Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-QSB



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the period ended December 31, 2006



oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from _________ to _________



Commission File Number :  0-50914



BIOTEL INC.

(Exact name of registrant as specified in its charter)

Minnesota
        41-1427114(State or other jurisdiction ofincorporation or organization)
        (I.R.S. EmployerIdentification No.)




1285 Corporate Center Drive, Suite 150

Eagan, MN  55121

(Address of principal executive offices, including zip code)



(651) 286-8620

(Registrants telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx
        Noo




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

Yeso
        Nox




The number of shares of registrants common stock, par value $0.01 per share, outstanding as of as of December 31, 2006, was 2,649,827.



Transitional Small Business Disclosure Format (check one):

Yeso
        Nox








---

BIOTEL INC.

INDEX

____________________________



PART I
        
        
        Page NumberItem 1:
        Financial InformationConsolidated Balance Sheets  December 31, 2006 and June 30, 2006
        1Consolidated Statements of Income  Three Months and    Six Months Ended December 31, 2006 and 2005
        2-3Consolidated Statements of Cash Flows
        4Consolidated Statement of Stockholders Equity
        5Notes to Consolidated Financial Statements (Unaudited)
        6Item 2:
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        11Item 3:
        Controls and Procedures
        15PART IIItem 1Item 5:
        Not applicable
        15Item 6:
        Exhibits
        15Signatures
        
        16






i



---

Table of Contents

Part I

Item 1:   Financial Information



BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



December 31,2006
Unaudited
        
        June 30,2006
AuditedASSETSCURRENT ASSETS:Cash and cash equivalents
        
        $
        101,784
        
        $
        51,186Trade accounts receivable, net of allowance
        
        
        1,732,967
        
        
        2,200,817for doubtful accounts of $55,264 and $50,034at December 31, 2006 and June 30, 2006, respectivelyInventories, net
        
        
        1,181,963
        
        
        1,141,289Deferred tax asset
        
        
        290,094
        
        
        290,094Prepaid expenses
        
        
        115,973
        
        
        87,607Prepaid income taxes
        
        
        69,004
        
        
        Other current assets
        
        
        1,800
        
        
        1,800Total Current Assets
        
        
        3,493,585
        
        
        3,772,793PROPERTY, PLANT & EQUIPMENT, Net
        
        
        793,477
        
        
        701,868OTHER ASSETS:Goodwill
        
        
        695,551
        
        
        695,551Other assets
        
        
        21,289
        
        
        24,108Total Other Assets
        
        
        716,840
        
        
        719,659$
        5,003,902
        
        $
        5,194,320LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Revolving line of credit
        
        $
        
        
        $
        110,000Current portion of notes payable
        
        
        224,526
        
        
        268,717Trade accounts payable
        
        
        521,818
        
        
        484,605Accrued payroll and related liabilities
        
        
        208,486
        
        
        214,748Deferred service contract revenue
        
        
        161,946
        
        
        168,470Other accrued expenses
        
        
        299,452
        
        
        319,034Accrued income taxes
        
        
        
        
        
        76,545Total Current Liabilities
        
        
        1,416,228
        
        
        1,642,119LONG-TERM LIABILITIES:Notes payable
        
        
        127,370
        
        
        241,525Total Liabilities
        
        
        1,543,598
        
        
        1,883,644STOCKHOLDERS EQUITY:Common stock, $.01 stated value; 10,000,000 sharesauthorized; 2,649,827 shares issued
        
        
        26,498
        
        
        26,498Additional paid-in capital
        
        
        1,982,084
        
        
        1,941,324Retained earnings
        
        
        1,451,722
        
        
        1,342,854Total Stockholders Equity
        
        
        3,460,304
        
        
        3,310,676$
        5,003,902
        
        $
        5,194,320






1

---

Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited



For the three months endedDecember 31,2006
        
        2005SALES AND SERVICES
        
        $
        2,705,159
        
        $
        2,493,011COST OF SALES AND SERVICES
        
        
        1,588,350
        
        
        1,517,573GROSS PROFIT
        
        
        1,116,809
        
        
        975,438OPERATING EXPENSESSelling and administrative expenses
        
        
        560,163
        
        
        494,683Research and development
        
        
        324,957
        
        
        280,511Total operating expenses
        
        
        885,120
        
        
        775,194INCOME FROM OPERATIONS
        
        
        231,689
        
        
        200,244OTHER INCOME (EXPENSE)Interest income
        
        
        1,275
        
        
        Interest expense
        
        
        (9,309
        )
        
        (16,293
        )Miscellaneous
        
        
        (198
        )
        
        2,245Total other income (expense)
        
        
        (8,232
        )
        
        (14,048
        )NET INCOME BEFOREPROVISION FOR INCOME TAXES
        
        
        223,457
        
        
        186,196PROVISION FOR INCOME TAXES
        
        
        79,342
        
        
        64,167NET INCOME
        
        $
        144,115
        
        $
        122,029INCOME PER SHAREBASIC
        
        $
        0.05
        
        $
        0.05DILUTED
        
        $
        0.05
        
        $
        0.04






2

---

Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited



For the six months endedDecember 31,2006
        
        2005SALES AND SERVICES
        
        $
        5,128,727
        
        $
        5,019,840COST OF SALES AND SERVICES
        
        
        3,053,423
        
        
        3,008,325GROSS PROFIT
        
        
        2,075,304
        
        
        2,011,515OPERATING EXPENSESSelling and administrative expenses
        
        
        1,180,379
        
        
        1,018,680Research and development
        
        
        703,117
        
        
        501,668Total operating expenses
        
        
        1,883,496
        
        
        1,520,348INCOME FROM OPERATIONS
        
        
        191,808
        
        
        491,167OTHER INCOME (EXPENSE)Interest income
        
        
        1,738
        
        
        Interest expense
        
        
        (20,866
        )
        
        (34,270
        )Miscellaneous
        
        
        693
        
        
        1,997Total other income (expense)
        
        
        (18,435
        )
        
        (32,273
        )NET INCOME BEFOREPROVISION FOR INCOME TAXES
        
        
        173,373
        
        
        458,894PROVISION FOR INCOME TAXES
        
        
        64,505
        
        
        163,270NET INCOME
        
        $
        108,868
        
        $
        295,624INCOME PER SHAREBASIC
        
        $
        0.04
        
        $
        0.11DILUTED
        
        $
        0.04
        
        $
        0.11






3

---

Table of Contents

BIOTEL INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited



For the six months endedDecember 31,2006
        
        2005OPERATING ACTIVITIESNet income
        
        $
        108,868
        
        $
        295,624Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
        
        
        159,518
        
        
        123,556Stock-based compensation
        
        
        40,760
        
        
        Increase in allowance for doubtful accounts
        
        
        5,230
        
        
        7,312Increase in inventory valuation allowance
        
        
        10,528
        
        
        79,235Loss (Gain) on disposal of fixed assets
        
        
        488
        
        
        (1,997
        )Changes in deferred and accrued amountsTrade accounts receivable
        
        
        462,620
        
        
        519,892Prepaid expenses
        
        
        (28,366
        )
        
        (52,280
        )Inventories
        
        
        (51,202
        )
        
        23,626Other assets
        
        
        (1,181
        )
        
        Trade accounts payable
        
        
        37,213
        
        
        (328,161
        )Accrued payroll and related liabilities
        
        
        (6,262
        )
        
        (27,797
        )Other accrued expenses
        
        
        (19,582
        )
        
        66,971Deferred service contract revenue
        
        
        (6,524
        )
        
        (10,622
        )Income taxes payable
        
        
        (145,549
        )
        
        22,809Net cash provided by operating activities
        
        
        566,559
        
        
        718,168INVESTING ACTIVITIESPurchases of property and equipment
        
        
        (255,115
        )
        
        (137,461
        )Proceeds from sale of property and equipment
        
        
        7,500
        
        
        6,000Net cash used for investing activities
        
        
        (247,615
        )
        
        (131,461
        )FINANCING ACTIVITIESProceeds from issuance of common stockNet change on line of credit
        
        
        (110,000
        )
        
        (315,031
        )Payments of long-term debt
        
        
        (158,346
        )
        
        (100,035
        )Net cash used for financing activities
        
        
        (268,346
        )
        
        (415,066
        )Net increase in cash and cash equivalents
        
        
        50,598
        
        
        171,641CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2006 and 2005
        
        
        51,186
        
        
        17,045CASH AND CASH EQUIVALENTS AS OF DECEMBER 31, 2006 and 2005
        
        $
        101,784
        
        $
        188,686






4

---

Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For the six months ended December 30, 2006 and 2005



Common Stock
        
        AdditionalPaid-InCapital
        
        RetainedEarnings
        
        TotalAmount
        
        SharesBalance, June 30, 2005
        
        $
        26,498
        
        2,649,827
        
        $
        1,941,324
        
        $
        890,629
        
        $
        2,858,451Net Income
        
        
        
        
        
        
        
        
        
        
        295,624
        
        
        295,624Balance, December 30, 2005
        
        $
        26,498
        
        2,649,827
        
        $
        1,941,324
        
        $
        1,186,253
        
        $
        3,154,075Balance, June 30, 2006
        
        $
        26,498
        
        2,649,827
        
        $
        1,941,324
        
        $
        1,342,854
        
        $
        3,310,676Stock-based compensation
        
        
        
        
        
        
        
        40,760
        
        
        
        
        
        40,760Net Income
        
        
        
        
        
        
        
        
        
        
        108,868
        
        
        108,868Balance, December 30, 2006
        
        $
        26,498
        
        2,649,827
        
        $
        1,982,084
        
        $
        1,451,722
        
        $
        3,460,304








5

---

Table of Contents

BIOTEL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



NOTE 1  BASIS OF PRESENTATION



The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-KSB for the fiscal year ended June 30, 2006, filed by Biotel Inc. (the Company) on September 28, 2006.



The information furnished reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial results for the interim periods presented. Interim results are subject to year end adjustments and audit by independent certified public accountants.



NOTE 2  INVENTORIES



As of December 31 and June 30, 2006, inventories consist of the following:



December 31,2006
        
        June 30,2006Raw materials and supplies
        
        $
        1,399,377
        
        $
        1,296,078Work in process
        
        
        2,233
        
        
        Finished Goods
        
        
        294,589
        
        
        351,340Evaluation units and replacements
        
        
        9,503
        
        
        7,0821,705,702
        
        
        1,654,500Valuation Allowance
        
        
        (523,739
        )
        
        (513,211
        )$
        1,181,963
        
        $
        1,141,289






NOTE 3  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 December 31 and June 30, 2006, the warranty reserve totaled $84,043 and $97,471, respectively, and this amount is included in Other Accrued Expenses. The following is a reconciliation of the aggregate warranty liability as of December 31, 2006:



6

---

Table of Contents

Balance, June 30, 2006
        
        $
        97,471Claims Paid
        
        
        (23,589
        )Additional warranties issued and revisions in estimates of previously issued warranties
        
        
        10,161Balance, December 31, 2006
        
        $
        84,043






NOTE 4  STOCK-BASED COMPENSATION



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



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



Three months endedDecember 31,2006
        
        December 31,2005Net income, as reported
        
        $
        144,115
        
        $
        122,029Add:  Stock-based employee compensation expense included in reported net income, net of related tax effects
        
        
        20,380
        
        
        Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
        
        
        (20,380
        )
        
        (5,308
        )Pro forma net income
        
        $
        144,115
        
        $
        116,721Earnings per share:Basic - as reported
        
        $
        0.05
        
        $
        0.05Basic - pro forma
        
        $
        0.05
        
        $
        0.04Diluted - as reported
        
        $
        0.05
        
        $
        0.04Diluted - pro forma
        
        $
        0.05
        
        $
        0.04






7

---

Table of Contents

Six months endedDecember 31,2006
        
        December 31,2005Net income, as reported
        
        $
        108,868
        
        $
        295,624Add:  Stock-based employee compensation expense included in reported net income, net of related tax effects
        
        
        40,760Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
        
        
        (40,760
        )
        
        (58,762
        )Pro forma net income
        
        $
        108,868
        
        $
        236,862Earnings per share:Basic - as reported
        
        $
        0.04
        
        $
        0.11Basic - pro forma
        
        $
        0.04
        
        $
        0.09Diluted - as reported
        
        $
        0.04
        
        $
        0.11Diluted - pro forma
        
        $
        0.04
        
        $
        0.09






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 December 31, 2006 and 2005, Biotel Inc. had 333,000 and358,000 outstanding options, respectively. Currently option prices range from $.375 to $2.00 per share with a weighted average remainingcontract life of 2.37 years. No options were exercised during the three months ended December 31, 2006 and 2005. No options were exercised during the six months ended December 31, 2006 and 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:




Outstanding
        
        ExercisableSharesAvailable
        
        Numberof Shares
        
        WeightedAverageExercisePrice
        
        Numberof Shares
        
        WeightedAverageExercisePriceBalance at June 30, 2005
        
        296,000
        
        354,000
        
        $
        1.1379
        
        185,750
        
        $
        0.9040Balance at September 30, 2005
        
        296,000
        
        354,000
        
        $
        1.2641
        
        274,500
        
        $
        1.1181Granted
        
        (10,000
        )
        10,000Expired
        
        6,000
        
        (6,000
        )Balance at December 31, 2005
        
        292,000
        
        358,000
        
        $
        1.2784
        
        245,000
        
        $
        1.2712Balance at June 30, 2006
        
        322,000
        
        328,000
        
        $
        1.1898
        
        230,000
        
        $
        1.0510Granted
        
        (10,000
        )
        10,000Expired
        
        5,000
        
        (5,000
        )Balance at September 30, 2006
        
        317,000
        
        333,000
        
        $
        1.2260
        
        281,000
        
        $
        1.1440Balance at December 31, 2006
        
        317,000
        
        333,000
        
        $
        1.2260
        
        286,500
        
        $
        1.1876






8

---

Table of Contents

NOTE 5   EARNINGS PER SHARE OF COMMON STOCK



The weighted average number of shares used in the computation of basic and diluted income per common share for the three months ended December 31, 2006 was 2,649,827 and 2,752,173, respectively, and for the three months ended December 31, 2005, was 2,649,827 and 2,760,024, respectively. The weighted average number of shares used in the computation of basic and diluted income per common share for the six months ended December 31, 2006 was 2,649,827 and 2,758,806, respectively, and for the six months ended December 31, 2005, was 2,649,827 and 2,770,388, respectively.



NOTE 6  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.



Three months ended December 31, 2006OEM MedicalEquipment Sales
        
        Direct MedicalEquipment Sales
        
        Corporate
        
        TotalsDomestic Revenues
        
        $
        2,287,732
        
        $
        192,592
        
        $
        
        
        $
        2,480,324International Revenues
        
        
        171,684
        
        
        53,151
        
        
        
        
        
        224,835Revenues from external customers
        
        
        2,459,416
        
        
        245,743
        
        
        
        
        
        2,705,159Intersegment revenues
        
        
        50,795
        
        
        (50,795
        )
        
        
        
        
        Interest expense
        
        
        318
        
        
        
        
        
        8,991
        
        
        9,309Income tax expense
        
        
        64,998
        
        
        17,859
        
        
        (3,515
        )
        
        79,342Depreciation
        
        
        73,725
        
        
        2,327
        
        
        6,142
        
        
        82,194Segment profit
        
        
        116,260
        
        
        34,678
        
        
        (6,823
        )
        
        144,115Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,218,548
        
        
        190,983
        
        
        594,371
        
        
        5,003,902Purchase of property and equipment
        
        
        139,818
        
        
        
        
        
        
        
        
        139,818






Three months ended December 31, 2005OEM MedicalEquipment Sales
        
        Direct MedicalEquipment Sales
        
        Corporate
        
        TotalsDomestic revenues
        
        $
        2,081,107
        
        $
        189,264
        
        $
        
        
        $
        2,270,371International revenues
        
        
        216,224
        
        
        6,416
        
        
        
        
        
        222,640Revenues from external customers
        
        
        2,297,331
        
        
        195,680
        
        
        
        
        
        2,493,011Intersegment revenues
        
        
        20,046
        
        
        (20,046
        )
        
        
        
        
        Interest expense
        
        
        1,227
        
        
        
        
        
        15,066
        
        
        16,293Income tax expense
        
        
        40,550
        
        
        13,574
        
        
        10,043
        
        
        64,167Depreciation and Amortization
        
        
        55,364
        
        
        1,668
        
        
        5,801
        
        
        62,833Segment profit
        
        
        76,187
        
        
        26,348
        
        
        19,494
        
        
        122,029Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,095,610
        
        
        246,134
        
        
        736,576
        
        
        5,078,320Purchase of property and equipment
        
        
        70,482
        
        
        26,078
        
        
        7,500
        
        
        104,060






9

---

Table of Contents

Six months ended December 31, 2006OEM MedicalEquipment Sales
        
        Direct MedicalEquipment Sales
        
        Corporate
        
        TotalsDomestic revenues
        
        $
        4,311,201
        
        $
        407,286
        
        $
        
        
        $
        4,718,487International revenues
        
        
        344,273
        
        
        65,967
        
        
        
        
        
        410,240Revenues from external customers
        
        
        4,655,474
        
        
        473,253
        
        
        
        
        
        5,128,727Intersegment revenues
        
        
        88,490
        
        
        (88,490
        )
        
        
        
        
        Interest expense
        
        
        1,272
        
        
        
        
        
        19,594
        
        
        20,866Income tax expense
        
        
        24,493
        
        
        35,160
        
        
        4,852
        
        
        64,505Depreciation and Amortization
        
        
        142,606
        
        
        4,754
        
        
        12,158
        
        
        159,518Segment profit
        
        
        50,856
        
        
        68,129
        
        
        (10,117
        )
        
        108,868Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,218,548
        
        
        190,983
        
        
        594,371
        
        
        5,003,902Purchase of property and equipment
        
        
        253,613
        
        
        
        
        
        1,502
        
        
        255,115






Six months ended December 31, 2005OEM MedicalEquipment Sales
        
        Direct MedicalEquipment Sales
        
        Corporate
        
        TotalsDomestic revenues
        
        $
        4,237,120
        
        $
        445,610
        
        $
        
        
        $
        4,682,730International revenues
        
        
        317,806
        
        
        19,304
        
        
        
        
        
        337,110Revenues from external customers
        
        
        4,554,926
        
        
        464,914
        
        
        
        
        
        5,019,840Intersegment revenues
        
        
        61,651
        
        
        (61,651
        )
        
        
        
        
        Interest expense
        
        
        2,267
        
        
        
        
        
        32,003
        
        
        34,270Income tax expense
        
        
        108,714
        
        
        45,036
        
        
        9,520
        
        
        163,270Depreciation and Amortization
        
        
        109,489
        
        
        2,891
        
        
        11,176
        
        
        123,556Segment profit
        
        
        189,775
        
        
        87,371
        
        
        18,478
        
        
        295,624Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,095,610
        
        
        246,134
        
        
        736,576
        
        
        5,078,320Purchase of property and equipment
        
        
        103,883
        
        
        26,078
        
        
        7,500
        
        
        137,461






NOTE 7  SUBSEQUENT EVENT



On January 31, 2007, the Company refinanced its line of credit and note payable and obtained a $350,000 term note payable and lines of credit for $1,000,000 and $500,000 with a bank. The term note requires 36 monthly payments of $11,079 of principal and interest at 8.5%, beginning March 5, 2007, with all unpaid principal and interest due February 5, 2010. The lines of credit bear interest at the banks prime rate (8.25% at January 31, 2007) plus .25% and expire on February 5, 2008. These debt agreements are collateralized by all of the Companys assets.



10

---

Table of Contents

Item 2:   Managements Discussion and Analysis of Financial Condition and Results of Operations



Cautionary Statement



Statements included or incorporated by reference in this Quarterly Report on Form 10-QSB which are not historical in nature are identified as forward looking statements for the purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended. Biotel cautions readers that forward looking statements, including, without limitation, those relating to our future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. The risks and uncertainties include, but are not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development and market acceptance, the regulatory
and trade environment and other risks indicated in filings with the Securities and Exchange Commission.



Critical Accounting Policies



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



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



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



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



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



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




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



Biotel warrants its 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.



11

---

Table of Contents

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.



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



Overview



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



Three Months ended December 31, 2006



Biotels net revenues for the three months ended December 31, 2006, were $2,705,000, 8.5% above net revenues of $2,493,000 for the three months ended December 31, 2005. This increase is a result of increased sales to medical corporations during the second quarter of fiscal 2007. In the three months ended December 31, 2006 and 2005, 28% and 29% of Biotels revenues were derived from one customer. The loss of this customer would have immediate significant adverse effect on our financial results.



Gross profit margin was $1,117,000 for the quarter ended December 31, 2006, 14.5% better than the gross profit margin of $975,000 for the second quarter of fiscal year 2006. Cost of sales and service increased to $1,588,000 (58.7% of sales) for the three months ended December 31, 2006, compared to $1,518,000 (60.9% of sales) for the second quarter of fiscal year 2006. Cost of sales and service increased in accordance with the increase in sales. Gross profit margin increased due in part to changes in product mix. Model mix variations are a normal part of the purchase cycle of Biotel customers.



Selling, general and administrative expenses increased to $560,000 (20.7% of sales) for the three months ended December 31, 2006, compared to $495,000 (19.8% of sales) for the three months ended December 31, 2005. This increase was due in part to the adoption of SFAS No. 123(R),Accounting for Stock-Based Compensation, which resulted in $20,380 in compensation expense for the second quarter of fiscal 2007. Management believes Biotel will recognize similar compensation expense in each of the two quarters remaining in fiscal year 2007.



Research and development expenditures for the second quarter of fiscal year 2007 were $325,000, an increase of 15.8% compared to $281,000 in the second quarter of fiscal year 2006.  The increase was primarily the result of increases in research and development efforts in the second quarter of fiscal year 2007 related to new Holter and event recorder products. Biotel believes its research and development expenses related to new Holter and event recorder products presently in product development have peaked.  Biotel plans include significant investment in research and development during fiscal year 2007.



12

---

Table of Contents

Interest expenditures decreased to $9,300 for the three-month period ended December 31, 2006, compared to interest expenditures of $16,000 for the three months ended December 31, 2005. Interest expenditures decreased corresponding to the reduction in long term debt.



Net earnings of $144,000 were posted for the second quarter of fiscal year 2007, versus net earnings of $122,000 in the second quarter of fiscal year 2006. Net earnings for the second quarter of fiscal year 2007 improved as a result of increased sales.



Six Months ended December 31, 2006



Biotels net revenues for the six months ended December 31, 2006, were $5,129,000, 2.2% above net revenues of $5,020,000 for the six months ended December 31, 2005. This increase is a result of increased sales to medical corporations during the first six months of fiscal 2007. In the six months ended December 31, 2006 and 2005, 2l% and 32% of Biotels revenues were derived from one customer. The loss of this customer would have immediate significant adverse effect on our financial results.



Gross profit margin was $2,075,000 for the six months ended December 31, 2006, 3.2% better than the gross profit margin of $2,012,000 for the first six months of fiscal year 2006. Cost of sales and service increased to $3,053,000 (59.5% of sales) for the six months ended December 31, 2006, compared to $3,008,000 (59.9% of sales) for the first six months of fiscal year 2006. Cost of sales and service increased in accordance with the increase in sales. Gross profit margin improved in part due to changes in product mix. Model mix variations are a normal part of the purchase cycle of Biotel customers.



Selling, general and administrative expenses increased to $1,180,000 (23.0% of sales) for the six months ended December 31, 2006, compared to $1,019,000 (20.3% of sales) for the six months ended December 31, 2005. This increase was due in part to the adoption of SFAS No. 123(R),Accounting for Stock-Based Compensation, which resulted in $40,760in compensation expense for the first six months of fiscal 2007. Management believes Biotel will recognize similar compensation expense in the remainder of fiscal year 2007.



Selling, general and administrative expenses for the six months ended December 31, 2006 also include $80,000 in compensation paid to the former owner of Agility. This amount was paid as a result of an amendment to the purchase agreement which was executed on August 31, 2006. By executing this amendment, the Company actually eliminated its remaining contingent obligation of up to $150,000 under the original purchase agreement and completed all payments due under the Agility purchase agreement.



Research and development expenditures for the first six months of fiscal year 2007 were $703,000, an increase of 40.2% compared to $502,000 in the first half of fiscal year 2006.  The increase was primarily the result of increases in research and development efforts in fiscal year 2007 related to new Holter and event recorder products. Biotel believes its research and development expenses related to new Holter and event recorder products presently in product development have peaked.  Biotel plans include significant investment in research and development during fiscal year 2007.



Interest expenditures decreased to $20,900 for the six-month period ended December 31, 2006, compared to interest expenditures of $34,000 for the six months ended December 31, 2005. Interest expenditures decreased corresponding to the reduction in long term debt.



Net earnings of $109,000 were posted for the first six months of fiscal year 2007, versus net earnings of $296,000 in the first half of fiscal year 2006. Net earnings for fiscal year 2007 were affected by the  increased expenditures for research and development and the Agility purchase settlement. Net earnings in the first half of fiscal 2007 were also affected by the adoption of SFAS No. 123(R),Accounting for Stock-Based Compensation, as outlined above.



Off-Balance Sheet Arrangements



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




Liquidity and Capital Resources



Working capital decreased to
$2,077,000 at December 31, 2006, compared to $2,131,000 at June 30, 2006. The decrease in working capital was largely due to the
use of cash for investment in capital equipment during the first half of fiscal 2007.



13

---

Table of Contents

Cash and cash equivalents were $102,000 at December 31, 2006, compared to $51,000 at June 30, 2006. The increase in cash was influenced by many factors, primarily operating activities and improvements in cost structures. The ratio of current assets to current liabilities (current ratio) was 2.47 to one at December 31, 2006 and 2.30 to one at June 30, 2006.



Accounts receivable decreased to $1,733,000 at December 31, 2006, versus $2,201,000 at June 30, 2006. The decrease in accounts receivable was related to strong collections during the second quarter of fiscal 2007. 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.



During the first half of fiscal year 2007, $255,000 was used for capital expenditures, compared with $137,000 in the first six months fiscal year 2006. Capital expenditures were increased as a result of Biotels development of new products. Biotel primarily invests in molds, tooling and fixtures for custom components used in its product lines. Levels of capital investment are expected to vary from year to year.



Inventory increased to $1,182,000 as of December 31, 2006, compared to $1,141,000 as of June 30, 2006. Biotels subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.



Current liabilities decreased to $1,416,000 at December 31, 2006, compared to $1,642,000 on June 30, 2006. This decrease was primarily due to the payment a note payable and estimated income taxes during the three-month period ended December 31, 2006.



Long term liabilities were reduced to $127,000 at December 31, 2006, compared to $242,000 at June 30, 2006, a reduction of approximately $115,000 as a result of payments made on notes outstanding.



As of December 31, 2006, stockholders equity had increased to $3,460,000 from $3,311,000 at June 30, 2006. The increase in stockholders equity was a result of the increase in retained earnings and the increase in additional paid in capital due to stock-based compensation.



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



14

---

Table of Contents

Item 3:   Controlsand Procedures



(a)           As of December 31, 2006, an evaluation was performed by Biotels Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the 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 the registrants disclosure controls and procedures were effective.



(b)Changes in internal controls. There were no significant 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.



Part II



Item 1.   LegalProceedings.Not applicable.



Item 2.   UnregisteredSales of Equity Securities and Use of Proceeds.Not applicable.



Item 3.   DefaultsUpon Senior Securities.Not applicable.



Item 4.   Submissionof Matters to a Vote of Security Holders.Not applicable.



Item 5.   Other Information.Not applicable.



Item 6.   Exhibits



Listing of Exhibits:


10
        Second Extension of Lease Agreement


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.




15

---

Table of Contents

Signatures



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Biotel Inc.Date:  February 12, 2007
        
        By:
        /s/ B. Steven SpringroseIts:  Chief Executive Officer and President






Date:  February 12, 2007
        
        By:
        /s/ Judy E. NausIts:  Chief Financial Officer






16

---