants common stock, par value $0.01
per share, as of September 24, 2010 was 2,783,827.

DOCUMENTS INCORPORATED BY REFERENCE

The
definitive proxy statement for the 2010 Annual Meeting of Shareholders to be
filed within 120 days of the end of the fiscal year is incorporated by
reference into Part III of this annual report.

Transitional
Small Business Disclosure Format (check one).     Yes oNox







PART
I

|        |          
|------- | ---------
|Item 1. | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Until July 1, 2006, the Companys King, North
 Carolina facility operated as Carolina Medical, Inc., a Minnesota
 corporation. Carolina Medical was incorporated in 1959 and became a wholly
 owned subsidiary of Biotel in 1998 through a series of merger transactions.
 This business designed, manufactured and serviced biological fluid and tissue
 management systems. Effective July 1, 2006, the assets of Carolina Medical
 were acquired by our subsidiary, Braemar, Inc.; and Carolina Medical, Inc.
 was dissolved on November 8, 2006. Engineering and manufacturing operations
 continued at the King, North Carolina facility through June 30, 2008.
 Effective July 1, 2008, engineering and manufacturing operations were
 consolidated into Braemars Eagan, Minnesota facility other than the
 retention of one engineer in Winston-Salem, North Carolina. On June 30, 2010,
 the Winston-Salem, North Carolina, facility was closed.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Until September 19, 2008, the Companys Columbia,
 South Carolina facility operated as Advanced Biosensor Inc., a Delaware
 corporation. Effective September 19, 2008, Advanced Biosensor was merged into
 Braemar, Inc. This facility sells maintenance services, Holter recorders,
 Holter diagnostic software and Holter supplies to medical clinics and
 hospitals and their patients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Agility Centralized Research Services, Inc. is a
 Minnesota corporation with operations in Bannockburn, Illinois. Agility
 provides 24-hour/7-day 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 is www.biotelinc.com.

2

---



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 7  Managements Discussion and Analysis of Financial
Condition and Results of Operations, and Item 8  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 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 companies and sales and
service to clinics and hospitals. Our wholly owned subsidiaries, Braemar and
Agility, design, manufacture, test and sell medical devices and services
primarily to medical companies. Braemar, through its Columbia, South Carolina
facility previously operated as Advanced Biosensor, sells products and services
to clinics and hospitals. Approximately 25% of our revenue is derived from
servicing and repairing products, including providing spare parts.

Sales to Medical
Companies

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 has transitioned to the use of
digital devices, with analog devices used essentially for service or
replacements.

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.

3

---



Sales to Medical
Companies (Continued)

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
initiated sales of wireless event recorders in June, 2008 and of wireless
Fusion mobile cardiac telemetry (MCT) devices in June, 2010. Braemar also
designs, develops and manufactures tissue management devices used in cosmetic
surgery procedures, such as liposuction devices.

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
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 and ISO 13485:2003 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

Braemar,
Inc.: Braemar, through its Columbia, South Carolina facility
formerly operated as Advanced Biosensor, distributes PC-based diagnostic
monitoring products marketed to clinics and hospitals. This facility sells
maintenance services, Holter recorders, Holter diagnostic software and Holter
supplies to medical clinics and hospitals and their patients.

Marketing and Sales

Approximately
90% of Biotels revenues for fiscal 2010 were derived from sales to OEM
manufacturers. Foreign sales, primarily to Europe, accounted for about 10% of
our revenues during the year ended June 30, 2010.

Sales to Medical
Companies

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

Braemar,
Inc., through its Columbia, South Carolina facility, formerly Advanced
Biosensor, markets its products to clinic and hospital end-users. It relies
primarily on telemarketing and leads generated from existing customers.

4

---



Significant Customers

The
Company had three major customers which accounted for approximately 56% and 58%
of the Companys consolidated revenues in the years ended June 30, 2010 and
2009, respectively. One of the three major customers was CardioNet, Inc. (CardioNet). Biotel
commenced litigation against CardioNet on July 16, 2009, claiming that it had
breached its merger agreement with the Company. Another major customer
(Customer B) did not renew a distribution agreement with Biotel that expired
on May 16, 2009, as required by the CardioNet merger agreement. Customer B has
subsequently made additional purchases of wireless event recorders in fiscal
year 2010 and has placed additional orders for wireless event recorders in
fiscal year 2011 in conjunction with a revised distribution agreement. None of
the major customers has indicated any intention to purchase Fusion MCT
recorders or systems. (See Factors That May Affect Future Results  Potential
loss of business due to termination notices sent in accordance with
requirements of terminated merger agreement, and Item 3. Legal Proceedings.)
As a result, the Company experienced a reduction of revenues from the sale of
products to these three major customers in fiscal year 2010 versus fiscal year
2009.

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 companies
that produce OEM Holter recorders, such as IntriCon (formerly Datrix
Corporation), GeTeMed and Kenz. Alternatively, Holter software developers and
marketers may prefer to manufacture their own internally designed and developed
Holter recorders, including Mortara, ScottCare and Medicomp.

In
Braemars event recorder business, it faces competition from a number of
private event recorder manufacturing firms, such as Aerotel, TZ Medical, IMD,
LifeWatch and MedNet. These companies are service providers which manufacture
their own event recorders.

Wireless
MCT products competitive with Braemar devices are designed and manufactured by
corporations that provide MCT services, including CardioNet, LifeWatch,
Medicomp, Biomedical Systems and MedNet. Other companies have announced MCT
product offerings or planned product offerings, including ScottCare and IntriCon.

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., Biomedical Systems and
other contract research organizations (CROs).

5

---



Competition (continued)

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 larger 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.

Research and Development

Our
aggregate research and development expenses during the fiscal years ended June
30, 2010 and 2009 amounted to approximately $1.5 million and $1.6 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.

Employees

As
of September 28, 2010, we had 45 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 Hospitals
|Manufacturing/R&D          | 30                         |  |                                 | 2 | 
|Sales and Marketing        | 4                          |  |                                 | 0 | 
|General and Administrative | 8                          |  |                                 | 1 | 
|Total                      | 42                         |  |                                 | 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. These two positions are
included in the table above.

6

---



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.

Carolina
Medical, Inc., a subsidiary of the Company that was dissolved in November, 2006
(Carolina Medical), was the subject of an environmental oversight by the
North Carolina Division of Environmental and Natural Resources (the DENR)
involving alleged ground water contamination on property that had been
owned/leased by Carolina Medical for activities that occurred on the property
prior to the Companys ownership of Carolina Medical. In June 2006, the
owner/landlord of the property, a partnership in which one of the partners is a
Biotel director and former shareholder and officer of Carolina Medical, and
Carolina Medical entered into an agreement for the early termination of the
lease of the property. In the agreement, the landlord indemnified the Company
for any losses it may incur in connection with environmental claims related to
the property. The DENR has notified the Company that it considers the landlord
to be the responsible party for the property. In order to protect the Company
from any claim with respect to the property that may exceed the landlords
ability to indemnify the Company, Biotel has obtained a binder for insurance to
cover any liability for environmental claims that the Company may have relating
to the property up to a maximum of $10 million during the ten-year period
ending in 2019. The annual cost of the insurance is $16,000.

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 two years. 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, 2010 and 2009, our provision for warranty
services was $234,430 and $186,424, respectively. The assumptions
we use to estimate warranty accruals are evaluated periodically in light of
actual experience and 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 can be different than our expectations.

7

---



Government and Other Regulation

Biotels
manufacturing subsidiary, Braemar, is registered with 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 is registered with the FDA.

Braemar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 require 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 and ISO 13485 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.

8

---



Management

Executive
officers of Biotel are as follows:

|                     |  |    |     |                                                                                                                  |          | 
|-------------------- |  | -- | --- | ---------------------------------------------------------------------------------------------------------------- | -------- | 
|Name                 |  |    | Age |                                                                                                                  | Position | 
|                     |  |    |     |                                                                                                                  |          | 
|B. Steven Springrose |  | 61 |     | Chief Executive Officer of Biotel; Chief Executive
 Officer of Braemar and Agility Centralized Research Services
|                     |  |    |     |                                                                                                                 
|Judy E. Naus         |  | 65 |     | Chief Financial Officer of Biotel; Vice President
 and Chief Financial Officer of Braemar                       

B. Steven Springrose has 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 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 2003. 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.

Judy E. Naus has 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 7  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.

Potential loss of business due to termination notices
sent in accordance with requirements of terminated merger agreement.
On April 2, 2009, the Company entered into a Merger Agreement (the Merger
Agreement) with CardioNet pursuant to which CardioNet was
to acquire our outstanding securities. In a letter dated July 14, 2009,
CardioNet advised us that CardioNet was terminating the Merger Agreement. On
July 16, 2009, we commenced a lawsuit claiming CardioNet breached and
improperly terminated the Merger Agreement. (See Item 3. Legal Proceedings.)
In accordance with the terms and conditions of the Merger Agreement, we
terminated and did not renew several business relationships we had at the time
the Merger Agreement was signed. Biotel believes its business has been
negatively affected by the Merger Agreement and the actions we were required to
take in accordance with the terms of the agreement. The Companys business
prospects, profitability and cash flow may be materially and adversely affected
as a result of the Merger Agreement and related legal expenses.

Three customers generated a significant portion of our
revenues.
Three major customers accounted for 56% and 58% of our consolidated revenues in
the fiscal years ended June 30, 2010 and 2009, respectively. CardioNet,
against whom we commenced a lawsuit, was one of these customers, and another
was a company with whom we did not renew a distribution agreement because of
the Merger Agreement described above. As a result of the Merger Agreement and
its requirement for the termination of Braemar customer relationships in
innovative wireless product lines, total sales to major customers in 2010 was
less than in 2009. The loss of or reduction in demand for our products from major
customers has had a material adverse effect on operating results and cash flow
from operations.

9

---



Factors
That May Affect Future Results (continued)

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 intellectual property and
know-how or our infringement of the intellectualproperty of others could have a material adverse
effect on our business. 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. The loss of trade secret protection for
technologies or know-how could adversely affect our business prospects.

10

---



Factors
That May Affect Future Results (continued)

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.

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
$5,000,000 per occurrence and $5,000,000 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.

11

---



Factors
That May Affect Future Results (Continued)

Our business could be materially adversely impacted by
risks inherent in international markets. During
the 12 months ended June 30, 2010 and 2009, approximately 10.0% and 12.0%,
respectively, of our revenues were generated by customers outside the United
States. Approximately 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.                                                 

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 exist 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, the market for our common stock generally has been
very limited and there can be no assurance that there will be an active market
for our common stock. 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.

12

---



Factors
That May Affect Future Results (Continued)

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 2,783,827 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.

13

---



|        |            
|------- | -----------
|Item 2. | PROPERTIES.

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                                         |  | Square 
 Feet
 Leased |  | Term of Lease                 
|Braemar,
 Inc.
 1285 Corporate Center Drive,
 Suite 150
 Eagan, MN 55121                            |  | Production,
 engineering and administration |  | 17,314                |  | Lease
 expires August 31, 2011
|Braemar,
 Inc.
 400 Arbor Lake Drive,
 Suite B450
 Columbia, SC 29223                               |  | Administration                              |  | 2,903                 |  | Lease
 expires April 30, 2011 
|Agility
 Centralized Research
 Services, Inc.
 2275 Half Day Road
 Suite 133
 Bannockburn, IL 60015 |  | Service
 operations                         |  | 1,225                 |  | Lease
 expires April 30, 2013 

14

---



|        |                   
|------- | ------------------
|Item 3. | LEGAL PROCEEDINGS.

On
April 2, 2009, the Company entered into a Merger Agreement (the Merger
Agreement) with CardioNet, Inc. (CardioNet) pursuant to which CardioNet was
to acquire the Companys outstanding securities for $4.82 per share. In a
letter dated July 14, 2009, CardioNet advised the Company that it was
terminating the Merger Agreement due to the Companys breach of a covenant to
withdraw and terminate a business relationship with ScottCare Corporation
(ScottCare). On July 15, 2009, CardioNet notified the Company that the
Company owed CardioNet $1.4 million for a termination fee and expenses as a
result of CardioNets termination of the Merger Agreement. The Company believes
CardioNets termination of the Merger Agreement was without merit. On July 16,
2009, the Company commenced a lawsuit in Hennepin County District Court, State
of Minnesota, claiming CardioNet breached and improperly terminated the Merger
Agreement. The Company is seeking specific performance and damages. On August
3, 2009, the case was removed to the United States District Court, District of
Minnesota. On September 4, 2009, CardioNet submitted an answer and counterclaim
denying the Companys claims and asserting a counterclaim for the $1.4 million
CardioNet claims it is owed as a result of its termination of the Merger
Agreement. On February 1, 2010, CardioNet filed its Amended Answer And Counterclaims,
asserting additional defenses and counterclaims against the Company. On May 28,
2010, following the completion of discovery, the Company moved for partial
summary judgment dismissing CardioNets counterclaims and certain defenses, and
that motion remains pending with the court. The case is set for a bench trial
to begin on November 8, 2010.

On
September 25, 2009, LifeWatch Services, Inc., and Card Guard Scientific
Survival, Ltd., the licensee and owner, respectively, of U.S. Patent Nos.
7,542,878 B2 (the 878 Patent) and 5,730,143 (the 143 Patent) commenced an
action LifeWatch
Patent Matter. On September 25, 2009, LifeWatch Services, Inc.,
and Card Guard against Braemar, Inc. (Braemar), and one of its customers,
eCardio Diagnostics, LLC (eCardio), in Federal District Court for the
Northern District of Illinois, File No. 09-CV-6001, alleging that Braemar and
eCardio had infringed the 878 and 143 Patents. The Supply Agreement between
Braemar and eCardio provides that Braemar will hold eCardio harmless from any
liability it incurs in connection with a claim that Braemars products violate
the intellectual property rights or infringes upon any patent of a third party.
Braemar and eCardio have denied the allegations, and Braemar is defending the
suit on behalf of both itself and eCardio. Since the action was commenced, the
Plaintiffs have dismissed their claims relating to alleged infringement of the
878 Patent and have continued to pursue their claims relating to the alleged
infringement of the 143 Patent.

|        |          
|------- | ---------
|Item 4. | RESERVED.

15

---



PART II

|        |                                                                                                               
|------- | --------------------------------------------------------------------------------------------------------------
|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND 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 ended June 30, 2010 and 2009 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
 Ended
 2009  2010 |  |   | Low  |  | High |     
|September 30                |  | $ | 2.22 |  | $    | 4.76 | 
|December 31                 |  | $ | 1.20 |  | $    | 2.90 | 
|March 31                    |  | $ | 1.10 |  | $    | 1.90 | 
|June 30                     |  | $ | 1.30 |  | $    | 1.80 | 
|                            |  |   |      |  |      |      | 
|Quarter
 Ended
 2008  2009 |  |   | Low  |  | High |     
|September 30                |  | $ | 2.55 |  | $    | 3.35 | 
|December 31                 |  | $ | 2.00 |  | $    | 3.00 | 
|March 31                    |  | $ | 1.52 |  | $    | 1.94 | 
|June 30                     |  | $ | 4.40 |  | $    | 4.81 | 

As
of June 30, 2010, we had approximately 400 shareholders of record of our common
stock. We have not paid any cash or other dividends during our last two 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 year ended June 30, 2010.

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, 2010, 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.

16

---



|                                                              |  |                                                                                                   |         |                                                                                   |   |                                                                                                                                                       |  |  |         | 
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | ------- | --------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|                                                              |  | 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       |  |                                                                                                   | 141,000 |                                                                                   | $ | 1.6793                                                                                                                                                |  |  | 509,000 | 
|Equity
 compensation plans not approved by securities holders |  |                                                                                                   |        |                                                                                   |   |                                                                                                                                                      |  |  |        | 
|                                                             
|Total                                                         |  |                                                                                                   | 141,000 |                                                                                   | $ | 1.6793                                                                                                                                                |  |  | 509,000 | 

|        |                         
|------- | ------------------------
|Item 6. | SELECTED FINANCIAL DATA.

Not
applicable.

|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 7. | 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 limits.
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.

17

---



Critical Accounting
Policies (Continued)

Inventories
are valued at lower of cost (using the average and first-in first-out cost
methods) or market. A valuation allowance is maintained to provide changes in
inventory valuation due to fluctuations in market requirements and product revisions.

Property,
equipment and leasehold improvements are recorded at cost. Depreciation is
calculated using the straight-line method over estimated useful lives of three
to five years for equipment, seven years for furniture and fixtures and two to
five years for leasehold improvements, which represents the terms of the
original leases.

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 2010 and 2009,
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
routinely warrant our recorders against defects in material and workmanship for
one year. Supplies, accessories and repairs typically carry no warranty to
90-days warranty, depending on the item. 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.

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

18

---



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
subsidiaries, 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, wireless event recorders, wireless MCT systems, and tissue extraction components; 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
subsidiary, Braemar, Inc., through its Columbia, South Carolina facility which
was formerly 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.

On
April 2, 2009, the Company entered into a Merger Agreement with CardioNet, Inc.
pursuant to which CardioNet was to acquire all of the Companys outstanding
securities. In a letter dated July 14, 2009, CardioNet notified the Company
that CardioNet was terminating the Merger Agreement due to the Companys breach
of a covenant requiring the Company to terminate a business relationship with
another company. On July 16, 2009, the Company commenced a lawsuit claiming
CardioNet breached and improperly terminated the Merger Agreement. (See Item
3. Legal Proceedings.) In accordance with the terms and conditions of the
Merger Agreement, we terminated and did not renew a number of business
relationships. We believe that our business has been adversely affected by the
Merger Agreement and the actions we were required to take pursuant to the
agreement and that this could have a material and adverse effect on our
profitability and financial condition.

Results of Operations

Biotels
net revenues for the year ended June 30, 2010, were $11,012,000, 12.9% less
than net revenues of $12,640,000 for the year ended June 30, 2009. Revenue
decreased in fiscal 2010 as a result of the terminated Merger Agreement
described above. In accordance with the terms and conditions of the Merger Agreement, we terminated
and did not renew a number of business relationships.

Gross
profit margin decreased to $4,326,000 (39.3%) for fiscal year 2010, compared to
$5,525,000 (43.7%) in fiscal year 2009. Cost of sales and service decreased to
$6,686,000 (60.7%) for fiscal year 2010, compared to $7,115,000 (56.3%) for
fiscal year 2009. The decrease in cost of sales and service was primarily the
result of the decrease in sales. Revenues on equipment sales in fiscal year
2010 were diminished, resulting in diminished gross margins as a result of
semi-fixed levels of manufacturing overhead and increase in allocation of costs
to product support. Gross margins vary from year to year dependent on model mix
and subsidiary contributions. Biotel manages its operations to promote
favorable gross margins and profitability.

Selling and administrative expenses increased to $3,324,000 (30.2% of sales)
for the year ended June 30, 2010, compared to $2,586,000 (20.5% of sales) for
the year ended June 30, 2009. This increase is primarily the result of
administrative expenses associated with general corporate legal fees related to the Companys
current legal proceedings (see Item 3. Legal Proceedings). Legal expenses for the fiscal year ended
June 30, 2010 totaled $1,200,000, compared to legal expenses of $137,000 for the fiscal year ended June 30, 2009.  Selling
expenses include salaries, commissions, benefits, travel expenses and other
selling expenses.

19

---



Results of Operations (continued)

Research
and development expenditures for fiscal year 2010 were $1,453,000, a decrease
of 9.3% compared to $1,602,000 in fiscal year 2009. The decrease resulted
primarily because heavy development activities related to a new Holter product
line and ER9 Wireless technology platform and product line were funded in the
two previous fiscal years. Expenditures for MCT wireless product development
activity in fiscal year 2010 benefited from the ER9 Wireless technology
platform developed in 2009 and 2008. Biotel expects a similar level of
expenditures for research and development in fiscal year 2011.

No
interest expense was posted for the year ended June 30, 2010, compared to
interest expense of $590 for the year ended June 30, 2009. During the year
ended June 30, 2009, interest expense was incurred only when the bank credit
line was accessed.

A
net loss of $283,000 was posted for the year ended June 30, 2010, versus net
income of $944,000 for the year ended June 30, 2009. The net loss was
primarily the result of diminished revenues and legal fees associated with the
terminated merger agreement. (See Item 3. Legal Proceedings.)

Off-Balance Sheet
Arrangements

Biotel
does not have any off-balance sheet financing arrangements other than operating leases.

Liquidity and Capital
Resources

Working
capital decreased to $4,034,000 at June 30, 2010, compared to $4,197,000 at
June 30, 2009. The decrease in working capital was primarily a result of the
reduction in the level of inventory required to support the decrease in
equipment sales.

Cash
and cash equivalents were $1,577,000 at June 30, 2010, compared to $1,160,000
at June 30, 2009. The increase in cash and cash equivalents was influenced by many factors,
including the decrease in accounts receivable and inventory and increase in
accounts payable. The ratio of current assets to current liabilities (current ratio)
decreased to 3.58 to one at June 30, 2010, compared to 3.97 to one at June 30,
2009.

Accounts
receivable decreased to $2,067,000 at June 30, 2010, versus $2,202,000 at June
30, 2009. The decrease in accounts receivable was related to decreased sales.
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 2010, $299,000 was used for capital expenditures, compared with
$380,000 in fiscal year 2009. Levels of capital investment are expected to vary
from year to year.

Inventory
decreased to $1,312,000 at June 30, 2010, compared to
$1,878,000 at June 30, 2009. This decrease resulted as less
material was purchased to support decreased sales levels as a result of the
terminated merger agreement. (See Item 3. Legal Proceedings.) Biotels
subsidiaries manage inventories to provide safety stock and product flow for
customers while controlling the amount of inventory.

Current
liabilities increased to $1,565,000 at June 30, 2010, compared to $1,415,000 on
June 30, 2009. The increase resulted from changes in deferred revenue and
accruals for expenses.

As
of June 30, 2010 and 2009, Biotel had long term liabilities of $343,000 and
$329,000, respectively, relating to the Companys deferred income tax
liability.

20

---



Liquidity and Capital
Resources (continued)

Stockholders
equity decreased to $5,386,000 at June 30, 2010, from $5,659,000 at June 30,
2009. The decrease in stockholders equity was principally a
result of the decrease in retained earnings due to the fiscal 2010 net loss.

Management
believes that present cash balances and internally generated funds should
provide sufficient working capital to meet present and projected needs for the
coming 12months. As described above, Biotel believes that its business has been
adversely affected by the Merger Agreement and the actions the Company took in
accordance with the terms and conditions of the Merger Agreement and that this
could have a material adverse effect on Biotels financial condition. There is
no assurance that Biotel will be successful in obtaining additional working
capital if more is required.

|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not
applicable.

21

---



|        |                                            
|------- | -------------------------------------------
|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.

See
Financial Statements beginning on page F-1.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
 FINANCIAL DISCLOSURE.

Not
applicable.

|         |                         
|-------- | ------------------------
|Item 9A. | CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under Rules
13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the Exchange Act), as of the end of the period covered by this
report. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.

There
have been no changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal control over financial
reporting during the fiscal year ended June 30, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

Managements Annual Report on Internal
Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act). Our management assessed the effectiveness of our
internal control over financial reporting as of June 30, 2010. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Our management has concluded that, as of June 30,
2010, our internal control over financial reporting is effective based on these
criteria. This annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over
financial reporting.

Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our internal control over financial reporting will prevent
all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within this Company have been detected. Biotels internal controls over
financial reporting, however, are designed to provide reasonable assurance that
the objectives of internal control over financial reporting are met.

|         |                   
|-------- | ------------------
|Item 9B. | OTHER INFORMATION.

Not
applicable.

22

---



PART III

|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Incorporated
by reference from Biotels definitive proxy statement to be filed for the 2010
Annual Meeting of Shareholders.

|         |                        
|-------- | -----------------------
|Item 11. | EXECUTIVE COMPENSATION.

Incorporated
by reference from Biotels definitive proxy statement to be filed for the 2010
Annual Meeting of Shareholders.

|         |                                                                                                 
|-------- | ------------------------------------------------------------------------------------------------
|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
 RELATED STOCKHOLDER MATTERS.

Incorporated
by reference from Biotels definitive proxy statement to be filed for the 2010
Annual Meeting of Shareholders.

|         |                                                                           
|-------- | --------------------------------------------------------------------------
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
 INDEPENDENCE.

Incorporated
by reference from Biotels definitive proxy statement to be filed for the 2010
Annual Meeting of Shareholders.

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

Incorporated
by reference from Biotels definitive proxy statement to be filed for the 2010
Annual Meeting of Shareholders.

PART IV

|         |          
|-------- | ---------
|Item 15. | 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-K.

23

---



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 28, 2010 | By          | /s/ B.
 Steven Springrose       
|                          |             | B. Steven
 Springrose, President
|                          |             | and 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 thing 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
 28, 2010
|B. Steven
 Springrose                                  |  |                    
|(President,
 Chief Executive Officerand a Director)    | 
|                                                       |  |                    
|/s/ Judy E.
 Naus                                      |  | September
 28, 2010
|Judy E. Naus                                           |  |                    
|(Chief
 Financial Officerand Chief Accounting Officer) | 
|                                                       |  |                    
|/s/ C. Roger
 Jones                                    |  | September
 28, 2010
|C. Roger
 Jones                                        |  |                    
|(Director)                                             |  |                    
|                                                       |  |                    
|/s/ Stanley
 N. Bormann                                |  | September
 28, 2010
|Stanley N.
 Bormann                                    |  |                    
|(Director)                                             |  |                    
|                                                       |  |                    
|/s/ L. John
 Ankney                                    |  | September
 28, 2010
|L. John
 Ankney                                        |  |                    
|(Director)                                             |  |                    
|                                                       |  |                    
|/s/ David A.
 Heiden                                   |  | September
 28, 2010
|David A.
 Heiden                                       |  |                    
|(Director)                                             |  |                    
|                                                       |  |                    
|/s/ Spencer
 M. Vawter                                 |  | September
 28, 2010
|Spencer M.
 Vawter                                     |  |                    
|(Director)                                             |  |                    

24

---



Exhibits:

|                |  |                                                                                                          |                                                                                                                                           | 
|--------------- |  | -------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit
 Number |  |                                                                                                          | Description
 of Document                                                                                                                  | 
|                |  |                                                                                                          |                                                                                                                                          
|3.1             |  |                                                                                                          | 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. *****                                  
|10.8            |  |                                                                                                          | Office Lease
 dated April 15, 2008 between Braemar, Inc. and Jonestown Properties,
 L.L.C.*******                                        
|10.9            |  |                                                                                                          | Office Lease
 dated March 25, 2009 between Biotel Inc. and Fontaine Business Park, LLC
 ********                                         
|10.10           |  |                                                                                                          | Office Lease
 dated May 7, 2010 between Agility Centralized Research Services, Inc. and
 Bannockburn Executive Plaza LLC *               
|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, Commission 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.                   
|*******         |  | Previously
 filed with Form 10-KSB on September 29, 2008, Commission File No. 0-50914.                  
|********        |  | Previously
 filed with Form 10-K on September 28, 2009, Commission File No. 0-50914.                    

25

---



BIOTEL INC.
REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE YEARS
ENDED
JUNE 30, 2010 AND 2009

F-1

---



BIOTEL INC.

CONTENTS

|                                                         |  |           
|-------------------------------------------------------- |  | ----------
|                                                         |  | PAGE      
|                                                         |  |           
|REPORT OF INDEPENDENT REGISTERED PUBLIC
 ACCOUNTING FIRM |  | F-3       
|                                                         |  |           
|CONSOLIDATED FINANCIAL STATEMENTS                        |  |           
|Consolidated balance sheets                              |  | F-4       
|Consolidated statements of
 operations                   |  | F-5       
|Consolidated statements of
 cash flows                   |  | F-6       
|Consolidated statements of
 stockholders equity         |  | F-7       
|                                                         |  |           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS               |  | F-8  F-18

F-2

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

Board
of Directors and StockholdersBiotel Inc.Eagan, Minnesota

We
have audited the accompanying consolidated balance sheets of Biotel Inc. (the Company) as of June 30, 2010 and 2009, and the
related consolidated statements of operations, 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. as of June 30, 2010 and 2009, and the results of its operations
and its 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
28, 2010
Columbia, South Carolina

F-3

---



BIOTEL INC.
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                               |  |          |           |      |   |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | --------- | ---- | - | --------- | 
|                                                                                                                                               |  | June 30, |          
|                                                                                                                                               |  | 2010     |           | 2009 |  
|                                                                                                                                               |  |          |           |      |   |           | 
|ASSETS                                                                                                                                        
|CURRENT ASSETS                                                                                                                                 |  |          |           |      |   |           | 
|Cash and cash equivalents                                                                                                                      |  | $        | 1,576,651 |      | $ | 1,160,409 | 
|Trade accounts receivable, net of allowance
 for doubtful accounts of $40,690 and $48,965 at June 30, 2010 and 2009,
 respectively             |  |          | 2,066,917 |      |   | 2,202,378 | 
|Income taxes receivable                                                                                                                        |  |          | 80,501    |      |   |          | 
|Inventories, net                                                                                                                               |  |          | 1,311,933 |      |   | 1,878,397 | 
|Deferred tax asset                                                                                                                             |  |          | 316,221   |      |   | 250,674   | 
|Prepaid expenses                                                                                                                               |  |          | 247,597   |      |   | 120,098   | 
|                                                                                                                                               |  |          |           |      |   |           | 
|Total Current Assets                                                                                                                           |  |          | 5,599,820 |      |   | 5,611,956 | 
|                                                                                                                                               |  |          |           |      |   |           | 
|PROPERTY & EQUIPMENT, Net                                                                                                                      |  |          | 985,030   |      |   | 1,081,314 | 
|                                                                                                                                               |  |          |           |      |   |           | 
|OTHER ASSETS                                                                                                                                   |  |          |           |      |   |           | 
|Goodwill                                                                                                                                       |  |          | 695,551   |      |   | 695,551   | 
|Other assets                                                                                                                                   |  |          | 13,820    |      |   | 13,820    | 
|                                                                                                                                               |  |          |           |      |   |           | 
|Total Other Assets                                                                                                                             |  |          | 709,371   |      |   | 709,371   | 
|                                                                                                                                               |  |          |           |      |   |           | 
|                                                                                                                                               |  | $        | 7,294,221 |      | $ | 7,402,641 | 
|                                                                                                                                               |  |          |           |      |   |           | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                          
|                                                                                                                                              
|CURRENT LIABILITIES                                                                                                                            |  |          |           |      |   |           | 
|Trade accounts payable                                                                                                                         |  | $        | 773,646   |      | $ | 557,094   | 
|Accrued payroll and related liabilities                                                                                                        |  |          | 246,576   |      |   | 277,803   | 
|Deferred service contract revenue                                                                                                              |  |          | 72,941    |      |   | 93,855    | 
|Unearned revenue                                                                                                                               |  |          | 149,200   |      |   |          | 
|Other accrued expenses                                                                                                                         |  |          | 322,987   |      |   | 283,502   | 
|Income taxes payable                                                                                                                           |  |          |          |      |   | 202,265   | 
|                                                                                                                                               |  |          |           |      |   |           | 
|Total Current Liabilities                                                                                                                      |  |          | 1,565,350 |      |   | 1,414,519 | 
|                                                                                                                                               |  |          |           |      |   |           | 
|LONG-TERM
LIABILITIES                                                                                                                          |  |          |           |      |   |           | 
|Deferred tax liability                                                                                                                         |  |          | 343,232   |      |   | 329,183   | 
|                                                                                                                                               |  |          |           |      |   |           | 
|COMMITMENTS AND CONTINGENCIES (See Notes 6 and 7)                                                                                              |  |          |           |      |   |           | 
|                                                                                                                                               |  |          |           |      |   |           | 
|Total Liabilities                                                                                                                              |  |          | 1,908,582 |      |   | 1,743,702 | 
|                                                                                                                                               |  |          |           |      |   |           | 
|STOCKHOLDERS EQUITY                                                                                                                           |  |          |           |      |   |           | 
|Preferred stock, $.01 stated value;
 2,000,000 shares authorized; no shares issued                                                             |  |          |          |      |   |          | 
|Common stock, $.01 stated value; 10,000,000
 shares authorized; 2,783,827 and 2,763,827 shares issued at June 30, 2010 and
 2009, respectively |  |          | 27,838    |      |   | 27,638    | 
|Additional paid-in capital                                                                                                                     |  |          | 2,168,015 |      |   | 2,158,638 | 
|Retained earnings                                                                                                                              |  |          | 3,189,786 |      |   | 3,472,663 | 
|                                                                                                                                               |  |          |           |      |   |           | 
|Total Stockholders Equity                                                                                                                     |  |          | 5,385,639 |      |   | 5,658,939 | 
|                                                                                                                                               |  |          |           |      |   |           | 
|                                                                                                                                               |  | $        | 7,294,221 |      | $ | 7,402,641 | 

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

F-4

---



BIOTEL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                              |  |                                |            |      |   |            |  
|------------------------------------------------------------- |  | ------------------------------ | ---------- | ---- | - | ---------- | -
|                                                              |  | For the
 years ended
 June 30, |           
|                                                              |  | 2010                           |            | 2009 |  
|                                                              |  |                                |            |      |   |            |  
|SALES AND SERVICES                                            |  | $                              | 11,012,350 |      | $ | 12,639,636 |  
|                                                              |  |                                |            |      |   |            |  
|COST OF SALES AND SERVICES                                    |  |                                | 6,686,055  |      |   | 7,114,810  |  
|                                                              |  |                                |            |      |   |            |  
|GROSS PROFIT                                                  |  |                                | 4,326,295  |      |   | 5,524,826  |  
|                                                              |  |                                |            |      |   |            |  
|OPERATING EXPENSES                                            |  |                                |            |      |   |            |  
|Selling and administrative                                    |  |                                | 3,324,167  |      |   | 2,585,932  |  
|Research and development                                      |  |                                | 1,452,611  |      |   | 1,601,525  |  
|                                                              |  |                                |            |      |   |            |  
|Total operating expenses                                      |  |                                | 4,776,778  |      |   | 4,187,457  |  
|                                                              |  |                                |            |      |   |            |  
|INCOME (LOSS) FROM OPERATIONS                                 |  |                                | (450,483   | )    |   | 1,337,369  |  
|                                                              |  |                                |            |      |   |            |  
|OTHER INCOME (EXPENSE)                                        |  |                                |            |      |   |            |  
|Interest income                                               |  |                                | 5,665      |      |   | 7,298      |  
|Interest expense                                              |  |                                |           |      |   | (590       | )
|Miscellaneous                                                 |  |                                | (15,064    | )    |   | 12,471     |  
|                                                              |  |                                |            |      |   |            |  
|Total other income (expense)                                  |  |                                | (9,399     | )    |   | 19,179     |  
|                                                              |  |                                |            |      |   |            |  
|NET INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES |  |                                | (459,882   | )    |   | 1,356,548  |  
|                                                              |  |                                |            |      |   |            |  
|PROVISION (BENEFIT) FOR INCOME TAXES                          |  |                                | (177,005   | )    |   | 412,611    |  
|                                                              |  |                                |            |      |   |            |  
|NET INCOME (LOSS)                                             |  | $                              | (282,877   | )    | $ | 943,937    |  
|                                                              |  |                                |            |      |   |            |  
|INCOME (LOSS) PER SHARE                                       |  |                                |            |      |   |            |  
|BASIC                                                         |  | $                              | (0.10      | )    | $ | 0.34       |  
|DILUTED                                                       |  | $                              | (0.10      | )    | $ | 0.33       |  

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

F-5

---



BIOTEL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                         |  |                                |           |      |   |           |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | --------- | ---- | - | --------- | -
|                                                                                         |  | For the
 years ended
 June 30, |          
|                                                                                         |  | 2010                           |           | 2009 |  
|                                                                                         |  |                                |           |      |   |           |  
|OPERATING
 ACTIVITIES                                                                    |  |                                |           |      |   |           |  
|Net income (loss)                                                                        |  | $                              | (282,877  | )    | $ | 943,937   |  
|Adjustments to reconcile net income (loss) to net cash provided by
 operating activities |  |                                |           |      |   |           |  
|Depreciation                                                                             |  |                                | 391,049   |      |   | 389,198   |  
|Stock-based compensation                                                                 |  |                                | 2,077     |      |   | 13,044    |  
|Deferred income taxes                                                                    |  |                                | (51,498   | )    |   | 97,560    |  
|Decrease in allowance for doubtful accounts                                              |  |                                | (8,275    | )    |   | (6,475    | )
|Increase (decrease) in inventory valuation allowance                                     |  |                                | 92,095    |      |   | (43,453   | )
|Loss on disposal of property and equipment                                               |  |                                | 64        |      |   | 529       |  
|Changes in deferred and accrued amounts                                                  |  |                                |           |      |   |           |  
|Trade accounts receivable                                                                |  |                                | 143,736   |      |   | (429,391  | )
|Income taxes receivable                                                                  |  |                                | (80,501   | )    |   | 39,310    |  
|Prepaid expenses                                                                         |  |                                | (127,499  | )    |   | (10,195   | )
|Inventories                                                                              |  |                                | 474,369   |      |   | (406,781  | )
|Trade accounts payable                                                                   |  |                                | 216,552   |      |   | (94,541   | )
|Accrued payroll and related liabilities                                                  |  |                                | (31,227   | )    |   | 40,300    |  
|Other accrued expenses                                                                   |  |                                | 39,485    |      |   | 84,962    |  
|Unearned revenue                                                                         |  |                                | 149,200   |      |   |          |  
|Deferred service contract revenue                                                        |  |                                | (20,914   | )    |   | (39,504   | )
|Income taxes payable                                                                     |  |                                | (202,265  | )    |   | 202,265   |  
|                                                                                         |  |                                |           |      |   |           |  
|Net
 cash provided by operating activities                                               |  |                                | 703,571   |      |   | 780,765   |  
|                                                                                         |  |                                |           |      |   |           |  
|INVESTING
 ACTIVITIES                                                                    |  |                                |           |      |   |           |  
|Purchases of property and equipment                                                      |  |                                | (299,329  | )    |   | (379,945  | )
|Proceeds from sale of property and equipment                                             |  |                                | 4,500     |      |   | 1,614     |  
|                                                                                         |  |                                |           |      |   |           |  
|Net
 cash used for investing activities                                                  |  |                                | (294,829  | )    |   | (378,331  | )
|                                                                                         |  |                                |           |      |   |           |  
|FINANCING
 ACTIVITIES                                                                    |  |                                |           |      |   |           |  
|Proceeds from issuance of common stock                                                   |  |                                | 7,500     |      |   |          |  
|Net change on line of credit                                                             |  |                                |          |      |   | (187,146  | )
|                                                                                         |  |                                |           |      |   |           |  
|Net
 cash provided by (used for) financing activities                                    |  |                                | 7,500     |      |   | (187,146  | )
|                                                                                         |  |                                |           |      |   |           |  
|Net
 increase in cash and cash equivalents                                               |  |                                | 416,242   |      |   | 215,288   |  
|                                                                                         |  |                                |           |      |   |           |  
|CASH AND
 CASH EQUIVALENTS AS OF JUNE 30, 2009 and 2008                                  |  |                                | 1,160,409 |      |   | 945,121   |  
|                                                                                         |  |                                |           |      |   |           |  
|CASH AND
 CASH EQUIVALENTS AS OF JUNE 30, 2010 and 2009                                  |  | $                              | 1,576,651 |      | $ | 1,160,409 |  
|                                                                                         |  |                                |           |      |   |           |  
|CASH PAID
 FOR                                                                           |  |                                |           |      |   |           |  
|Interest                                                                                 |  | $                              |          |      | $ | 621       |  
|Income Taxes                                                                             |  | $                              | 300,693   |      | $ | 73,475    |  

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

F-6

---



BIOTEL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the years ended June 30, 2010 and 2009

|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|------------------------- |  | ------------- | ------ | ---------------------------- |  | ------------------ |  | ----- | --------- |  | - | --------- | - | - | --------- | -
|                          |  | Common
 Stock |        | Additional
 Paid-In
 Capital |  | Retained
 Earnings |  | Total |          
|                          |  |               |        |                              | 
|                          |  | Amount        |        | Shares                       |  |                    |  |      
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Balance, June 30, 2008    |  | $             | 27,638 |                              |  | 2,763,827          |  | $     | 2,145,594 |  | $ | 2,528,726 |   | $ | 4,701,958 |  
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Stock-based compensation  |  |               |       |                              |  |                   |  |       | 13,044    |  |   |          |   |   | 13,044    |  
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Net income                |  |               |       |                              |  |                   |  |       |          |  |   | 943,937   |   |   | 943,937   |  
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Balance, June 30, 2009    |  |               | 27,638 |                              |  | 2,763,827          |  |       | 2,158,638 |  |   | 3,472,663 |   |   | 5,658,939 |  
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Exercise of stock options |  |               | 200    |                              |  | 20,000             |  |       | 7,300     |  |   |          |   |   | 7,500     |  
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Stock-based compensation  |  |               |       |                              |  |                   |  |       | 2,077     |  |   |          |   |   | 2,077     |  
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Net loss                  |  |               |       |                              |  |                   |  |       |          |  |   | (282,877  | ) |   | (282,877  | )
|                          |  |               |        |                              |  |                    |  |       |           |  |   |           |   |   |           |  
|Balance, June 30, 2010    |  | $             | 27,838 |                              |  | 2,783,827          |  | $     | 2,168,015 |  | $ | 3,189,786 |   | $ | 5,385,639 |  

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

F-7

---



BIOTEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  NATURE OF
BUSINESS AND CORPORATE ORGANIZATION

Biotel Inc.
(Parent Company) has two wholly owned
subsidiaries, Braemar, 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 also manufactures and services biological fluid and tissue
management systems. Braemar, Inc. primarily sells to original equipment
manufacturing (OEM) customers who use the Companys products as components in
their medical product lines. Braemar, Inc., through its acquisition of 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 are both national and international.

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, analysis of goodwill for potential impairment
 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. Advertising expenses totaled approximately $5,000 and
 $11,000 in the fiscal years ended June 30, 2010 and 2009, respectively.                                                                                                                                                                                                                                                                                                                                                    

F-8

---



NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, Continued

| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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 methods over estimated
 useful lives of three to five years for equipment, seven years for furniture
 and fixtures and two to five years for leasehold improvements, which
 represents the terms of the related leases. Maintenance and repairs which do
 not improve or extend the useful lives of assets are charged to expense as
 incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Goodwill                 
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                           | The Companys 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 2010 and 2009, such tests
 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, 2010 and 2009, current liabilities
 include service contract revenue deferrals of approximately $73,000 and
 $94,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Warranty reserve         
| |                          
| |                           | The Company offers warranties of up to two years 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, 2010 and 2009, the warranty reserve totaled
 $234,430 and $186,424, respectively, and this amount is included in Other
 Accrued Expenses. The following is a reconciliation of the aggregate warranty
 liability as of June 30, 2010 and 2009:

|                                                                                         |  |      |          |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | ------- | -
|                                                                                         |  | 2010 |          | 2009 |  
|Balance, beginning of year                                                               |  | $    | 186,424  |      | $ | 87,512  |  
|Claims paid                                                                              |  |      | (164,724 | )    |   | (94,343 | )
|Additional warranties issued and revisions
 in estimates of previously issued warranties |  |      | 212,730  |      |   | 193,255 |  
|                                                                                         |  |      |          |      |   |         |  
|Balance, end of year                                                                     |  | $    | 234,430  |      | $ | 186,424 |  

| |                   |                                                                                                                                          
| | ----------------- | -----------------------------------------------------------------------------------------------------------------------------------------
| | Unearned revenues
| |                  
| |                   | Unearned revenues represent payments received from customers for products that have not yet been produced
and delivered to the customers.
|

F-9

---



NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, Continued

| |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Revenues for
 services provided by the Company are recognized as these services are
 provided.                                                                                                                                                                                                                                                                                                               
| |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                    | The Companys revenue recognition complies with the accounting and
 disclosure requirements of Securities and Exchange Commission Staff
 Accounting Bulletin (SAB) No. 104.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Net income (loss) per common share
| |                                   
| |                                    | The Company reports both basic net income (loss) per share, which is
 based on the weighted-average number of common shares outstanding, and
 diluted net income (loss) per share, which is based on the weighted-average
 number of common shares outstanding plus all potential dilutive shares
 outstanding. Potential dilutive shares consist of the stock options
 outstanding.                                                                                                                                                                                                                                                                                                                  
| |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Stock options plans               
| |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                    | The Company uses the fair value recognition
 provision under United States generally accepted accounting principles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                    | 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 significant assumptions were used: risk-free interest rates based
 on date of issuance of 1.55% to 4.41%, no expected dividends, a volatility
 factor of 20.62 to 229.35, an expected life of the options of 5-10 years
 (amortized over the vesting period) and expected vesting of the options at
 100%.                                                                                                                                                                                                                                
| |                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-10

---



NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, Continued

| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Recently issued accounting standards
| |                                     
| |                                      | Other accounting standards that have been issued or proposed by the
 FASB or other standards-setting bodies are not expected to have a material
 impact on the Companys financial position, results of operations or cash
 flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-11

---



NOTE 3  INVENTORIES

As
of June 30, 2010 and 2009, inventories consist of the following:

|                                   |  |      |           |      |   |           |  
|---------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                   |  | 2010 |           | 2009 |  
|                                   |  |      |           |      |   |           |  
|Raw
 materials and supplies        |  | $    | 1,308,624 |      | $ | 1,782,903 |  
|Finished
 goods                    |  |      | 231,339   |      |   | 235,534   |  
|Evaluation
 units and replacements |  |      | 8,612     |      |   | 4,507     |  
|                                   |  |      |           |      |   |           |  
|                                   |  |      | 1,548,575 |      |   | 2,022,944 |  
|Valuation
 allowance               |  |      | (236,642  | )    |   | (144,547  | )
|                                   |  |      |           |      |   |           |  
|                                   |  | $    | 1,311,933 |      | $ | 1,878,397 |  

NOTE 4  PROPERTY AND EQUIPMENT

As
of June 30, 2010 and 2009, property and equipment consist of the following:

|                          |  |      |            |      |   |            |  
|------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                          |  | 2010 |            | 2009 |  
|                          |  |      |            |      |   |            |  
|Machinery
 and equipment  |  | $    | 3,691,382  |      | $ | 3,402,351  |  
|Furniture
 and fixtures   |  |      | 34,791     |      |   | 34,791     |  
|Leasehold
 improvements   |  |      | 47,857     |      |   | 47,857     |  
|                          |  |      |            |      |   |            |  
|                          |  |      | 3,774,030  |      |   | 3,484,999  |  
|Accumulated
 depreciation |  |      | (2,789,000 | )    |   | (2,403,685 | )
|                          |  |      |            |      |   |            |  
|                          |  | $    | 985,030    |      | $ | 1,081,314  |  

Depreciation
expense for the years ended June 30, 2010 and 2009 totaled $391,049 and
$389,198, respectively.

NOTE 5  REVOLVING LINE OF CREDIT

The Company
has a $1,500,000 credit line with a bank. The line bears interest at the banks
prime rate (3.25% at June 30, 2010) plus .25% and expires on February 5, 2011.
There was no outstanding balance on this line of credit as of June 30, 2010 and
2009.

F-12

---



NOTE 6  LEASE
OBLIGATIONS

Biotel and
its subsidiaries are parties to operating leases at the following locations:

Braemar,
Inc. leases its facility in Columbia, South Carolina, under a 24-month lease
agreement which will expire April 30, 2011.

Braemar,
Inc. leases its facility in Eagan, Minnesota under a 66-month lease agreement
which will expire August 31, 2011.

Braemar,
Inc. leased a facility in Winston-Salem, North Carolina under a 36-month lease
agreement with an expiration date of June 30, 2011. Under terms of the
agreement, Braemar elected to terminate the lease effective June 30, 2010.

Agility
Centralized Research Services, Inc. leases its facility in Bannockburn,
Illinois, under a 36-month lease agreement which will expire April 30, 2013.

Future
minimum lease payments due under these non-cancelable operating leases as of
June 30, 2010 are as follows:

|For the years ending
June 30, |  |   |         | 
|----------------------------- |  | - | ------- | 
|2011                          |  | $ | 172,135 | 
|2012                          |  |   | 41,311  | 
|2013                          |  |   | 18,674  | 
|                              |  |   |         | 
|                              |  | $ | 232,120 | 

The leases
for office and manufacturing space include costs allocated by the lessor for
property taxes, insurance and maintenance. Total rent expense for leased space
was $246,998 and $248,786 for the years ended June 30, 2010 and 2009,
respectively.

F-13

---



NOTE 7  COMMITMENTS
AND CONTINGENCIES

Carolina
Medical, Inc., a subsidiary of the Company that was dissolved in November,
2006, was the subject of 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 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 acknowledged 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, and agreed to indemnify the
Company for any environmental claims related to the property. In order to
protect the Company from any claim with respect to the property that may exceed
the landlords ability to indemnify the Company, Biotel has obtained insurance
to cover any liability for environmental claims that the Company may have
relating to the property up to a maximum of $10 million during the ten-year
period ending in 2019. The annual cost of the insurance is $16,000.

On April 2,
2009, the Company entered into a Merger Agreement (the Merger Agreement) with
CardioNet, Inc. (CardioNet) pursuant to which CardioNet was to acquire the
Companys outstanding securities for $4.82 per share. In a letter dated July
14, 2009, CardioNet advised the Company that it was terminating the Merger
Agreement due to the Companys breach of a covenant to withdraw and terminate a
business relationship with ScottCare Corporation (ScottCare). On July 15,
2009, CardioNet notified the Company that the Company owed CardioNet $1.4
million for a termination fee and expenses as a result of CardioNets
termination of the Merger Agreement. The Company believes CardioNets
termination of the Merger Agreement was without merit. On July 16, 2009, the
Company commenced a lawsuit in Hennepin County District Court, State of
Minnesota, claiming CardioNet breached and improperly terminated the Merger
Agreement. The Company is seeking specific performance and damages. On August 3,
2009, the case was removed to the United States District Court, District of
Minnesota. On September 4, 2009, CardioNet submitted an answer and counterclaim
denying the Companys claims and asserting a counterclaim for the $1.4 million
CardioNet claims it is owed as a result of its termination of the Merger
Agreement. On February 1, 2010, CardioNet filed its Amended Answer And
Counterclaims, asserting additional defenses and counterclaims against the
Company. On May 28, 2010, following the completion of discovery, the Company
moved for partial summary judgment dismissing CardioNets counterclaims and
certain defenses, and that motion remains pending with the court. The case is
set for a bench trial to begin on November 8, 2010.

On
September 25, 2009, LifeWatch Services, Inc., and Card Guard Scientific
Survival, Ltd., the licensee and owner, respectively, of U.S. Patent Nos.
7,542,878 B2 (the 878 Patent) and 5,730,143 (the 143 Patent) commenced an
action LifeWatch Patent Matter against Braemar, Inc. (Braemar), and one of
its customers, eCardio Diagnostics, LLC (eCardio), in Federal District Court
for the Northern District of Illinois, File No. 09-CV-6001, alleging that
Braemar and eCardio had infringed the 878 and 143 Patents. The Supply
Agreement between Braemar and eCardio provides that Braemar will hold eCardio
harmless from any liability it incurs in connection with a claim that Braemars
products violate the intellectual property rights or infringes upon any patent
of a third party. Braemar and eCardio have denied the allegations, and Braemar
is defending the suit on behalf of both itself and eCardio. Since the action
was commenced, the Plaintiffs have dismissed their claims relating to alleged
infringement of the 878 Patent and have continued to pursue their claims
relating to the alleged infringement of the 143 Patent.

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.

F-14

---



NOTE 8  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 56% and 58% of the Companys consolidated
revenues in the years ended June 30, 2010 and 2009, respectively.

Accounts
receivable due from these customers at June 30, 2010 and 2009 totaled
approximately $1,341,000 and $1,441,000, respectively.

NOTE 9  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. Under this plan, the number of common shares subject to
outstanding awards shall not exceed the greater of 650,000 shares or 15% of the
aggregate number of common shares outstanding. 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, 2010 Biotel Inc. had 141,000 options outstanding, and as of June
30, 2009, Biotel Inc. had 211,000 options outstanding. Currently, option prices
range from $.625 to $2.05 per share with a weighted average remaining contract
life of 3.20 years. During the year ended June 30, 2010, 20,000 options were
exercised. During the year ended June 30, 2009, no options were exercised.
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. The compensation cost charged against income for this plan was
$2,077 and $13,044 for the years ended June 30, 2010 and 2009, respectively.

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

|                         |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|------------------------ |  | ----------------- | -------- | ---------------------------------- | - | ----------------- |  | ---------------------------------- | ------- |  | - | ------ | 
|                         |  | Outstanding       |          | Exercisable                        |  
|                         |  | Number
 of Shares |          | Weighted
 Average
 Exercise
 Price |   | Number
 of Shares |  | Weighted
 Average
 Exercise
 Price |        
|                         |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2008 |  |                   | 211,000  |                                    | $ | 1.3635            |  |                                    | 203,500 |  | $ | 1.5214 | 
|                         |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Granted                  |  |                   | 145,000  |                                    |   | 2.0472            |  |                                    |         |  |   |        | 
|Expired                  |  |                   | (25,000  | )                                  |   | 1.8200            |  |                                    |         |  |   |        | 
|Cancelled                |  |                   | (120,000 | )                                  |   | 2.0000            |  |                                    |         |  |   |        | 
|                         |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2009 |  |                   | 211,000  |                                    | $ | 1.6391            |  |                                    | 198,500 |  | $ | 1.6171 | 
|                         |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Exercised                |  |                   | (20,000  | )                                  |   | 0.3750            |  |                                    |         |  |   |        | 
|Expired                  |  |                   | (50,000  | )                                  |   | 2.0500            |  |                                    |         |  |   |        | 
|                         |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2010 |  |                   | 141,000  |                                    | $ | 1.6793            |  |                                    | 133,500 |  | $ | 1.6537 | 

F-15

---



NOTE 10  INCOME
TAXES

The
components of the provision (benefit) for income taxes are as follows for the years ended
June 30, 2010 and 2009:

|                                               |  |      |          |      |   |         | 
|---------------------------------------------- |  | ---- | -------- | ---- | - | ------- | 
|                                               |  | 2010 |          | 2009 |  
|                                               |  |      |          |      |   |         | 
|Current provision (benefit) for
 taxes         |  | $    | (60,570  | )    | $ | 315,051 | 
|Change in deferred tax
 assets and liabilities |  |      | (51,498  | )    |   | 97,560  | 
|Research and development
 tax credits          |  |      | (65,000  | )    |   |        | 
|                                               |  |      |          |      |   |         | 
|Total provision (benefit)                      |  | $    | (177,068 | )    | $ | 412,611 | 

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

|                                        |  |      |       |      |  |      |  
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | -
|                                        |  | 2010 |       | 2009 | 
|                                       
|Computed at the federal
 statutory rate |  |      | -34.0 | %    |  | 34.0 | %
|State income taxes                      |  |      | -3.3  | %    |  | 3.3  | %
|Manufacturers deduction                |  |      |      |      |  | -2.1 | %
|Other                                   |  |      | -1.2  | %    |  | -4.8 | %
|                                        |  |      |       |      |  |      |  
|                                        |  |      | -38.5 | %    |  | 30.4 | %

The tax
effects of temporary differences that give rise to significant portions of the
deferred tax accounts as of June 30, 2010 and 2009 are presented below:

|                                                  |  |      |          |      |   |          |  
|------------------------------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                                                  |  | 2010 |          | 2009 |  
|                                                  |  |      |          |      |   |          |  
|Deferred tax assets (liabilities)
 applicable to: |  |      |          |      |   |          |  
|Allowance for doubtful accounts                   |  | $    | 16,000   |      | $ | 19,100   |  
|Inventory reserves                                |  |      | 92,300   |      |   | 56,400   |  
|Warranty reserves                                 |  |      | 91,400   |      |   | 72,700   |  
|Accruals                                          |  |      | 65,600   |      |   | 63,100   |  
|Depreciation                                      |  |      | (215,900 | )    |   | (249,400 | )
|Goodwill                                          |  |      | (252,800 | )    |   | (221,400 | )
|Net operating loss carryforwards                  |  |      | 230,000  |      |   | 232,000  |  
|Other                                             |  |      | 73,805   |      |   | 76,407   |  
|                                                  |  |      |          |      |   |          |  
|                                                  |  |      | 100,405  |      |   | 48,907   |  
|Less valuation allowance                          |  |      | 127,416  |      |   | 127,416  |  
|                                                  |  |      |          |      |   |          |  
|Deferred tax liability                            |  | $    | (27,011  | )    | $ | (78,509  | )

F-16

---



NOTE 10  INCOME
TAXES (continued)

The
deferred tax amounts presented above have been classified on the accompanying consolidated
balance sheets as of June 30, 2010 and 2009 as follows:

|                    |  |      |          |      |   |          |  
|------------------- |  | ---- | -------- | ---- | - | -------- | -
|                    |  | 2010 |          | 2009 |  
|Current asset       |  | $    | 316,221  |      | $ | 250,674  |  
|Long-term liability |  |      | (343,232 | )    |   | (329,183 | )
|                    |  | $    | (27,011  | )    | $ | (78,509  | )

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, 2010 and 2009,
management recorded a valuation allowance of $127,416 for the deferred tax
asset that was more likely than not to be realized in future periods. The
valuation allowance at June 30, 2010 and 2009, related to a portion of the
federal net operating loss carryforwards from which the Company was
not expecting to realize the benefit due to Internal Revenue Code section 382 limitations relating to
a prior transaction executed by the Company.

At June 30,
2010, the Company had federal net operating loss carryforwards totaling
$422,000, which expire on various dates through 2020. The Company also had
state net operating loss carryforwards totaling $1,312,000, which expire on
various dates through 2026.

NOTE 11  NET INCOME
(LOSS) PER SHARE OF COMMON STOCK

The
weighted average number of shares used in the computation of basic and diluted
net income (loss) per common share as of June 30, 2010, was 2,774,676.
In computing dilutive net loss per common share as of June 30, 2010, common shares issuable upon
exercise of employee stock options (see Note 9) have not been included in the computation because their inclusion
would have had an antidilutive effect.  The weighted average number of shares used in the
computation of basic and diluted net income (loss) per common share as of June
30, 2009, was 2,763,827 and 2,854,822, respectively.

NOTE 12  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, 2010 and 2009, totaled
$78,165 and $71,047, respectively.

F-17

---



NOTE 13  OPERATIONS
AND INDUSTRY SEGMENTS

The Company
reports on two segments of business: OEM Medical Equipment Sales and Service
and Direct Medical Equipment Sales and Service. The industry segment
information corresponds with the Companys different customer and product
types.

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.

|                                     |  |                               |            |                                  |   |           |   |        |           |   |   |            |  
|------------------------------------ |  | ----------------------------- | ---------- | -------------------------------- | - | --------- | - | ------ | --------- | - | - | ---------- | -
|                                     |  | 2010                          |           
|                                     |  | OEM Medical
 Sales & Service  |            | Direct Medical
 Sales & Service  |   | Corporate |   | Totals |          
|                                     |  |                               |            |                                  |   |           |   |        |           |   |   |            |  
|Domestic revenues                    |  | $                             | 9,533,818  |                                  | $ | 459,335   |   | $      |          |   | $ | 9,993,153  |  
|International revenues               |  |                               | 867,648    |                                  |   | 151,549   |   |        |          |   |   | 1,019,197  |  
|Revenues from external
 customers    |  |                               | 10,401,466 |                                  |   | 610,884   |   |        |          |   |   | 11,012,350 |  
|Intersegment revenues                |  |                               |           |                                  |   |          |   |        |          |   |   |           |  
|Interest expense                     |  |                               |           |                                  |   |          |   |        |          |   |   |           |  
|Income tax expense                   |  |                               | (9,065     | )                                |   | 42,568    |   |        | (210,508  | ) |   | (177,005   | )
|Depreciation                         |  |                               | 371,029    |                                  |   |          |   |        | 20,020    |   |   | 391,049    |  
|Segment profit                       |  |                               | 7,170      |                                  |   | 66,581    |   |        | (356,628  | ) |   | (282,877   | )
|Goodwill                             |  |                               | 695,551    |                                  |   |          |   |        |          |   |   | 695,551    |  
|Total segment assets                 |  |                               | 5,024,853  |                                  |   | 77,743    |   |        | 2,191,625 |   |   | 7,294,221  |  
|Purchases of property and
 equipment |  |                               | 293,249    |                                  |   |          |   |        | 6,080     |   |   | 299,329    |  
|                                     |  |                               |            |                                  |   |           |   |        |           |   |   |            |  
|                                     |  | 2009                          |           
|                                     |  | OEM
 Medical
 Sales & Service |            | Direct
 Medical
 Sales & Service |   | Corporate |   | Totals |          
|                                     |  |                               |            |                                  |   |           |   |        |           |   |   |            |  
|Domestic revenues                    |  | $                             | 10,579,765 |                                  | $ | 585,381   |   | $      |          |   | $ | 11,165,146 |  
|International revenues               |  |                               | 1,380,139  |                                  |   | 94,351    |   |        |          |   |   | 1,474,490  |  
|Revenues from external
 customers    |  |                               | 11,959,904 |                                  |   | 679,732   |   |        |          |   |   | 12,639,636 |  
|Intersegment revenues                |  |                               | 27,734     |                                  |   | (27,734   | ) |        |          |   |   |           |  
|Interest expense                     |  |                               |           |                                  |   |          |   |        | 590       |   |   | 590        |  
|Income tax expense                   |  |                               | 544,605    |                                  |   | 71,902    |   |        | (203,896  | ) |   | 412,611    |  
|Depreciation                         |  |                               | 360,908    |                                  |   | 5,404     |   |        | 22,886    |   |   | 389,198    |  
|Segment profit                       |  |                               | 832,112    |                                  |   | 102,506   |   |        | 9,319     |   |   | 943,937    |  
|Goodwill                             |  |                               | 695,551    |                                  |   |          |   |        |          |   |   | 695,551    |  
|Total segment assets                 |  |                               | 5,844,166  |                                  |   | 64,680    |   |        | 1,493,795 |   |   | 7,402,641  |  
|Purchases of property and
 equipment |  |                               | 374,811    |                                  |   |          |   |        | 5,134     |   |   | 379,945    |  

NOTE 14  SUBSEQUENT
EVENTS

The Company
has evaluated events and transactions through the SEC filing date for potential
recognition or disclosure in the consolidated financial statements and has
determined there are no subsequent events to disclose.

F-18

---