Table of Contents





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

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FORM 10-Q

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|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|x | QUARTERLY REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  |                                                                                          
|  | For the period ended September 30, 2008                                                  
|  |                                                                                          
|o | TRANSITION REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |                                                                                          
|  | For the transition period from _________ to _________                                    

Commission File Number: 0-50914

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|                                                       
|-------------------------------------------------------
|BIOTEL INC.                                            
|(Exact
 name of registrant as specified in its charter)

| |                                                                  |  |                                        | 
| | ---------------------------------------------------------------- |  | -------------------------------------- | 
| | Minnesota                                                        |  | 41-1427114                             | 
| | (State
 or other jurisdiction of
 incorporation or organization) |  | (I.R.S.
 Employer
 Identification 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.
Yes x          No
o

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

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b2 of the
Exchange Act).
Yes o          No
x

The number of shares of
registrants common stock, par value $0.01 per share, outstanding as of as of
September 30, 2008, was 2,763,827.





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| |             | 
| | ----------- | 
| | BIOTEL INC. | 
| | INDEX       | 
| |             | 

|        |                |                                                                                        |  |            
|------- | -------------- | -------------------------------------------------------------------------------------- |  | -----------
|        |                |                                                                                        |  | Page Number
|        |                |                                                                                        |  |            
|PART I  |                |                                                                                        |  |            
|        |                |                                                                                        |  |            
|        | Item 1:        | Financial
 Information                                                                 |  | 3          
|        |                |                                                                                        |  |            
|        |                | Consolidated Balance Sheets
 September 30, 2008 and June 30, 2008                     |  | 3          
|        |                | Consolidated Statements of
Income  Three Months ended September 30,
 2008 and 2007    |  | 4          
|        |                | Consolidated Statements of
Cash Flows                                                  |  | 5          
|        |                | Consolidated Statements of
Stockholders Equity                                        |  | 6          
|        |                | Notes to
Consolidated Financial Statements (Unaudited)                                 |  | 7          
|        |                |                                                                                        |  |            
|        | Item 2:        | Managements Discussion and Analysis of Financial
 Condition and Results of Operations |  | 11         
|        |                |                                                                                        |  |            
|        | Item 3:        | Qualitative
and Quantitative Disclosure about Market
 Risk                             |  | 14         
|        |                |                                                                                        |  |            
|        | Item 4:        | Controls
and Procedures                                                                |  | 14         
|        |                |                                                                                        |  |            
|PART II |                |                                                                                        |  |            
|        |                |                                                                                        |  |            
|        | Item 1Item 4: | Not
applicable                                                                         |  | 14         
|        | Item 5:        | Other
Information                                                                      |  | 14         
|        | Item 6:        | Exhibits                                                                               |  | 14         
|        |                |                                                                                        |  |            
|        | Signatures     |                                                                                        |  | 15         

i

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Table of Contents

Part I

Item 1: Financial Information

BIOTEL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                 |  |                              |           |                     |   |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | --------- | ------------------- | - | --------- | 
|                                                                                                                                                 |  | September 30,2008
 Unaudited |           | June 30,2008Audited |  
|                                                                                                                                                 |  |                              |           |                     |  
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|ASSETS                                                                                                                                           | 
|CURRENT ASSETS                                                                                                                                   |  |                              |           |                     |   |           | 
|Cash and cash equivalents                                                                                                                        |  | $                            | 650,759   |                     | $ | 945,121   | 
|Trade accounts receivable, net of allowance for
 doubtful accounts of $53,107 and $55,440 at September 30, 2008 and June 30,
 2008, respectively |  |                              | 2,072,686 |                     |   | 1,766,512 | 
|Prepaid income taxes                                                                                                                             |  |                              |          |                     |   | 39,310    | 
|Inventories, net                                                                                                                                 |  |                              | 1,782,156 |                     |   | 1,428,163 | 
|Deferred tax asset                                                                                                                               |  |                              | 244,018   |                     |   | 244,018   | 
|Prepaid expenses                                                                                                                                 |  |                              | 116,557   |                     |   | 109,903   | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|Total Current Assets                                                                                                                             |  |                              | 4,866,176 |                     |   | 4,533,027 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|PROPERTY & EQUIPMENT, Net                                                                                                                        |  |                              | 1,116,468 |                     |   | 1,092,710 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|OTHER ASSETS                                                                                                                                     |  |                              |           |                     |   |           | 
|Goodwill                                                                                                                                         |  |                              | 695,551   |                     |   | 695,551   | 
|Other assets                                                                                                                                     |  |                              | 13,820    |                     |   | 13,820    | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|Total Other Assets                                                                                                                               |  |                              | 709,371   |                     |   | 709,371   | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  | $                            | 6,692,015 |                     | $ | 6,335,108 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                             | 
|CURRENT LIABILITIES                                                                                                                              |  |                              |           |                     |   |           | 
|Revolving line of credit                                                                                                                         |  | $                            |          |                     | $ | 187,146   | 
|Trade accounts payable                                                                                                                           |  |                              | 805,154   |                     |   | 651,635   | 
|Accrued payroll and related
liabilities                                                                                                          |  |                              | 193,452   |                     |   | 237,503   | 
|Deferred service contract revenue                                                                                                                |  |                              | 122,425   |                     |   | 133,359   | 
|Other accrued expenses                                                                                                                           |  |                              | 188,422   |                     |   | 198,540   | 
|Income taxes payable                                                                                                                             |  |                              | 127,484   |                     |   |          | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|Total Current Liabilities                                                                                                                        |  |                              | 1,436,937 |                     |   | 1,408,183 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|LONG-TERM LIABILITIES                                                                                                                            |  |                              |           |                     |   |           | 
|Deferred taxes payable                                                                                                                           |  |                              | 224,967   |                     |   | 224,967   | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|COMMITMENTS AND CONTINGENCIES (See Notes 7 and 8)                                                                                                |  |                              |          |                     |   |          | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|Total Liabilities                                                                                                                                |  |                              | 1,661,904 |                     |   | 1,633,150 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|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; 2,763,827 shares issued                                                          |  |                              | 27,638    |                     |   | 27,638    | 
|Additional paid-in capital                                                                                                                       |  |                              | 2,145,594 |                     |   | 2,145,594 | 
|Retained earnings                                                                                                                                |  |                              | 2,856,879 |                     |   | 2,528,726 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|Total Stockholders Equity                                                                                                                       |  |                              | 5,030,111 |                     |   | 4,701,958 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 
|                                                                                                                                                 |  | $                            | 6,692,015 |                     | $ | 6,335,108 | 
|                                                                                                                                                 |  |                              |           |                     |   |           | 

3

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BIOTEL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
Unaudited

|                                              |  |                                           |           |      |   |           |  
|--------------------------------------------- |  | ----------------------------------------- | --------- | ---- | - | --------- | -
|                                              |  | For the three months ended
 September 30, |          
|                                              |  | 2008                                      |           | 2007 |  
|                                              |  |                                           |           |      |  
|                                              |  |                                           |           |      |   |           |  
|SALES AND SERVICES                            |  | $                                         | 3,168,174 |      | $ | 2,750,779 |  
|                                              |  |                                           |           |      |   |           |  
|COST OF SALES AND SERVICES                    |  |                                           | 1,719,045 |      |   | 1,495,743 |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|GROSS PROFIT                                  |  |                                           | 1,449,129 |      |   | 1,255,036 |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|OPERATING EXPENSES                            |  |                                           |           |      |   |           |  
|Selling and administrative                    |  |                                           | 582,661   |      |   | 584,381   |  
|Research and development                      |  |                                           | 366,157   |      |   | 409,256   |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|Total operating expenses                      |  |                                           | 948,818   |      |   | 993,637   |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|INCOME FROM OPERATIONS                        |  |                                           | 500,311   |      |   | 261,399   |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|OTHER INCOME (EXPENSE)                        |  |                                           |           |      |   |           |  
|Interest income                               |  |                                           | 2,224     |      |   | 4,278     |  
|Interest expense                              |  |                                           | (565      | )    |   | (98       | )
|Miscellaneous                                 |  |                                           | 13,000    |      |   | 937       |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|Total other income (expense)                  |  |                                           | 14,659    |      |   | 5,117     |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|NET INCOME BEFORE PROVISION FOR INCOME
 TAXES |  |                                           | 514,970   |      |   | 266,516   |  
|                                              |  |                                           |           |      |   |           |  
|PROVISION FOR INCOME TAXES                    |  |                                           | 186,817   |      |   | 96,619    |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|NET INCOME                                    |  | $                                         | 328,153   |      | $ | 169,897   |  
|                                              |  |                                           |           |      |   |           |  
|                                              |  |                                           |           |      |   |           |  
|INCOME PER SHARE                              |  |                                           |           |      |   |           |  
|BASIC                                         |  | $                                         | 0.12      |      | $ | 0.06      |  
|                                              |  |                                           |           |      |   |           |  
|DILUTED                                       |  | $                                         | 0.11      |      | $ | 0.06      |  
|                                              |  |                                           |           |      |   |           |  

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BIOTEL INC.CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited

|                                                                                             |  |                                           |          |      |   |          |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------- | ---- | - | -------- | -
|                                                                                             |  | For the three months ended
 September 30, |         
|                                                                                             |  | 2008                                      |          | 2007 |  
|                                                                                             |  |                                           |          |      |  
|                                                                                             |  |                                           |          |      |   |          |  
|OPERATING ACTIVITIES                                                                         |  |                                           |          |      |   |          |  
|Net income                                                                                   |  | $                                         | 328,153  |      | $ | 169,897  |  
|Adjustments to reconcile net income to net cash
 provided by (used for) operating activities |  |                                           |          |      |   |          |  
|Depreciation and amortization                                                                |  |                                           | 86,043   |      |   | 63,590   |  
|Stock-based compensation                                                                     |  |                                           |         |      |   | 12,393   |  
|Increase (decrease) in allowance for doubtful
 accounts                                      |  |                                           | (2,333   | )    |   | 1,365    |  
|Increase (decrease) in inventory valuation
allowance                                         |  |                                           | 11,888   |      |   | (9,403   | )
|Changes in deferred and accrued amounts                                                      |  |                                           |          |      |   |          |  
|Trade
 accounts receivable                                                                   |  |                                           | (303,841 | )    |   | (49,800  | )
|Prepaid expenses                                                                             |  |                                           | (6,654   | )    |   | 45,609   |  
|Inventories                                                                                  |  |                                           | (365,881 | )    |   | (212,115 | )
|Trade accounts payable                                                                       |  |                                           | 153,519  |      |   | (92,173  | )
|Accrued payroll and related
liabilities                                                      |  |                                           | (44,051  | )    |   | (65,406  | )
|Other accrued expenses                                                                       |  |                                           | (10,118  | )    |   | (51,542  | )
|Deferred service contract revenue                                                            |  |                                           | (10,934  | )    |   | (17,777  | )
|Income taxes payable                                                                         |  |                                           | 166,794  |      |   | (83,440  | )
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|Net cash provided by (used for) operating
activities                                         |  |                                           | 2,585    |      |   | (288,802 | )
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|INVESTING ACTIVITIES                                                                         |  |                                           |          |      |   |          |  
|Purchases of property and equipment                                                          |  |                                           | (109,801 | )    |   | (80,661  | )
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|Net cash used for investing
activities                                                       |  |                                           | (109,801 | )    |   | (80,661  | )
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|FINANCING ACTIVITIES                                                                         |  |                                           |          |      |   |          |  
|Net change on line of credit                                                                 |  |                                           | (187,146 | )    |   |         |  
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|Net cash used for financing
activities                                                       |  |                                           | (187,146 | )    |   |         |  
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|Net change in cash and cash
equivalents                                                      |  |                                           | (294,362 | )    |   | (369,463 | )
|                                                                                             |  |                                           |          |      |   |          |  
|CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2008 and
 2007                                      |  |                                           | 945,121  |      |   | 508,314  |  
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30, 2008
 and 2007                                 |  | $                                         | 650,759  |      | $ | 138,851  |  
|                                                                                             |  |                                           |          |      |   |          |  
|                                                                                             |  |                                           |          |      |   |          |  
|CASH PAID FOR                                                                                |  |                                           |          |      |   |          |  
|Interest Expense                                                                             |  | $                                         | 442      |      | $ | 28       |  
|                                                                                             |  |                                           |          |      |   |          |  
|Income Taxes                                                                                 |  | $                                         | 20,000   |      | $ | 180,060  |  
|                                                                                             |  |                                           |          |      |   |          |  

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BIOTEL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the three months ended September 30, 2008 and 2007

|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|--------------------------- |  | ------------ | ------ | ---------------------------- | ---------------- | --------- |  | ----- | --------- |  | - | --------- |  | - | --------- | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|                            |  | Common Stock |        | Additional
 Paid-In
 Capital |                  |           |  |       |           |  |  
|                            |  |              |        |                              | RetainedEarnings |           |  |       |          
|                            |  | Amount       |        | Shares                       |                  |           |  | Total |          
|                            |  |              |        |                              |                  |           |  |       |           |  |  
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|Balance, June 30, 2007      |  | $            | 26,738 |                              |                  | 2,673,827 |  | $     | 2,043,175 |  | $ | 1,862,587 |  | $ | 3,932,500 | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|Stock-based compensation    |  |              |       |                              |                  |          |  |       | 12,393    |  |   |          |  |   | 12,393    | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|Net income                  |  |              |       |                              |                  |          |  |       |          |  |   | 169,897   |  |   | 169,897   | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|Balance, September 30, 2007 |  | $            | 26,738 |                              |                  | 2,673,827 |  | $     | 2,055,568 |  | $ | 2,032,484 |  | $ | 4,114,790 | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|Balance, June 30, 2008      |  | $            | 27,638 |                              |                  | 2,763,827 |  | $     | 2,145,594 |  | $ | 2,528,726 |  | $ | 4,701,958 | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|Net income                  |  |              |       |                              |                  |          |  |       |          |  |   | 328,153   |  |   | 328,153   | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 
|Balance, September 30, 2008 |  | $            | 27,638 |                              |                  | 2,763,827 |  | $     | 2,145,594 |  | $ | 2,856,879 |  | $ | 5,030,111 | 
|                            |  |              |        |                              |                  |           |  |       |           |  |   |           |  |   |           | 

6

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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, 2008, filed by Biotel Inc. (the Company)
on September 29, 2008.

The
information furnished reflects, in the opinion of the management of the
Company, all adjustments necessary for a fair presentation of its 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 September 30, 2008 and June 30, 2008, inventories consist of the following:

|                                   |  |                    |           |                |   |           |  
|---------------------------------- |  | ------------------ | --------- | -------------- | - | --------- | -
|                                   |  | September 30
 2008 |           | June 30,
 2008 |  
|                                   |  |                    |           |                |  
|                                   |  |                    |           |                |   |           |  
|Raw materials and supplies         |  | $                  | 1,685,476 |                | $ | 1,374,588 |  
|Finished goods                     |  |                    | 287,040   |                |   | 229,169   |  
|Evaluation units and
 replacements |  |                    | 9,528     |                |   | 12,406    |  
|                                   |  |                    |           |                |   |           |  
|                                   |  |                    |           |                |   |           |  
|                                   |  |                    | 1,982,044 |                |   | 1,616,163 |  
|Valuation allowance                |  |                    | (199,888  | )              |   | (188,000  | )
|                                   |  |                    |           |                |   |           |  
|                                   |  |                    |           |                |   |           |  
|                                   |  | $                  | 1,782,156 |                | $ | 1,428,163 |  
|                                   |  |                    |           |                |   |           |  

NOTE 3  WARRANTY RESERVE

Biotel
provides warranties against defects in materials and workmanship in our
products. Warranty periods for our products range from 90 days to two years.
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 our expectations. The Company periodically assesses the adequacy of its
recorded liability and adjusts the balance as necessary. At September 30, 2008
and June 30, 2008, the warranty reserve totaled $89,081 and $87,512,
respectively. At September 30, 2007 and June 30, 2007, the warranty reserve
totaled $79,191 and $97,471, respectively. Warranty reserve is included in
Other Accrued Expenses. The following is a reconciliation of the aggregate
warranty liability as of September 30, 2008 and 2007.

7

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|                                                                                         |  |                    |         |                    |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------------ | - | ------- | -
|                                                                                         |  | September 30
 2008 |         | September 30
 2007 |  
|                                                                                         |  |                    |         |                    |  
|Beginning of Period, June
30, 2008 and 2007                                              |  | $                  | 87,512  |                    | $ | 75,906  |  
|                                                                                         |  |                    |         |                    |   |         |  
|Claims Paid                                                                              |  |                    | (10,090 | )                  |   | (18,225 | )
|Additional warranties
issued and revisions in estimates of previously
 issued warranties |  |                    | 11,659  |                    |   | 16,785  |  
|                                                                                         |  |                    |         |                    |   |         |  
|                                                                                         |  |                    |         |                    |   |         |  
|End of Period, September
30, 2008 and 2007                                               |  | $                  | 89,081  |                    | $ | 74,466  |  
|                                                                                         |  |                    |         |                    |   |         |  

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 No. 123(R) had been utilized.

In
adopting SFAS No. 123(R), the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the
fair value recognition method. Under the modified prospective method,
compensation cost is recognized from the adoption date forward for all new
stock options granted and for any outstanding unvested awards as if the fair
value method had been applied to those awards as of the date of grant.

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 September 30, 2008 and 2007, Biotel Inc. had 201,000
and 301,000 outstanding options, respectively. Currently option prices range
from $.375 to $2.00 per share with a weighted average remaining contract life
of 1.49 years. During the three months ended September 30, 2008 and 2007, no
options were exercised. Option vesting and expiration is determined by the
Board of Directors at the time the options are awarded. No options may be awarded
with an expiration greater than 10 years.

8

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Table of Contents

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

|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|------------------------------ |  | ----------------- | ------- | ---------------------------------- | - | ----------------- |  | ---------------------------------- | ------- |  | - | ------ | 
|                               |  | Outstanding       |         | Exercisable                        |  
|                               |  |                   |         |                                    |  
|                               |  | Number
 of Shares |         | Weighted
 Average
 Exercise
 Price |   | Number
 of Shares |  | Weighted
 Average
 Exercise
 Price |        
|                               |  |                   |         |                                    |   |                   |  |                                    |        
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2007       |  |                   | 301,000 |                                    | $ | 1.2899            |  |                                    | 254,500 |  | $ | 1.2583 | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at September 30,
 2007 |  |                   | 301,000 |                                    | $ | 1.2899            |  |                                    | 288,000 |  | $ | 1.2674 | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Exercised                      |  |                   | (90,000 | )                                  | $ | 0.5972            |  |                                    |         |  |   |        | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2008       |  |                   | 211,000 |                                    | $ | 1.5853            |  |                                    | 203,500 |  | $ | 1.5780 | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Expired                        |  |                   | (10,000 | )                                  | $ | 1.5500            |  |                                    |         |  |   |        | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at September 30,
 2008 |  |                   | 201,000 |                                    | $ | 1.5871            |  |                                    | 198,500 |  | $ | 1.5831 | 

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 September 30, 2008 were
2,763,827 and 2,853,677, respectively, and for the three months ended September
30, 2007 were 2,673,827 and 2,848,290, respectively.

NOTE 6  OPERATIONS AND INDUSTRY
SEGMENTS

The
Company reports on two segments of business: OEM Medical Sales & Service
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.

9

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|                                   |  |                                       |           |                                 |   |           |   |        |           |   |   |           | 
|---------------------------------- |  | ------------------------------------- | --------- | ------------------------------- | - | --------- | - | ------ | --------- | - | - | --------- | 
|                                   |  | Three months ended September 30, 2008 |          
|                                   |  |                                       |          
|                                   |  | OEM Medical
 Sales & Services         |           | Direct Medical
 Equipment Sales |   | Corporate |   | Totals |          
|                                   |  |                                       |           |                                 |   |           |   |        |          
|                                   |  |                                       |           |                                 |   |           |   |        |          
|Domestic revenues                  |  | $                                     | 2,623,759 |                                 | $ | 185,854   |   | $      |          |   | $ | 2,809,613 | 
|International
revenues             |  |                                       | 366,490   |                                 |   | (7,929    | ) |        |          |   |   | 358,561   | 
|                                   |  |                                       |           |                                 |   |           |   |        |           |   |   |           | 
|Revenues from external
customers   |  |                                       | 2,990,249 |                                 |   | 177,925   |   |        |          |   |   | 3,168,174 | 
|Intersegment
revenues              |  |                                       | 27,734    |                                 |   | (27,734   | ) |        |          |   |   |          | 
|Interest expense                   |  |                                       |          |                                 |   |          |   |        | 565       |   |   | 565       | 
|Income tax
expense                 |  |                                       | 171,461   |                                 |   | 16,761    |   |        | (1,405    | ) |   | 186,817   | 
|Depreciation and
amortization      |  |                                       | 78,427    |                                 |   | 1,938     |   |        | 5,678     |   |   | 86,043    | 
|Segment profit                     |  |                                       | 301,619   |                                 |   | 29,261    |   |        | (2,727    | ) |   | 328,153   | 
|Goodwill                           |  |                                       | 695,551   |                                 |   |          |   |        |          |   |   | 695,551   | 
|Total segment
assets               |  |                                       | 5,573,606 |                                 |   | 129,334   |   |        | 1,028,385 |   |   | 6,731,325 | 
|Purchase of property and
equipment |  |                                       | 104,668   |                                 |   |          |   |        | 5,133     |   |   | 109,801   | 
|                                   |  |                                       |           |                                 |   |           |   |        |           |   |   |           | 
|                                   |  | Three months ended September 30, 2007 |          
|                                   |  |                                       |          
|                                   |  | OEM Medical
 Sales & Services         |           | Direct Medical
 Equipment Sales |   | Corporate |   | Totals |          
|                                   |  |                                       |           |                                 |   |           |   |        |          
|                                   |  |                                       |           |                                 |   |           |   |        |           |   |   |           | 
|Domestic revenues                  |  | $                                     | 2,281,077 |                                 | $ | 154,465   |   | $      |          |   | $ | 2,435,542 | 
|International
revenues             |  |                                       | 278,839   |                                 |   | 36,398    |   |        |          |   |   | 315,237   | 
|                                   |  |                                       |           |                                 |   |           |   |        |          
|Revenues from external
customers   |  |                                       | 2,559,916 |                                 |   | 190,863   |   |        |          |   |   | 2,750,779 | 
|Intersegment
revenues              |  |                                       | 34,443    |                                 |   | (34,443   | ) |        |          |   |   |          | 
|Interest expense                   |  |                                       |          |                                 |   |          |   |        | 98        |   |   | 98        | 
|Income tax
expense                 |  |                                       | 62,411    |                                 |   | 18,186    |   |        | 16,022    |   |   | 96,619    | 
|Depreciation and
amortization      |  |                                       | 56,150    |                                 |   | 2,063     |   |        | 5,377     |   |   | 63,590    | 
|Segment profit                     |  |                                       | 103,535   |                                 |   | 35,259    |   |        | 31,103    |   |   | 169,897   | 
|Goodwill                           |  |                                       | 695,551   |                                 |   |          |   |        |          |   |   | 695,551   | 
|Total segment
assets               |  |                                       | 4,675,689 |                                 |   | 147,282   |   |        | 442,738   |   |   | 5,265,709 | 
|Purchase of property and
equipment |  |                                       | 80,661    |                                 |   |          |   |        |          |   |   | 80,661    | 

10

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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-Q
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, Braemar, Inc. and Agility Centralized
Research Services, Inc. (collectively, Biotel), which are all located in the
United States. Significant intercompany accounts and transactions are
eliminated in consolidation.

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

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

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

Biotel
charges 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 method over estimated useful lives of three
to five years for equipment, seven years for furniture and fixtures and two to
five years for leasehold improvements, which represents the terms of the
original leases.

Goodwill
is accounted for in accordance with 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 2008 and 2007,
Biotel performed the required impairment tests of goodwill and determined our
recorded goodwill had not been impaired.

We
routinely warrant our recorders against defects in material and workmanship for
one year. Supplies, accessories and repairs typically carry no warranty to
90-days warranty, depending on the item. An accrual is provided for estimated
future claims. Such accruals are based on historical experience and
managements estimate of the level of future claims.

11

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Revenues
from product sales are recognized at date of shipment.

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.

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 Companys 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.

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, Biotel supplies an array of
products and services to provide for the research, development, testing, and
manufacturing needs of its customers.

Biotel
subsidiaries, Braemar, Inc. and Agility Centralized Research Services, Inc.,
sell medical devices, technology and research services to medical companies.
They design, manufacture, and test 24- and 48-hour Holter recorders, 30-day ECG
event recorders, 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
subsidiary, Braemar, Inc., through its Columbia, South Carolina facility which
was formerly Advanced Biosensor, 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 September 30, 2008

Biotels
net revenues for the three months ended September 30, 2008, were $3,168,000,
15.1% better than net revenues of $2,751,000 for the three months ended
September 30, 2007. This increase was the result of strong sales of medical
devices and research services during the first quarter of fiscal 2009. Medical
device sales included shipments of the Braemar DL900 advanced Holter monitor
and Braemar ER920W wireless event recorder which were introduced in the second
half of fiscal 2008.

Gross
profit was $1,449,000 for the quarter ended September 30, 2008, 15.5% greater
than the gross profit of $1,255,000 for the first quarter of fiscal year 2008.
Gross profit increased as a result of the increase in revenue for the first
quarter of fiscal 2009. Gross profit margin improved slightly to 45.7% for the
three months ended September 30, 2008 compared to 45.6% for the three months
ended September 30, 2007. Cost of sales and service increased to $1,719,000
(54.3% of sales) for the three months ended September 30, 2008, compared to $1,496,000
(54.4% of sales) for the first quarter of fiscal year 2008. The increase in
cost of sales and service was a result of the increase in sales for the first
quarter of fiscal 2009.

12

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Selling,
general and administrative expenses of $583,000 (18.4% of sales) for the three
months ended September 30, 2008 was comparable to $584,000 (21.2% of sales) for
the three months ended September 30, 2007. Selling expenses include salaries,
commissions, benefits, travel expenses and other selling expenses.

Research
and development expenditures for the first quarter of fiscal year 2009 were
$366,000, a decrease of 10.5% compared to $409,000 in the first quarter of
fiscal year 2008. Biotel expects research and development investment in fiscal
2009 to be comparable to prior year levels as the Company addresses developing
markets in Holter, event recording and wireless arrhythmia management.

Interest
expense increased to $565 for the three-month period ended September 30, 2008,
compared to interest expense of $98 for the three months ended September 30,
2007.

Net
earnings of $328,000 were posted for the first quarter of fiscal year 2009,
versus net earnings of $170,000 in the first quarter of fiscal year 2008. The
increase in net earnings was primarily the result of the increase in sales
during the first three months of fiscal year 2009.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

Working
capital increased to $3,429,000 at September 30, 2008, compared to $3,125,000
at June 30, 2008. The increase in working capital is largely the result of the
Companys continued profitability.

Cash
and cash equivalents were $651,000 at September 30, 2008, compared to $945,000
at June 30, 2008. The decrease in cash was primarily the result of payments of
estimated income taxes and revolving line of credit, as well as increases in
accounts receivable and inventory in the first quarter of fiscal 2009. The
ratio of current assets to current liabilities (current ratio) was 3.39 to
one at September 30, 2008 and 3.22 to one at June 30, 2008.

Accounts
receivable increased to $2,073,000 at September 30, 2008, versus $1,767,000 at
June 30, 2008, as a result of strong sales in the month of September, 2008. 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 three months of fiscal year 2009, $110,000 was used for capital
expenditures, compared with $81,000 in the first three months of fiscal year
2008. 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 $1,782,000 as of September 30, 2008 versus $1,428,000 as of June
30, 2008. Biotels subsidiaries manage inventories to provide safety stock and
product flow for customers while controlling the amount of inventory.

Current
liabilities increased to $1,437,000 at September 30, 2008, compared to $1,408,000
on June 30, 2008. The increase is primarily due to the increase in accounts
payable and accrued income taxes.

Biotel
has long term liabilities consisting of deferred taxes payable totaling
$225,000. Biotel has no long term debt.

13

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As
of September 30, 2008, stockholders equity had increased to $5,030,000 from
$4,702,000 at June 30, 2008. The increase in stockholders equity was a result
of the increase in retained earnings.

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

Item 3: Qualitative and Quantitative Disclosure about
Market
Risk

Not
applicable.

Item 4: Controls and Procedures

(a)      As
of September 30, 2008, 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 Chief Executive Officer and
Chief Financial Officer concluded that the registrants disclosure controls and
procedures were effective.

(b)      Changes in internal controls.
There were
no changes in the first quarter of fiscal 2009 in Biotels internal controls
over financial reporting 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. Legal Proceedings. Not applicable.

Item 1A. Risk Factors. Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds. Not
applicable.

Item 3. Defaults Upon Senior Securities. Not applicable.

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

Item 5. Other Information. On September 29, 2008,
Biotel issued a news
release containing its financial results for the period ending June 30, 2008.
The news release is attached as Exhibit 99.1.

Item 6. Exhibits

Listing
of Exhibits:

| |      |                                                                                                                                     
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------
| | 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.           
| |      |                                                                                                                                     
| | 99.1 | Biotel Inc. news release
 dated September 29, 2008, containing the companys financial results for the
 period ending June 30, 2008.

14

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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: November 14, 2008 | By:          | /s/ B. Steven Springrose                   
|                        |              |                                             | 
|                        |              | Its: Chief Executive
 Officer and President
|                        |              |                                            
|Date: November 14, 2008 | By:          | /s/ Judy E. Naus                           
|                        |              |                                             | 
|                        |              | Its: Chief Financial
 Officer              

15

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