UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              ____________________

                                   FORM 10-KSB
                                   (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, 2006.

                                       OR

[ ]  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.
                 (Name of Small business Issuer 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

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

     Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X]  No [ ]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

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

     Issuer's revenues for fiscal year ended June 30, 2006 were $10,223,332.

     The aggregate market value of voting and non-voting common equity held by
non-affiliates of registrant as of June 30, 2006 was approximately $2,708,011.

     The number of shares outstanding of the registrant's common stock, par
value $0.01 per share, as of June 30, 2006 was 2,649,827.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The definitive proxy statement for the 2006 Annual Meeting of Shareholders
is incorporated by reference into Part III of this annual report.

   Transitional Small Business Disclosure Format (check one). Yes [ ]  No [X]

<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

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

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

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

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

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

         When we use the terms "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.

INVESTMENT CONSIDERATIONS

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

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

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

PRODUCTS AND SERVICES

         Biotel's development, manufacturing and marketing of medical devices
falls into two business segments - sales and service to medical corporations and
sales and service to clinics and hospitals. Two of our wholly-owned subsidiaries
(Braemar and Agility) design, manufacture, test and sell medical devices and
services primarily to medical corporations. Our other subsidiary (Advanced
Biosensor) sells products and services to clinics and hospitals. Approximately
20% of our revenue is derived from servicing and repairing products, including
providing spare parts.

Sales to Medical Corporations
-----------------------------

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

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

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

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

         CAROLINA MEDICAL, INC.: Until July 1, 2006, the Company's King, North
Carolina facility operated as Carolina Medical. This business develops,
manufactures and services OEM components for fluid transport, flow

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measurement and ultrasound medical devices. Its leading products are used in the
liposuction and cosmetic surgery industry, including pump components, tissue
separators and fluid infiltration devices and in electromagnetic blood flow and
blood pressure instruments, including blood flow sensors used in heart pumps.

         Effective July 1, 2006, Braemar acquired the assets of Carolina
Medical. The King, North Carolina manufacturing facility is certified to and
meets ISO 9001:2000, ISO 13485:2003 and EN46001 standards.

Sales to Clinics and Hospitals
------------------------------

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

MARKETING AND SALES

         Approximately 90% of Biotel's revenues for fiscal 2006 were derived
from sales to OEM manufacturers. Foreign sales, primarily to Europe, accounted
for about 7.3% of our revenues during the year ended June 30, 2006.

Sales to Medical Corporations
-----------------------------

         Braemar manufacture products for use in OEM-manufactured medical
devices. OEM sales traditionally results in lower selling expenses due to fewer
customers and fewer sales-related employees and independent representatives.
However, gross margins are lower for OEM sales and the customer base is highly
concentrated. Agility markets its products to pharmaceutical companies, medical
device manufacturers, and contract research and academic research organizations.

Sales to Clinics and Hospitals
------------------------------

         Advanced Biosensor markets it products to clinic and hospital
end-users. It relies primarily on telemarketing and leads generated from
existing customers. At September 1, 2005 Advanced Biosensor abandoned marginal
sales activity involving the distribution of the Advanced Biosensor Holter
diagnostic software platform to hospitals and clinics. We estimate that
discontinuing the distribution of the diagnostic software platform to hospitals
and clinics reduced fiscal 2006 revenues by approximately $300,000.

SIGNIFICANT CUSTOMERS

         One major customer, accounted for approximately 27% and 26% of Biotel's
consolidated revenues for the fiscal years ended June 30, 2006 and 2005,
respectively. Biotel performs OEM manufacturing for that customer under a
September 2003 OEM Purchase Agreement. The agreement's initial term expires in
September 2006, but it may be renewed by either party for two additional
one-year periods. Either party may terminate the agreement with 60 days notice
prior to the expiration of the initial term or, if applicable, a renewal period,
or upon the uncured breach of the agreement by the other party.

         A second OEM customer accounted for 10% and 11% of Biotel's
consolidated revenues for fiscal years ended June 30, 2006 and 2005,
respectively. Biotel performs OEM manufacturing for that customer under an OEM
Supply and Purchase Agreement. The initial agreement was in effective until
December 2006 with automatic one-year renewals unless terminated by either Party
with 180 days prior written notice. The agreement has automatically renewed to
December 2007.

         A third OEM customer accounted for 6% and 11% of Biotel's consolidated
revenues for fiscal years ended June 30, 2006 and 2005, respectively. Biotel
does not have a contract with this customer. Instead, manufacturing projects are
undertaken by Biotel in response to individual purchase orders.

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<PAGE>


BACKLOG

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

COMPETITION

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

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

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

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

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

RESEARCH AND DEVELOPMENT

         Our aggregate research and development expenses during the fiscal years
ended June 30, 2006 and 2005 amounted to approximately $1.2 million and $1.0
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.


                                       5

<PAGE>


EMPLOYEES

         As of August 31, 2006, we had 52 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 company:

                                                            Sales to Clinics
                                                          ---------------------
                             Sales to Medical Companies       And Hospitals
                             --------------------------   ---------------------
Manufacturing/R&D                        33                         2
Sales and Marketing                       5                         1
General and Administrative               10                         1
                             --------------------------   ---------------------
Total                                    48                         4
                             ==========================   =====================

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

ENVIRONMENTAL MATTERS

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

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

MANUFACTURING

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

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

PRODUCT WARRANTIES AND SERVICE

         We provide warranties against defects in materials and workmanship in
our products. Warranty periods for our products range from 90 days to one year.
At the time a sale is recorded, we establish a provision for estimated expenses
of providing service under these warranties. Non-warranty service is billed to
the customer as performed. As of June 30, 2006 and 2005, our provision for
warranty services was $97,471 and $79,062, respectively. The assumptions we use
to estimate warranty accruals are evaluated periodically in light of actual
experience, management's estimates of future claims and, when appropriate, the
accruals are adjusted. Our determination of the

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appropriate level of warranty accrual is subjective and based on estimates and
actual experience that can be different than our expectations.

GOVERNMENT AND OTHER REGULATION

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

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

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

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

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

INTELLECTUAL PROPERTY

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


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<PAGE>


MANAGEMENT

         Executive officers of Biotel are as follows:

NAME                    AGE  POSITION
----                    ---  --------

B. Steven Springrose...  57  Chief Executive Officer of Biotel; Chief Executive
                             Officer of Advanced Biosensor, Carolina Medical and
                             Agility Centralized Research Services

Harold A. Strandquist..  57  President of Braemar

Judy E. Naus...........  61  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 Carolina Medical's, Advanced
Biosensor's and Agility's Chief Executive Officer. Mr. Springrose was employed
in a management position with Biotel from 1982 through 1998 and in a management
position with Braemar, Inc. from January 1999 to November 1999. Mr. Springrose
served as an independent contractor with pacemaker sales from 2000 to 2004. Mr.
Springrose earned his bachelor of science degree from the University of
Minnesota and a master of science degree from Washington University in St.
Louis, Missouri, in biomedical engineering. He also earned an MBA from the
University of St. Thomas, and holds three patents.

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

         JUDY E. 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 6 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.

         The following risk factors should be considered carefully in addition
to the other information contained in this registration statement. This
registration statement 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 registration statement.

         TWO CUSTOMERS GENERATED A SIGNIFICANT PORTION OF OUR REVENUES. One
major customer accounted for 26.9% and 26.3% of our consolidated revenues in the
fiscal years ended June 30, 2006 and 2005, respectively, and this customer will
likely account for a significant percentage of our revenues during 2007. Another
customer accounted for 10.0% and 11.4% of our consolidated revenues for fiscal
years end June 30, 2006 and 2005, respectively, and will likely account for a
significant percentage of our revenues during 2007. Both major customers are
established corporations with over $250 million in revenues. Because these
customers are not required to purchase any minimum amount of products from us,
or any products at all, there is no assurance that we will be able

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to retain these major customers or continue to maintain the levels of sales to
them. The loss of or reduction in demand for our products from a major customer
could have a material adverse effect on operating results and cash flow from
operations.

         WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL TO MEET CAPITAL
EXPENDITURE NEEDS IF OUR OPERATIONS DO NOT GENERATE SUFFICIENT FUNDS TO DO SO.
Our business is expected to have continuing capital expenditure needs. While we
anticipate that our operations will generate sufficient funds to meet our
capital expenditure needs for the foreseeable future, our ability to gain access
to additional capital, if needed, cannot be assured, particularly in view of
competitive factors and industry conditions. Competitive factors and industry
conditions include quality, price, technological capability, proprietary rights,
and the ability to develop and market products and processes. Any additional
capital raised through the sale of equity may dilute the ownership percentage of
holders of our common stock.

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

         IF WE FAIL TO ACHIEVE AND MAINTAIN THE HIGH MANUFACTURING STANDARDS
THAT OUR PRODUCTS AND SERVICES REQUIRE, OUR BUSINESS COULD SUFFER. Our products
and services require precise, high quality manufacturing. Our failure to achieve
and maintain these high manufacturing standards, including the incidence of
manufacturing errors, design defects or component failures, could result in
patient injury or death, product recalls or withdrawals, delays or failures in
product testing or delivery, cost overruns or other problems that could
seriously hurt our business.

         IF WE ARE UNABLE TO RETAIN SENIOR MANAGEMENT, OUR BUSINESS OPERATIONS
COULD BE ADVERSELY AFFECTED. Our success and future prospects depend on the
continued contributions of our senior management. There can be no assurances
that we would be able to find qualified replacements for these individuals if
their services were no longer available. The loss of services of one or more
members of our senior management team could have a material adverse effect on
our business.

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

         Companies in the medical device industry typically obtain patents and
frequently engage in substantial intellectual property litigation. Our products
and technologies could infringe on the rights of others. If a third party
successfully asserts a claim for infringement against us, we may be liable for
substantial damages, be unable to sell

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products using that technology, or have to seek a license or redesign the
related product. These alternatives may be uneconomical or impossible. Patent
litigation could be costly, result in product development delays and divert the
efforts and attention of management from our business. We do not have any
pending infringement claims against us, nor are we aware that any parties intend
to pursue any infringement claims in the future.

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

         OUR AGILITY SUBSIDIARY FACES THE RISK OF BECOMING INVOLVED IN
LITIGATION AS A RESULT OF INJURY OR DEATH TO A CLINICAL TEST SUBJECT. Agility
provides ECG data collection and management services in connection with testing
pharmaceutical and medical device products. A portion of the services Agility
provides to the manufacturers involves monitoring ECG results of test patients.
Agility does not provide diagnostic or other healthcare services to the patient.
Although Agility does not have a contractual relationship with the test subjects
and has taken steps to limit its liability in the case of patient injury or
death, Agility could be named as a defendant in resulting litigation due to its
role in the clinical testing. Agility is not a defendant in any litigation and
is not aware of any circumstances under which it could be named as a defendant
in a lawsuit in the future. Involvement in litigation would likely be costly and
time consuming to management, regardless of whether Agility ultimately prevailed
in the litigation.

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

         OUR BUSINESS COULD BE MATERIALLY ADVERSELY IMPACTED BY RISKS INHERENT
IN INTERNATIONAL MARKETS. During the 12 months ended June 30, 2006 and 2005,
approximately 7.3% and 5.4%, respectively, of our revenues were generated by
customers outside the United States. Over 90% of these customers are located in
Europe. We expect that customers outside the United States will continue to
account for a comparable portion of Biotel's revenue in the future. Our
international sales subject us to inherent risks related to changes in the
economic, political, legal and business environments in the foreign countries in
which we do business. Although Europe has historically been stable, we may still
be subject to the following general risks relating to international sales:

     o    Fluctuations in currency exchange rates.
     o    Regulatory, product approval and reimbursement requirements.
     o    Tariffs and other trade barriers.
     o    Greater difficulty in accounts receivable collection and longer
          collection periods.

                                       10

<PAGE>


     o    Difficulties and costs of managing foreign distributors.
     o    Reduced protection for intellectual property rights in some countries.
     o    Burdens of complying with a wide variety of foreign laws.
     o    The impact of recessions in foreign economies.
     o    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:

     o    Make a special written suitability determination for the purchaser.
     o    Receive the purchaser's written agreement to a transaction prior to
          sale.
     o    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.
     o    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.
     o    Give bid and offer quotations and broker and salesperson compensation
          information to the customer orally or in writing before or with the
          confirmation.

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

         AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR OUR COMMON STOCK, AND WE
CANNOT ASSURE THE MARKET PRICE FOR OUR COMMON STOCK IF A MARKET DOES DEVELOP.
Our common stock is quoted on the OTC Bulletin Board. However, there can be no
assurance that an active market for our common stock will develop, or if any
such market does develop, that it will continue. To the extent that brokerage
firms act as market makers for our securities, they may be a dominating
influence in any market that might develop, and the degree of participation by
these firms may significantly affect the price and liquidity of our common
stock. These firms may discontinue their market making activities at any time.
The prices at which our common stock are traded in the market will be determined
by these firms and by the purchasers and sellers of our securities, but the
prices may not necessarily relate to our assets, book value, results of
operations or other established and quantifiable criteria of value. Securities
quoted on the OTC Bulletin Board are often thinly traded, highly volatile and
not followed by analysts. Consequently, investors may have difficulty reselling
our common stock.

         OUR POLICY TO FOREGO PAYING DIVIDENDS FOR THE FORESEEABLE FUTURE MAY
HURT OUR STOCK PRICE. We do not anticipate paying any dividends on our common
stock for the foreseeable future, which may make our common stock an
unattractive investment. Some institutional investors may only invest in
dividend-paying equity securities or may operate under other restrictions that
may prohibit or limit their ability to invest in our common stock.

         UNDESIGNATED SHARES IN OUR ARTICLES OF INCORPORATION COULD PREVENT OR
DELAY A CHANGE IN CONTROL OF US OR OTHERWISE NEGATIVELY AFFECT SHAREHOLDERS. Our
articles of incorporation currently authorize the board of directors, without
shareholder approval, to issue up to 12,000,000 shares of capital stock, of
which up to 2,000,000 shares are designated as preferred stock and up to
10,000,000 shares are designated as common stock. We currently have 2,649,827
common shares outstanding. The board of directors may issue up to 2,000,000
preferred shares in one or more classes or series and with those provisions as
it determines, without shareholder approval. The holders of our common stock do
not have any preemptive rights. The issuance of stock with rights and
preferences determined by the board of directors could make it more difficult
for a third party to acquire us, dilute the stock ownership or adversely effect
the rights of holders of our common stock, including voting rights.

                                       11

<PAGE>


ITEM 2.  DESCRIPTION OF PROPERTY.

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

<TABLE>
<CAPTION>

                                                         Square
                                                         Feet
Entity Name; Location              Use                   Leased                 Term of Lease
---------------------              ---                   ------                 -------------

<S>                                <C>                   <C>                    <C>
Braemar, Inc.                      Production,           17,314                 Lease expires August 31, 2011.
1285 Corporate Center Drive,       manufacturing and
Suite 150                          administration
Eagan, MN  55121

Braemar, Inc.                      Production,           13,440                 Lease expires June 30, 2008.
157 Industrial Drive               manufacturing and
King, NC 27021                     administration

Advanced Biosensor Inc.            Administration        2,903                  Lease expires April 30, 2009.
400 Arbor Lake Drive,
Suite B450
Columbia, SC 29223

Agility Centralized Research       Service operations    1,225                  Lease expires January 31, 2007.
Services, Inc.
2275 Half Day Road
Suite 133
Bannockburn, IL 60015
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS.

         Not Applicable.

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

         Not applicable.

                                     PART II

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

         Our common stock is traded on the Pink Sheets under the symbol BTEL.
The reported high and low bid prices for the fiscal quarters for the past two
fiscal years ending June 30, 2006 are set forth in the table below, as reported
by Yahoo! for fiscal 2005 and by nasdaq.com for fiscal 2006 These quotations
represent prices between dealers and do not include retail markup, markdown or
commission and may not represent actual transactions.

        QUARTER ENDED
        2005 - 2006                          LOW            HIGH
        --------------                      -----          ------
        September 30                        $1.65          $2.35
        December 31                         $1.50          $2.35
        March 31                            $1.62          $2.25
        June 30                             $1.90          $3.00

                                       12

<PAGE>


        QUARTER ENDED
        2004 - 2005                          LOW            HIGH
        --------------                      -----          ------
        September 30                        $1.75          $2.50
        December 31                         $2.60          $3.60
        March 31                            $1.95          $3.05
        June 30                             $1.60          $3.00


         As of June 30, 2006, we had approximately 400 shareholders of record of
our common stock. We have not paid any cash or other dividends during our last
three fiscal years, and we currently have no intention to pay dividends. The
payment of dividends, if any, in the future, rests within the discretion of our
board of directors and will depend, among other things, upon our earnings, our
capital requirements and our financial condition, as well as other relevant
facts.

          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Biotel
did not issue any shares of capital stock during the quarter ended June 30,
2006.

          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, 2006, 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.

<TABLE>
<CAPTION>
                                                                                         NUMBER OF
                                                                                        SECURITIES
                                                                                         REMAINING
                                                                                       AVAILABLE FOR
                                              NUMBER OF                               FUTURE ISSUANCE
                                           SECURITIES TO BE                            UNDER EQUITY
                                             ISSUED UPON        WEIGHTED AVERAGE    COMPENSATION PLANS
                                             EXERCISE OF        EXERCISE PRICE OF       (EXCLUDING
                                             OUTSTANDING           OUTSTANDING          SECURITIES
                                          OPTIONS, WARRANTS     OPTIONS, WARRANTS      REFLECTED IN
                                              AND RIGHTS           AND RIGHTS           COLUMN (a))
---------------------------------------   -----------------     -----------------   ------------------
                                                 (a)                  (b)                   (c)
<S>                                       <C>                   <C>                 <C>
Equity compensation plans approved by
     security holders                          328,000               $1.1898              322,000
Equity compensation plans not approved
     by securities holders                       --                     --                   --
                                          -----------------     -----------------   ------------------

Total                                          328,000               $1.1898              322,000
                                          =================     =================   ==================
</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

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

                                       13

<PAGE>


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

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

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

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

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

         Property, equipment and leasehold improvements are recorded at cost.
Depreciation is calculated using the straight-line or declining-balance methods
over estimated useful lives of three to 10 years for equipment, three to five
years for automobiles and two to 31 years for leasehold improvements.

         SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill is deemed
to have an indefinite useful life and is not amortized but is subject to
impairment tests performed at least annually. During fiscal 2006 and 2005, we
performed the required impairment tests of goodwill and determined our recorded
goodwill had not been impaired.

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

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

         Revenues from product sales are recognized at date of shipment.

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

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

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

                                       14

<PAGE>


OVERVIEW

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

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

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

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

RESULTS OF OPERATIONS

         Biotel's net revenues for the year ended June 30, 2006, were
$10,223,000, 0.5% above net revenues of $10,169,000 for the year ended June 30,
2005. In the fiscal year ended June 30, 2006, 37% of Biotel's revenues were
derived from two customers. In the fiscal year ended June 30, 2005, 48% of
Biotel's revenues were derived from three customers. The loss of one or more of
these customers would have immediate significant adverse effect on our financial
results.

         Gross profit margin decreased to $4,137,000 (40.5%) for fiscal year
2006, compared to $4,325,000 (42.5%) in fiscal year 2005. Cost of sales and
service increased to $6,087,000 for fiscal year 2006, compared to $5,844,000 for
fiscal year 2005. The increase in cost of sales and service was primarily caused
by changes in product mix resulting in a lower gross margin. Gross profit margin
also decreased in part due to the planned discontinuation of software product
lines at Advanced Biosensor, which revenues were associated with lower costs and
higher expenses than other Biotel product lines.

         Selling, general and administrative expenses decreased to $2,145,000
(21.0% of sales) for the year ended June 30, 2006, compared to $2,636,000 (25.9%
of sales) for the year ended June 30, 2005. The decrease is primarily a result
of planned changes in staffing to streamline selling and administrative
operations. Selling expenses include salaries, commissions, benefits, travel
expenses and other selling expenses.

         Research and development expenditures for fiscal year 2006 were
$1,221,000, an increase of 23.2% compared to $991,000 in fiscal year 2005. The
increase was primarily the result of planned increases in development efforts
during fiscal year 2006. Biotel engineering, management and administrative staff
is used when non-recurring engineering ("NRE") services are sold to customers,
and the engineering component of such activity is reported as cost of goods
sold. NRE service charges are paid by Biotel customers for work performed to
develop new custom devices for customers. NRE charges are common in the industry
and are non-recurring to the customer upon project completion, typically upon
commencement of manufacturing and regular delivery of products. Biotel has a
history of NRE revenues from period to period, as it is regularly engaged in new
customer development activity. Biotel contracts with customers for NRE services
and tracks development engineering costs, time and labor content spent on such
projects.

         Interest expenditures decreased to $64,000 for the year ended June 30,
2006, compared to interest expenditures of $74,000 for the year ended June 30,
2005. Interest expenditures decreased corresponding to the reduction in long
term debt.

                                       15

<PAGE>


         Net earnings for the year ended June 30, 2006, and June 30, 2005, were
$452,000 and $444,000, respectively. Net earnings for the year ended June 30,
2006, were affected by costs associated with reduction of inventory for
discontinued and mature product lines and potentially undeliverable inventories
due to a customer's postponement of a product line. Net earnings for the year
ended June 30, 2005 were primarily affected by expenditures associated with the
costs of the acquisition, operation and integration of Agility.

OFF-BALANCE SHEET ARRANGEMENTS

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

LIQUIDITY AND CAPITAL RESOURCES

         Working capital increased to $2,131,000 at June 30, 2006, compared to
$1,921,000 at June 30, 2005. Increase in working capital was largely a result of
the decrease in the balance of the revolving line of credit.

         Cash and cash equivalents were $51,000 at June 30, 2006, compared to
$17,000 at June 30, 2005. The increase in cash was influenced by many factors,
primarily operating activities and improvements in cost structures. The ratio of
current assets to current liabilities ("current ratio") increased to 2.30 to one
at June 30, 2006, compared to 1.89 to one at June 30, 2005.

         Accounts receivable increased to $2,201,000 at June 30, 2006, versus
$2,132,000 at June 30, 2005. The increase in accounts receivable was related to
increasing sales activity and longer payment cycles of two major customers. To
the extent that credit terms are extended to customers, Biotel's cash position
is diminished and debt may be required to supplement cash flows. Accordingly,
Biotel attempts to make timely collections from its customers in accordance with
credit terms, extend credit only to credit worthy customers with a strong
payment history, and to keep credit terms as short as is practicable.

         In fiscal year 2006, $346,000 was used for capital expenditures,
compared with $548,000 in fiscal year 2005. Biotel primarily invests in molds,
tooling and fixtures for custom components used in its product lines. Levels of
capital investment are expected to vary from year to year.

         Inventory decreased to $1,141,000 for the year ended June 30, 2006,
compared to $1,468,000 for the year ended June 30, 2005. During fiscal year
2006, a major customer placed on hold a pre-existing purchase order for a
recently launched product line and informed Biotel of its plans to re-work and
re-market its existing inventories to new applications prior to accepting
additional deliveries of the product line. In June, 2006 Biotel made the
assessment that its inventories for this revised product line had potentially
lengthy lead times to delivery and may be undeliverable should market conditions
unfavorably change. Accordingly, Biotel adjusted its inventory reserve in the
amount of $170,000 to adjust its inventories of this product line. The
adjustment also included a modest reserve for obsolescence of inventories
surrounding the Company's electromagnetic flowmeter product lines. Biotel's
subsidiaries manage inventories to provide safety stock and product flow for
customers while controlling the amount of inventory.

         Current liabilities decreased to $1,642,000 at June 30, 2006, compared
to $2,166,000 on June 30, 2005. This decrease was primarily due to the decrease
of $462,000 in the balance of the revolving line of credit.

         Long term liabilities were reduced to $242,000 at June 30, 2006,
compared to $450,000 at June 30, 2005, a reduction of approximately $154,000 as
a result of payments made on notes outstanding.

         As of June 30, 2006, stockholders' equity had increased to $3,311,000
from $2,858,000 at June 30, 2005. The increase in stockholder's equity was
principally as a result of the increase in retained earnings.

         Management believes that present cash balances, internally generated
funds and its credit line should provide sufficient working capital to meet
present and projected needs for the coming 12 months, including principal
payments required under present debt instruments. There is no assurance that
Biotel will be successful in obtaining

                                       16

<PAGE>


additional working capital if more is required. Biotel believes it will be able
to finance operations at its Agility subsidiary over the next 12 months using
cash generated from Biotel operations and Biotel credit facilities.

ITEM 7.  FINANCIAL STATEMENTS.

         See Financial Statements beginning on page F-1.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.

ITEM 8A. CONTROLS AND PROCEDURES.

         As of June 30, 2006 an evaluation was performed by Biotel's President
and Chief Financial Officer of the effectiveness of the design and operation of
the registrant's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based
upon, and as of the date of that evaluation, the President and Chief Financial
Officer concluded that Biotel's disclosure controls and procedures were
effective.

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

ITEM 8B. OTHER INFORMATION.

         Not applicable.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Incorporated by reference from Biotel's definitive proxy statement for
the 2006 Annual Meeting of Shareholders.

ITEM 10. EXECUTIVE COMPENSATION.

         Incorporated by reference from Biotel's definitive proxy statement for
the 2006 Annual Meeting of Shareholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

         Incorporated by reference from Biotel's definitive proxy statement for
the 2006 Annual Meeting of Shareholders.



                                       17

<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Incorporated by reference from Biotel's definitive proxy statement for
the 2006 Annual Meeting of Shareholders.

ITEM 13. EXHIBITS.

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         Incorporated by reference from Biotel's definitive proxy statement for
the 2006 Annual Meeting of Shareholders.












                                       18

<PAGE>


                                   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, 2006            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 things
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or their, his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

/s/ B. Steven Springrose                              September 28, 2006
---------------------------------------
B. Steven Springrose
(President, Chief Executive Officer
and a Director)

/s/ Judy E. Naus                                      September 28, 2006
---------------------------------------
Judy E. Naus
(Chief Financial Officer
and Chief Accounting Officer)

/s/ C. Roger Jones                                    September 28, 2006
---------------------------------------
C. Roger Jones
(Director)

/s/ Stanley N. Bormann                                September 28, 2006
---------------------------------------
Stanley N. Bormann
(Director)

/s/ L. John Ankney                                    September 28, 2006
---------------------------------------
L. John Ankney
(Director)

/s/ David A. Heiden                                   September 28, 2006
---------------------------------------
David A. Heiden
(Director)

/s/ Spencer M. Vawter                                 September 28, 2006
---------------------------------------
Spencer M. Vawter
(Director)


                                       19

<PAGE>


                                    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 January 5, 2006 between Agility Centralized
            Research Services, Inc. and Bannockburn Executive Plaza, L.L.C. *
 10.5       Asset Purchase Agreement among Biotel Inc., ACRS Acquisition
            Company, Daniel Pawlik and Agility Centralized Research
            Services, LLC. **
 10.6       OEM Purchase Agreement by and between Philips Medical Systems and
            Braemar, Inc. dated September 1, 2003.**
 10.7       Termination of Lease, Release, Hold Harmless and Indemnification
            Agreement dated June 30, 2006. *
 11.1       Statement regarding computation of per share earnings. ***
 21.1       Subsidiaries of Biotel Inc. *
 24.1       Power of Attorney (included in signature page)
 31.1       Certification of Chief Executive Officer.*
 31.2       Certification of Chief Financial Officer.*
 32.1       Certification pursuant to 18 U.S.C. Section 1350, as adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
         *  Filed herewith.
        **  Previously filed with Form 10-SB on October 14, 2004, Commission
            File No. 0-50914.
       ***  Previously filed with Amendment No. 2 to Form 10-SB on
            December 27, 2004, Commission File No. 0-50914.


                                       20

<PAGE>








                          BIOTEL INC. AND SUBSIDIARIES

                             REPORT ON CONSOLIDATED
                              FINANCIAL STATEMENTS

                               FOR THE YEARS ENDED
                             JUNE 30, 2006 AND 2005


















                                      F-1

<PAGE>


                          BIOTEL INC. AND SUBSIDIARIES


                                    CONTENTS


                                                                         PAGE
                                                                         ----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...................F-3

FINANCIAL STATEMENTS
      Consolidated balance sheets.........................................F-4
      Consolidated statements of income...................................F-5
      Consolidated statements of stockholders' equity.....................F-6
      Consolidated statements of cash flows...............................F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................F-8 - F-19































                                      F-2
<PAGE>















             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders
BIOTEL INC. AND SUBSIDIARIES
Columbia, South Carolina

         We have audited the accompanying consolidated balance sheets of BIOTEL
INC. AND SUBSIDIARIES (the Company) as of June 30, 2006 and 2005, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

         We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Biotel Inc.
and Subsidiaries as of June 30, 2006 and 2005, 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 27, 2006
Columbia, South Carolina




                                      F-3
<PAGE>

                          BIOTEL INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                                JUNE 30,
                                                         -----------------------
                                                            2006        2005
                                                         ----------   ----------

                                     ASSETS

CURRENT ASSETS
  Cash and cash equivalents                              $   51,186   $   17,045
  Trade accounts receivable, net of allowance             2,200,817    2,131,894
    for doubtful accounts of $50,034 and $70,205
    at June 30, 2006 and June 30, 2005, respectively
  Inventories, net                                        1,141,289    1,468,439
  Deferred tax asset                                        290,094      363,717
  Prepaid expenses                                           87,607       99,451
  Other current assets                                        1,800        6,142
                                                         ----------   ----------

          Total Current Assets                            3,772,793    4,086,688
                                                         ----------   ----------

PROPERTY & EQUIPMENT, Net                                   701,868      651,355
                                                         ----------   ----------

OTHER ASSETS
  Goodwill                                                  695,551      695,551
  Other assets                                               24,108       40,971
                                                         ----------   ----------

          Total Other Assets                                719,659      736,522
                                                         ----------   ----------

                                                         $5,194,320   $5,474,565
                                                         ==========   ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Revolving line of credit                               $  110,000   $  572,012
  Current portion of notes payable                          268,717      252,645
  Trade accounts payable                                    484,605      658,040
  Accrued payroll and related liabilities                   214,748      192,871
  Deferred service contract revenue                         168,470      187,023
  Other accrued expenses                                    319,034      212,426
  Accrued income taxes                                       76,545       90,662
                                                         ----------   ----------

        Total Current Liabilities                         1,642,119    2,165,679

LONG-TERM LIABILITIES:
  Notes payable                                             241,525      450,435
                                                         ----------   ----------

COMMITMENTS AND CONTINGENCIES (See Notes 7 and 8)
          Total Liabilities                               1,883,644    2,616,114
                                                         ----------   ----------

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; 2,649,827 shares issued                      26,498       26,498
  Additional paid-in capital                              1,941,324    1,941,324
  Retained earnings                                       1,342,854      890,629
                                                         ----------   ----------

          Total Stockholders' Equity                      3,310,676    2,858,451
                                                         ----------   ----------

                                                         $5,194,320   $5,474,565
                                                         ==========   ==========

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

                                      F-4
<PAGE>

                          BIOTEL INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

                                                  FOR THE YEARS ENDED
                                                       JUNE 30,
                                           ----------------------------------
                                               2006                 2005
                                           ------------          ------------

SALES AND SERVICES                         $ 10,223,332          $ 10,168,616

COST OF SALES AND SERVICES                    6,086,599             5,843,515
                                           ------------          ------------

GROSS PROFIT                                  4,136,733             4,325,101
                                           ------------          ------------

OPERATING EXPENSES
  Selling and administrative                  2,144,768             2,635,913
  Research and development                    1,220,742               990,869
                                           ------------          ------------

    Total operating expenses                  3,365,510             3,626,782
                                           ------------          ------------

INCOME FROM OPERATIONS                          771,223               698,319
                                           ------------          ------------

OTHER EXPENSE
  Interest                                      (63,736)              (73,714)
  Miscellaneous                                 (32,931)              (22,351)
                                           ------------          ------------

    Total other expense                         (96,667)              (96,065)
                                           ------------          ------------

NET INCOME BEFORE
    PROVISION FOR INCOME TAXES                  674,556               602,254

PROVISION FOR INCOME TAXES                      222,331               158,120
                                           ------------          ------------

NET INCOME                                 $    452,225          $    444,134
                                           ============          ============

NET INCOME PER COMMON SHARE
     BASIC                                 $       0.17          $       0.17
                                           ============          ============
     DILUTED                               $       0.16          $       0.16
                                           ============          ============

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

                                      F-5

<PAGE>




                          BIOTEL INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                   FOR THE YEARS ENDED JUNE 30, 2006 AND 2005

<TABLE>
<CAPTION>
                                    COMMON STOCK        ADDITIONAL
                              -----------------------     PAID-IN     RETAINED
                                AMOUNT       SHARES       CAPITAL     EARNINGS      TOTAL
                              ----------   ----------   ----------   ----------   ----------
<S>                           <C>           <C>         <C>          <C>          <C>
Balance, June 30, 2004        $   25,768    2,576,827   $1,912,179   $  446,495   $2,384,442

  Exercise of stock options          730       73,000       29,145           --       29,875

  Net Income                          --           --           --      444,134      444,134
                              ----------   ----------   ----------   ----------   ----------

Balance, June 30, 2005            26,498    2,649,827    1,941,324      890,629    2,858,451

  Exercise of stock options

  Net Income                          --           --           --      452,225      452,225
                              ----------   ----------   ----------   ----------   ----------

Balance, June 30, 2006        $   26,498    2,649,827   $1,941,324   $1,342,854   $3,310,676
                              ==========   ==========   ==========   ==========   ==========
</TABLE>













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

                                      F-6

<PAGE>


                          BIOTEL INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 FOR THE YEARS ENDED
                                                                                      JUNE 30,
                                                                              --------------------------
                                                                                 2006           2005
                                                                              -----------    -----------
<S>                                                                           <C>            <C>
OPERATING ACTIVITIES
       Net income                                                             $   452,225    $   444,134
       Adjustments to reconcile net income to net cash
         provided by operating activities
            Depreciation and amortization                                         288,197        238,923
            Deferred income tax                                                    73,623        (28,050)
            Decrease in allowance for doubtful accounts                           (20,171)        (7,332)
            Increase in inventory valuation allowance                             183,224         64,365
            Gain on disposal of fixed assets                                       (9,856)          --
            Changes in deferred and accrued amounts
                 Trade accounts receivable                                        (48,752)      (416,522)
                 Prepaid expenses                                                  16,186        (58,114)
                 Inventories                                                      143,926       (247,633)
                 Other assets                                                       8,863        (24,435)
                 Trade accounts payable                                          (173,436)        87,442
                 Accrued payroll and related liabilities                           30,195        (55,452)
                 Other accrued expenses                                           106,608         61,545
                 Deferred service contract revenue                                (18,553)        (3,577)
                 Accrued income taxes                                             (14,117)        (9,288)
                                                                              -----------    -----------

                      Net cash provided by operating activities                 1,018,162         46,006
                                                                              -----------    -----------

INVESTING ACTIVITIES
       Purchases of property and equipment                                       (345,928)      (548,186)
       Proceeds from sale of property and equipment                                25,075             --
                                                                              -----------    -----------

                      Net cash used for investing activities                     (320,853)      (548,186)
                                                                              -----------    -----------

FINANCING ACTIVITIES
       Proceeds from issuance of common stock                                          --         29,875
       Net change on line of credit                                              (462,012)       572,012
       Proceeds from notes payable                                                     --             --
       Payments of notes payable                                                 (201,156)      (200,780)
                                                                              -----------    -----------

                      Net cash provided for (used for) financing activities      (663,168)       401,107
                                                                              -----------    -----------

                      Net increase (decrease) in cash and cash equivalents         34,141       (101,073)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                       17,045        118,118
                                                                              -----------    -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                        $    51,186    $    17,045
                                                                              ===========    ===========

CASH PAID FOR
       Interest Expense                                                       $    53,157    $    65,722
                                                                              ===========    ===========
       Income Taxes                                                           $   162,325    $   174,495
                                                                              ===========    ===========

NONCASH FINANCING ACTIVITY
       Increase in note payable for accrued interest                          $     8,318    $        --
                                                                              ===========    ===========
</TABLE>

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

                                      F-7


<PAGE>



BIOTEL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS AND CORPORATE ORGANIZATION
------------------------------------------------------

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

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

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

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

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

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

     ADVERTISING AND MARKETING
          The Company follows the policy of charging the costs of advertising,
          except for costs associated with direct response advertising, to
          operating expenses as incurred. During the years ending June 30, 2006
          and 2005, advertising expenses totaled approximately $19,000 and
          $65,000, respectively.


                                      F-8
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
--------------------------------------------------------------

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

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

     GOODWILL
          The Company accounts for the purchase price in excess of tangible
          assets in accordance with Statement of Financial Accounting Standards
          (SFAS) No. 142, Goodwill and Other Intangible Assets. The goodwill
          arose from the acquisition of Braemar, Inc. Goodwill is deemed to have
          an indefinite useful life and is subject to impairment tests performed
          at least annually. During 2006 and 2005, such test of goodwill
          determined the recorded goodwill had not been impaired.

     SERVICE CONTRACTS
          Amounts billed to customers for service contracts are recognized as
          income over the term of the agreements, and the associated costs are
          recognized as incurred. At June 30, 2006 and 2005, current liabilities
          include service contract revenue deferrals of approximately $168,000
          and $187,000, respectively.

     WARRANTY RESERVE
          The Company offers warranties of up to a year to its customers
          depending on the specific product sold. The Company's warranties
          require it to repair or replace defective products during the warranty
          period at no cost to the customer. The Company records a liability for
          estimated costs that may be incurred under its warranties based on
          recorded sales. Although historical warranty costs have been within
          expectations, there can be no assurance that future warranty costs
          will not exceed historical amounts. The Company periodically assesses
          the adequacy of its recorded liability and adjusts the balance as
          necessary. At June 30, 2006 and 2005, the warranty reserve totaled
          $97,471 and $79,062, respectively, and this amount is included in
          Other Accrued Expenses. The following is a reconciliation of the
          aggregate warranty liability as of June 30, 2006 and 2005:

                                                             2006      2005
                                                          ---------  ---------
          Balance, beginning of year                      $  79,062  $  98,316
          Claims paid                                       (75,176)  (105,516)
          Additional warranties issued and revisions in      93,585     86,262
            estimates of previously issued warranties
                                                          ---------  ---------

          Balance, end of year                            $  97,471  $  79,062
                                                          =========  =========

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

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


                                      F-9
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
--------------------------------------------------------------

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

     STOCK OPTIONS PLANS
          The Company has elected to account for its stock-based compensation
          under the disclosure-only provisions of SFAS No. 123, Accounting for
          Stock-Based Compensation. Accordingly, the Company accounts for its
          employee stock option plan under the provisions of Accounting
          Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
          Employees, for the measurement and recognition of its stock-based
          compensation. Under the provisions of APB No. 25, the Company
          recognized no compensation expense related to options granted.
          However, SFAS No. 123 requires the Company to disclose pro forma
          information regarding option grants made to its employees and board of
          directors. SFAS No. 123 specifies certain valuation techniques that
          produce estimated compensation charges that are included in the pro
          forma results below.

          SFAS No. 123 pro forma amounts are as follows for the fiscal years
          ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                 2006          2005
                                                              -----------   -----------
<S>                                                           <C>           <C>
          Net income, as reported                             $   452,225   $   444,134
          Less:  Total stock-based employee compensation
          expense determined under fair-value based
          method for all awards, net of related tax effects        42,036        90,898
                                                              -----------   -----------

          Pro forma net income                                $   410,189   $   353,236
                                                              ===========   ===========

          Pro forma basic net income per share                $      0.15   $      0.15
                                                              ===========   ===========

          Pro forma diluted net income per share              $      0.15   $      0.14
                                                              ===========   ===========

          Basic net income per share as reported              $      0.17   $      0.17
                                                              ===========   ===========

          Diluted net income per share as reported            $      0.16   $      0.16
                                                              ===========   ===========
</TABLE>

          Under SFAS No. 123, the fair value of each option grant is estimated
          on the date of grant using the Black-Scholes option pricing model. For
          the options issued, the following weighted average assumptions were
          used for the year ending June 30, 2006 and 2005: risk-free interest
          rates based on date of issuance of 3.72% to 4.32%, no expected
          dividends, a volatility factor of 298.33 and 74.79, respectively, 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.

                                      F-10
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
--------------------------------------------------------------

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

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

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

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

          In December, 2004, the FASB issued SFAS No. 123 (revised 2004),
          Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) will require
          companies to measure all employee stock-based compensation awards
          using a fair value method and record such expense in its financial
          statements. In addition, the adoption of SFAS No 123(R) requires
          additional accounting and disclosure related to the income tax and
          cash flow effects resulting from share-based payment arrangements.
          SFAS No. 123(R) is effective beginning as of the first annual
          reporting period beginning after December 15, 2005. The Company is
          currently evaluating the impact that the adoption of SFAS No. 123(R)
          will have on its financial position, results of operation and cash
          flows. The cumulative effective of adoption, if any, will be measured
          and recognized in the statement of operations on the date of adoption.

          In April, 2005, the Securities and Exchange Commission's Office of the
          Chief Accountant and its Division of Corporate Finance issued Staff
          Accounting Bulletin (SAB) No. 107 to provide guidance regarding the
          application of SFAS No. 123(R). SAB No. 107 provides interpretive
          guidance related to the interaction between SFAS No. 123(R) and
          certain SEC rules and regulations, as well as the staff's views
          regarding the valuation of share-based payment arrangements for public
          companies. SAB No. 107 also reminds public companies of the importance
          of including disclosures within filings made with the SEC relating to
          the accounting for share-based payment transactions, particularly
          during the transition to SFAS No. 123(R).

          During 2005, the FASB issued four FSP's related to the implementation
          of SFAS No. 123(R). These FSP's related to (1) the classification and
          measurement of freestanding financial instruments originally issued in
          exchange for employee services, (2) the application of grant date as
          defined in SFAS No. 123(R), (3) the transition election related to
          accounting for the tax effects of share-based payment awards, and (4)
          the classification of options and similar instruments issued as
          employee compensation that allow for cash settlement upon the
          occurrence of a contingent event. The issuance of these FSP's by the
          FASB is intended to clarify the interpretation of the guidance related
          to these specific issues when implementing SFAS No. 123(R).

                                      F-11
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
--------------------------------------------------------------

          In May, 2005, the FASB issued SFAS No. 154, Accounting Changes and
          Error Correction - a replacement of APB Opinion No. 20 and FASB
          Statement No. 3. SFAS No. 154 establishes retrospective application as
          the required method for reporting a change in accounting principle,
          unless it is impracticable, in which case the changes should be
          applied to the latest practicable date presented. SFAS No. 154 also
          requires that a correction of an error be reported as a prior period
          adjustment by restating prior period financial statements. SFAS No.
          154 is effective for accounting changes and corrections of errors made
          in fiscal years beginning after December 15, 2005.

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


NOTE 3 - INVENTORIES
--------------------

     As of June 30, 2006 and 2005, inventories consist of the following:

                                                 2006           2005
                                              -----------    -----------

          Raw materials and supplies          $ 1,296,078    $ 1,332,661
          Work in process                              --         67,243
          Finished Goods                          351,340        376,630
          Evaluation units and replacements         7,082         21,892
                                              -----------    -----------

                                                1,654,500      1,798,426
          Valuation Allowance                    (513,211)      (329,987)
                                              -----------    -----------

                                              $ 1,141,289    $ 1,468,439
                                              ===========    ===========


NOTE 4 - PROPERTY AND EQUIPMENT
-------------------------------

     As of June 30, 2006 and 2005, property and equipment consist of the
     following:

                                                 2006           2005
                                              -----------    -----------

          Machinery and equipment             $ 2,669,884    $ 2,566,254
          Vehicles                                  4,680          4,680
          Furniture and fixtures                   34,791         88,559
          Leasehold improvements                   54,237         37,601
                                              -----------    -----------

                                                2,763,592      2,697,094
          Accumulated depreciation             (2,061,724)    (2,045,739)
                                              -----------    -----------

                                              $   701,868    $   651,355
                                              ===========    ===========

     Depreciation expense for the years ended June 30, 2006 and 2005 totaled
     $280,197 and $229,981, respectively.

                                      F-12
<PAGE>

NOTE 5 - LONG TERM DEBT
-----------------------

     As of June 30, 2006 and 2005, long-term debt consists of the following:

<TABLE>
<CAPTION>
     BANK                                                                            2006         2005
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
     Term loan with bank, payable in monthly installments of
     $20,527 including interest at the prime rate (8.0% at
     June 30, 2006) plus 1.0%, due March 26, 2008.
     This loan is collateralized by a first lien on principally all
     Company assets and a $35,000 personal guarantee by the
     Company's Chief Executive Officer.                                            $ 455,711    $ 656,867

     OTHER
     Note payable to stockholder, annual interest of 7.0%, due
     September 30, 2006                                                               54,531       46,213

                                                                                   ---------    ---------
                                                                                     510,242      703,080

     Less current maturities                                                        (268,717)    (252,645)
                                                                                   ---------    ---------

                                                                                   $ 241,525    $ 450,435
                                                                                   =========    =========

     Maturities of long-term debt are as follows for the periods ending June 30:

          2006                                                                     $ 268,717
          2007                                                                       241,525
                                                                                   ---------
                                                                                   $ 510,242
                                                                                   =========
</TABLE>

     The bank loan agreements contain financial and other covenants requiring
the Company to provide certain financial information to the bank on a monthly
and quarterly basis. The financial covenants require the Company to maintain a
net worth of $1,900,000 and a debt-to-worth ratio not in excess of 2.0 to one.

     The Company also has a $1,250,000 credit line with a bank. The line bears
interest at the bank's prime rate (8.00% at June 30, 2006) plus 1.0% and expires
on November 3, 2006. The outstanding credit line balance as of June 30, 2006 was
$110,000. The outstanding credit line balance as of June 30, 2005, was $572,012.


NOTE 6 - RELATED PARTY TRANSACTIONS
-----------------------------------

     Interest expense for related party obligations for the years ended June 30,
2006 and 2005, was $6,951 and $4,309, respectively. Accrued interest payable to
related parties was $2,863 and $7,278 as of June 30, 2006 and 2005,
respectively.

     Braemar, Inc. leases its land and building in King, North Carolina, from
King Investment Partners, a partnership which is partially owned by Company
stockholders, under a lease agreement which expires June 30, 2008. Total rent
expense to the affiliated partnership was $50,400 for each of the years ended
June 30, 2006 and 2005, respectively. (See Notes 7 and 8.)

                                      F-13
<PAGE>

NOTE 7 - LEASE OBLIGATIONS
--------------------------

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

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

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

     Agility Centralized Research Services, Inc. leases its facility under a
one-year lease agreement which will expire January 31, 2007.

     Future minimum lease payments due under these non-cancelable operating
leases as of June 30, 2006 are as follows:

                    2007                                $186,193
                    2008                                 196,147
                    2009                                 142,802
                    2010                                 109,368
                    2011                                 112,834
                    2012                                  18,902
                                                        --------

                                                        $766,246
                                                        ========

     Total rent expense for leased space was $280,602 and $288,914 for the years
ended June 30, 2006 and 2005, respectively.


NOTE 8 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

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

     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
<PAGE>

NOTE 9 - SIGNIFICANT CUSTOMER CONCENTRATIONS
--------------------------------------------

     Credit sales are made to the Company's customers in the ordinary course of
business. Generally, these sales are unsecured. The Company had two major
customers that accounted for approximately 27% and 10% of the Company's
consolidated revenues for the year ended June 30, 2006. For the year ended June
30, 2005, the Company had three major customers which accounted for 26%, 11% and
11%, respectively, of the Company's consolidated revenues. Accounts receivable
due from these customers at June 30, 2006 and 2005 totaled approximately
$1,691,000 and $758,000, respectively.


NOTE 10 - STOCK OPTIONS
-----------------------

     Biotel Inc. adopted an incentive compensation plan for board designated
personnel on November 15, 2001, by amending the "Biosensor Corporation 1999
Incentive Compensation Plan." Options to purchase shares of the Company's common
stock are granted at a price not less than 100% of the fair market value of the
common stock, as determined by the Board of Directors using the best available
market data, on the date the options are granted. As of June 30, 2006 and 2005,
Biotel Inc. had 328,000 and 354,000 outstanding options, respectively.
Currently, option prices range from $.375 to $2.00 per share with a weighted
average remaining contract life of 2.6 years. No options were exercised during
the twelve months ended June 30, 2006, and 73,000 options were exercised during
the twelve months ended June 30, 2005. Option vesting and expiration is
determined by the Board of Directors at the time they are awarded. No options
may be awarded with an expiration greater than 10 years.

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


<TABLE>
<CAPTION>
                                                                       Outstanding                           Exercisable
                                                            ----------------------------------    -------------------------------
                                                                                 Weighted                              Weighted
                                                                                 Average                               Average
                                                Shares           Number          Exercise              Number          Exercise
                                              Available        of Shares          Price              of Shares          Price
---------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>             <C>                   <C>             <C>
Balance at June 30, 2004                       324,000          326,000         $ 0.6125              224,000         $ 0.5329
---------------------------------------------------------------------------------------------------------------------------------

Granted                                       (205,000)         205,000
Exercised                                       73,000          (73,000)
Expired                                        104,000         (104,000)

Balance at June 30, 2005                       296,000          354,000         $ 1.1379              185,750         $ 0.9040
---------------------------------------------------------------------------------------------------------------------------------

Granted                                        (10,000)          10,000
Expired                                         36,000          (36,000)

Balance at June 30, 2006                       322,000          328,000         $ 1.1898              230,000         $ 1.0510
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                      F-15
<PAGE>

NOTE 11 - INCOME TAXES
----------------------

     The components of the provision for income taxes are as follows for the
years ended June 30, 2006 and 2005:

                                                           2006        2005
                                                         ---------   ---------

          Current provision for taxes                    $ 267,954   $ 188,070
          Decrease in deferred tax credits                 (59,623)       (950)
          Increase (decrease) in valuation allowance        14,000     (29,000)
                                                         ---------   ---------

              Total provision                            $ 222,331   $ 158,120
                                                         =========   =========

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

                                                           2006        2005
                                                         ---------   ---------

          Computed at the federal statutory rate              34.0%       34.0%
            State income taxes                                 3.3%        3.3%
            Increase (decrease) in valuation allowance         2.1%       -4.9%
            Other                                             -6.4%       -6.1%
                                                         ---------   ---------

                                                              33.0%       26.3%
                                                         =========   =========

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax accounts as of June 30, 2006 and 2005 are presented
below:

                                                           2006        2005
                                                         ---------   ---------

          Deferred tax assets applicable to:
            Allowance for doubtful accounts              $  19,500   $  27,400
            Inventory reserves                             200,200     128,700
            Warranty reserves                               38,000      30,800
            Net operating loss carryforwards               266,000     260,700
            AMT tax credit                                  42,730      42,800
            Other                                          (78,336)     57,317
                                                         ---------   ---------

                                                           488,094     547,717
            Less valuation allowance                       198,000     184,000
                                                         ---------   ---------

              Deferred tax asset                         $ 290,094   $ 363,717
                                                         =========   =========

     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, 2006 and
2005, management concluded that the deferred tax asset of $290,094 and $363,717,
respectively, was more likely than not to be realized in future periods. The
valuation allowance at June 30, 2006 and 2005, related to a portion of the
federal and state net operating loss carryforwards that the Company was not
expecting to realize the benefit from due to various federal and state
limitations.

                                      F-16
<PAGE>

NOTE 11 - INCOME TAXES, Continued
---------------------------------

     At June 30, 2006, the Company had federal net operating loss carryforwards
totaling $389,000, which expire on various dates through 2017. The Company also
had state net operating loss carryforwards totaling $2,507,000, which expire on
various dates through 2024.


NOTE 12 - NET INCOME PER SHARE OF COMMON STOCK
----------------------------------------------

     The weighted average number of shares used in the computation of basic and
diluted net income per common share as of June 30, 2006, was 2,649,827 and
2,773,237, respectively. The weighted average number of shares used in the
computation of basic and diluted net income per common share as of June 30,
2005, was 2,619,846 and 2,857,635, respectively.


NOTE 13 - EMPLOYEE BENEFITS PLANS
---------------------------------

     Biotel Inc. has a 401(k) plan covering substantially all of its employees.
Company contributions for the fiscal years ended June 30, 2006 and 2005, totaled
$48,047 and $56,642, respectively.


NOTE 14 - OPERATIONS AND INDUSTRY SEGMENTS
------------------------------------------

     The Company reports on two segments of business: OEM Medical Equipment
Sales and Direct Medical Equipment Sales. The industry segment information
corresponds with the Company's different customer and product types and
therefore complies with the requirements of SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.

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



                                      F-17
<PAGE>

NOTE 14 - OPERATIONS AND INDUSTRY SEGMENTS, Continued
-----------------------------------------------------

<TABLE>
<CAPTION>
                                                                     2006
                                   -------------------------------------------------------------------------
                                     OEM MEDICAL      DIRECT MEDICAL
                                   SALES & SERVICE    SALES & SERVICE        CORPORATE             TOTALS
                                   ---------------    ---------------       ------------        ------------
<S>                                  <C>                <C>                 <C>                 <C>
Domestic Revenues                    $  8,553,423       $    920,902                            $  9,474,325
International Revenues                    653,490             95,517                                 749,007
                                     ------------       ------------        ------------        ------------
Revenues from external customers        9,206,913          1,016,419                              10,223,332
Intersegment revenues                     194,822           (194,822)                                     --
Interest expense                            6,951                 --              56,785              63,736
Income tax expense                        157,670             60,025               4,636             222,331
Depreciation                              259,291              8,138              20,768             288,197
Segment profit                            206,888            252,841              (7,504)            452,225
Goodwill                                  695,551                 --                  --             695,551
Total segment assets                    4,591,726            209,076             393,518           5,194,320
Purchase of property and equipment        310,350             26,078               9,500             345,928

<CAPTION>
                                                                     2005
                                   -------------------------------------------------------------------------
                                     OEM MEDICAL      DIRECT MEDICAL
                                   SALES & SERVICE    SALES & SERVICE        CORPORATE             TOTALS
                                   ---------------    ---------------       ------------        ------------
<S>                                  <C>                <C>                 <C>                 <C>
Domestic Revenues                    $  8,430,143       $  1,186,618                            $  9,616,761
International Revenues                    448,654            103,201                                 551,855
                                     ------------       ------------        ------------        ------------
Revenues from external customers        8,878,797          1,289,819                  --          10,168,616
Intersegment revenues                     272,985           (272,985)                                     --
Interest expense                            4,309                 --              69,405              73,714
Income tax expense                        170,159            (16,000)              3,961             158,120
Depreciation                              219,210             15,493               4,220             238,923
Segment profit                            543,011            (58,761)            (40,116)            444,134
Goodwill                                  695,551                 --                  --             695,551
Total segment assets                    4,777,616            194,842             502,107           5,474,565
Purchase of property and equipment        454,354              1,501              92,331             548,186
</TABLE>


NOTE 15 - SUBSEQUENT EVENTS
---------------------------

     During June, 2006, the Company began efforts to dissolve its Carolina
Medical, Inc. subsidiary. Effective July 1, 2006, the Company's Braemar, Inc.
subsidiary acquired the assets of Carolina Medical and is conducting engineering
and manufacturing operations at the King, North Carolina facility previously
leased by Carolina Medical.







                                      F-18