Table of Contents

---

---

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

| |           | 
| | --------- | 
| |           | 
| |           | 
| | FORM 10-Q | 
| |           | 
| |           | 

|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|x | QUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  |                                                                                          
|  | For the
 period ended March 31, 2010.                                                    
|  |                                                                                          
|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


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

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

|                                                              |                | 
|------------------------------------------------------------- | -------------- | 
|1285 Corporate Center Drive, Suite 150 
 Eagan, MN 55121     
|(Address
 of principal executive offices, 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 May 1,
2010, was 2,783,827.

---

---



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

|        |                |                                                                                              |             |   
|------- | -------------- | -------------------------------------------------------------------------------------------- | ----------- | --
|PART I  |                |                                                                                              | Page Number
|        |                |                                                                                              |             |   
|        | Item 1:        | Financial
 Information                                                                       |             | 3 
|        |                |                                                                                              |             |   
|        |                | Consolidated Balance Sheets  March 31,
 2010 and June 30, 2009                              |             | 3 
|        |                | Consolidated Statements of Operations 
 Three Months ended March 31, 2010 and 2009          |             | 4 
|        |                | Consolidated Statements of Operations 
 Nine Months ended March 31, 2010 and 2009           |             | 5 
|        |                | Consolidated Statements of Cash Flows 
 Nine months ended March 31, 2010 and 2009           |             | 6 
|        |                | Consolidated Statements of Stockholders
 Equity  Nine Months ended March 31, 2010 and 2009 |             | 7 
|        |                | Notes to Consolidated Financial Statements
 (Unaudited)                                      |             | 8 
|        |                |                                                                                              |             |   
|        | Item 2:        | Managements Discussion and Analysis of
 Financial Condition and Results of Operations       |             | 15
|        |                |                                                                                              |             |   
|        | Item 3:        | Qualitative
 and Quantitative Disclosure about Market Risk                                   |             | 19
|        |                |                                                                                              |             |   
|        | Item 4:        | Controls
 and Procedures                                                                     |             | 19
|        |                |                                                                                              |             |   
|PART II |                |                                                                                              |            
|        |                |                                                                                              |             |   
|        | Item 1 and 1A: | Not
 applicable                                                                              |             | 19
|        | Item 2:        | Not
 applicable                                                                              |             | 19
|        | Item 3 and 4:  | Not
 applicable                                                                              |             | 19
|        | Item 5:        | Not
 applicable                                                                              |             | 19
|        | Item 6:        | Exhibits                                                                                     |             | 20
|        |                |                                                                                              |             |   
|        | Signatures     |                                                                                              |             | 21

i

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Table of Contents

Part I

Item
1: Financial Information

BIOTEL INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                         |  |                         |           |                |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | -------------- | - | --------- | 
|                                                                                                                                                         |  | March 31,2010
Unaudited |           | June 30,2009
* |  
|                                                                                                                                                         |  |                         |           |                |   |           | 
|ASSETS                                                                                                                                                  
|CURRENT
 ASSETS                                                                                                                                          |  |                         |           |                |   |           | 
|Cash and cash equivalents                                                                                                                                |  | $                       | 1,851,544 |                | $ | 1,160,409 | 
|Trade accounts receivable, net of allowance for
 doubtful accounts of $41,095 and $48,965 at March 31, 2010 and June 30, 2009,
 respectively             |  |                         | 1,351,102 |                |   | 2,202,378 | 
|Inventories, net                                                                                                                                         |  |                         | 1,653,367 |                |   | 1,878,397 | 
|Deferred tax asset                                                                                                                                       |  |                         | 324,687   |                |   | 250,674   | 
|Refundable income taxes                                                                                                                                  |  |                         | 1,247     |                |   |          | 
|Prepaid expenses                                                                                                                                         |  |                         | 266,615   |                |   | 120,098   | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|Total Current Assets                                                                                                                                     |  |                         | 5,448,562 |                |   | 5,611,956 | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|PROPERTY & EQUIPMENT, Net                                                                                                                                |  |                         | 992,720   |                |   | 1,081,314 | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|OTHER ASSETS                                                                                                                                             |  |                         |           |                |   |           | 
|Goodwill                                                                                                                                                 |  |                         | 695,551   |                |   | 695,551   | 
|Other assets                                                                                                                                             |  |                         | 13,820    |                |   | 13,820    | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|Total Other Assets                                                                                                                                       |  |                         | 709,371   |                |   | 709,371   | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|                                                                                                                                                         |  | $                       | 7,150,653 |                | $ | 7,402,641 | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                    
|CURRENT LIABILITIES                                                                                                                                      |  |                         |           |                |   |           | 
|Trade accounts payable                                                                                                                                   |  | $                       | 677,862   |                | $ | 557,094   | 
|Accrued payroll and related liabilities                                                                                                                  |  |                         | 238,204   |                |   | 277,803   | 
|Deferred service contract revenue                                                                                                                        |  |                         | 69,069    |                |   | 93,855    | 
|Other accrued expenses                                                                                                                                   |  |                         | 212,486   |                |   | 283,502   | 
|Income taxes payable                                                                                                                                     |  |                         |          |                |   | 202,265   | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|Total Current Liabilities                                                                                                                                |  |                         | 1,197,621 |                |   | 1,414,519 | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|LONG-TERM LIABILITIES                                                                                                                                    |  |                         |           |                |   |           | 
|Deferred taxes payable                                                                                                                                   |  |                         | 329,183   |                |   | 329,183   | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|COMMITMENTS AND CONTINGENCIES (See Notes 9 and 10)                                                                                                       |  |                         |           |                |   |           | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|Total Liabilities                                                                                                                                        |  |                         | 1,526,804 |                |   | 1,743,702 | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|STOCKHOLDERS EQUITY                                                                                                                                     |  |                         |           |                |   |           | 
|Preferred stock, $.01 stated value; 2,000,000 shares
 authorized; no shares issued                                                                       |  |                         |          |                |   |          | 
|Common stock, $.01 stated value; 10,000,000 shares
 authorized; 2,783,827 and 2,763,827 shares issued at March 31, 2010 and June
 30, 2009, respectively |  |                         | 27,838    |                |   | 27,638    | 
|Additional paid-in capital                                                                                                                               |  |                         | 2,167,496 |                |   | 2,158,638 | 
|Retained earnings                                                                                                                                        |  |                         | 3,428,515 |                |   | 3,472,663 | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|Total Stockholders Equity                                                                                                                               |  |                         | 5,623,849 |                |   | 5,658,939 | 
|                                                                                                                                                         |  |                         |           |                |   |           | 
|                                                                                                                                                         |  | $                       | 7,150,653 |                | $ | 7,402,641 | 

*Derived from the 10K for the year ended June 30, 2009.

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

3

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Table of Contents

BIOTEL INC. AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF OPERATIONSUnaudited

|                                                              |  |                                       |           |      |   |           |  
|------------------------------------------------------------- |  | ------------------------------------- | --------- | ---- | - | --------- | -
|                                                              |  | For the three months ended
 March 31, |          
|                                                              |  | 2010                                  |           | 2009 |  
|                                                              |  |                                       |           |      |   |           |  
|SALES AND SERVICES                                            |  | $                                     | 2,409,043 |      | $ | 3,120,784 |  
|                                                              |  |                                       |           |      |   |           |  
|COST OF SALES AND SERVICES                                    |  |                                       | 1,367,866 |      |   | 1,802,861 |  
|                                                              |  |                                       |           |      |   |           |  
|GROSS PROFIT                                                  |  |                                       | 1,041,177 |      |   | 1,317,923 |  
|                                                              |  |                                       |           |      |   |           |  
|OPERATING EXPENSES                                            |  |                                       |           |      |   |           |  
|Selling and administrative                                    |  |                                       | 910,136   |      |   | 630,878   |  
|Research and development                                      |  |                                       | 319,037   |      |   | 435,775   |  
|                                                              |  |                                       |           |      |   |           |  
|Total operating expenses                                      |  |                                       | 1,229,173 |      |   | 1,066,653 |  
|                                                              |  |                                       |           |      |   |           |  
|INCOME (LOSS) FROM OPERATIONS                                 |  |                                       | (187,996  | )    |   | 251,270   |  
|                                                              |  |                                       |           |      |   |           |  
|OTHER INCOME (EXPENSE)                                        |  |                                       |           |      |   |           |  
|Interest income                                               |  |                                       | 1,398     |      |   | 1,396     |  
|Miscellaneous                                                 |  |                                       |          |      |   | (529      | )
|                                                              |  |                                       |           |      |   |           |  
|Total other income                                            |  |                                       | 1,398     |      |   | 867       |  
|                                                              |  |                                       |           |      |   |           |  
|NET INCOME (LOSS) BEFORE PROVISION (CREDIT)
 FOR INCOME TAXES |  |                                       | (186,598  | )    |   | 252,137   |  
|                                                              |  |                                       |           |      |   |           |  
|PROVISION (CREDIT) FOR INCOME TAXES                           |  |                                       | (61,018   | )    |   | 99,311    |  
|                                                              |  |                                       |           |      |   |           |  
|NET INCOME (LOSS)                                             |  | $                                     | (125,580  | )    | $ | 152,826   |  
|                                                              |  |                                       |           |      |   |           |  
|INCOME (LOSS) PER SHARE                                       |  |                                       |           |      |   |           |  
|BASIC                                                         |  | $                                     | (0.05     | )    | $ | 0.06      |  
|DILUTED                                                       |  | $                                     | (0.05     | )    | $ | 0.05      |  

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

4

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Table of Contents

BIOTEL INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


Unaudited


|                                                              |  |                                      |           |      |   |           |  
|------------------------------------------------------------- |  | ------------------------------------ | --------- | ---- | - | --------- | -
|                                                              |  | For the nine months ended
 March 31, |          
|                                                              |  | 2010                                 |           | 2009 |  
|                                                              |  |                                      |           |      |   |           |  
|SALES AND SERVICES                                            |  | $                                    | 8,124,343 |      | $ | 9,474,912 |  
|                                                              |  |                                      |           |      |   |           |  
|COST OF SALES AND SERVICES                                    |  |                                      | 4,753,506 |      |   | 5,244,416 |  
|                                                              |  |                                      |           |      |   |           |  
|GROSS PROFIT                                                  |  |                                      | 3,370,837 |      |   | 4,230,496 |  
|                                                              |  |                                      |           |      |   |           |  
|OPERATING EXPENSES                                            |  |                                      |           |      |   |           |  
|Selling and administrative                                    |  |                                      | 2,426,548 |      |   | 1,813,262 |  
|Research and development                                      |  |                                      | 1,097,891 |      |   | 1,213,916 |  
|                                                              |  |                                      |           |      |   |           |  
|Total operating expenses                                      |  |                                      | 3,524,439 |      |   | 3,027,178 |  
|                                                              |  |                                      |           |      |   |           |  
|INCOME (LOSS) FROM OPERATIONS                                 |  |                                      | (153,602  | )    |   | 1,203,318 |  
|                                                              |  |                                      |           |      |   |           |  
|OTHER INCOME (EXPENSE)                                        |  |                                      |           |      |   |           |  
|Interest income                                               |  |                                      | 4,249     |      |   | 5,892     |  
|Interest expense                                              |  |                                      |          |      |   | (590      | )
|Miscellaneous                                                 |  |                                      | (13,813   | )    |   | 12,471    |  
|                                                              |  |                                      |           |      |   |           |  
|Total other income (expense)                                  |  |                                      | (9,564    | )    |   | 17,773    |  
|                                                              |  |                                      |           |      |   |           |  
|NET INCOME (LOSS) BEFORE PROVISION (CREDIT)
 FOR INCOME TAXES |  |                                      | (163,166  | )    |   | 1,221,091 |  
|                                                              |  |                                      |           |      |   |           |  
|PROVISION (CREDIT) FOR INCOME TAXES                           |  |                                      | (119,018  | )    |   | 451,199   |  
|                                                              |  |                                      |           |      |   |           |  
|NET INCOME (LOSS)                                             |  | $                                    | (44,148   | )    | $ | 769,892   |  
|                                                              |  |                                      |           |      |   |           |  
|INCOME (LOSS) PER SHARE                                       |  |                                      |           |      |   |           |  
|BASIC                                                         |  | $                                    | (0.02     | )    | $ | 0.28      |  
|DILUTED                                                       |  | $                                    | (0.02     | )    | $ | 0.27      |  

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

5

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Table of Contents

BIOTEL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSUnaudited

|                                                                                         |  |                                      |           |      |   |           |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | ---- | - | --------- | -
|                                                                                         |  | For the nine months ended
 March 31, |          
|                                                                                         |  | 2010                                 |           | 2009 |  
|OPERATING
 ACTIVITIES                                                                    |  |                                      |           |      |   |           |  
|Net income (loss)                                                                        |  | $                                    | (44,148   | )    | $ | 769,892   |  
|Adjustments to reconcile net income (loss) to net
 cash provided by operating activities |  |                                      |           |      |   |           |  
|Depreciation and amortization                                                            |  |                                      | 292,012   |      |   | 267,790   |  
|Stock-based compensation                                                                 |  |                                      | 1,558     |      |   | 12,524    |  
|Deferred income tax                                                                      |  |                                      | (74,013   | )    |   |          |  
|Increase in refundable income taxes                                                      |  |                                      | (1,247    | )    |   |          |  
|Decrease in allowance for doubtful accounts                                              |  |                                      | (7,870    | )    |   | (5,922    | )
|Increase (decrease) in inventory valuation allowance                                     |  |                                      | 35,369    |      |   | (2,761    | )
|Loss (gain) on disposal of property and equipment                                        |  |                                      | (1,187    | )    |   | 529       |  
|Changes in deferred and accrued amounts                                                  |  |                                      |           |      |   |           |  
|Trade accounts receivable                                                                |  |                                      | 859,146   |      |   | (178,887  | )
|Prepaid expenses                                                                         |  |                                      | (146,517  | )    |   | 15,446    |  
|Inventories                                                                              |  |                                      | 189,661   |      |   | (505,791  | )
|Trade accounts payable                                                                   |  |                                      | 120,768   |      |   | (112,113  | )
|Accrued payroll and related liabilities                                                  |  |                                      | (39,599   | )    |   | (13,307   | )
|Other accrued expenses                                                                   |  |                                      | (71,016   | )    |   | (8,345    | )
|Deferred service contract revenue                                                        |  |                                      | (24,786   | )    |   | (49,841   | )
|Income taxes payable                                                                     |  |                                      | (202,265  | )    |   | 375,032   |  
|                                                                                         |  |                                      |           |      |   |           |  
|Net cash provided by operating activities                                                |  |                                      | 885,866   |      |   | 564,246   |  
|                                                                                         |  |                                      |           |      |   |           |  
|INVESTING
 ACTIVITIES                                                                    |  |                                      |           |      |   |           |  
|Purchases of property and equipment                                                      |  |                                      | (206,731  | )    |   | (279,479  | )
|Proceeds from sale of property and equipment                                             |  |                                      | 4,500     |      |   | 1,614     |  
|                                                                                         |  |                                      |           |      |   |           |  
|Net cash used for investing activities                                                   |  |                                      | (202,231  | )    |   | (277,865  | )
|                                                                                         |  |                                      |           |      |   |           |  
|FINANCING
 ACTIVITIES                                                                    |  |                                      |           |      |   |           |  
|Net change on line of credit                                                             |  |                                      |          |      |   | (187,146  | )
|Exercise of stock options                                                                |  |                                      | 7,500     |      |   |          |  
|                                                                                         |  |                                      |           |      |   |           |  
|Net cash provided by (used for) financing activities                                     |  |                                      | 7,500     |      |   | (187,146  | )
|                                                                                         |  |                                      |           |      |   |           |  
|Net increase in cash and cash equivalents                                                |  |                                      | 691,135   |      |   | 99,235    |  
|                                                                                         |  |                                      |           |      |   |           |  
|CASH AND
 CASH EQUIVALENTS AS OF JUNE 30, 2009 and 2008                                  |  |                                      | 1,160,409 |      |   | 945,121   |  
|                                                                                         |  |                                      |           |      |   |           |  
|CASH AND
 CASH EQUIVALENTS AS OF MARCH 31, 2010 and 2009                                 |  | $                                    | 1,851,544 |      | $ | 1,044,356 |  
|                                                                                         |  |                                      |           |      |   |           |  
|CASH PAID
 FOR                                                                           |  |                                      |           |      |   |           |  
|Interest                                                                                 |  | $                                    |          |      | $ | 621       |  
|Income Taxes                                                                             |  | $                                    | 279,500   |      | $ | 36,832    |  

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

6

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Table of Contents

BIOTEL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the nine months ended March 31, 2010 and 2009 
Unaudited

|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|------------------------- |  | ------------ | ------ | ------ | ------------------ | --------- |  | ---------------------------- | --------- |  | - | --------- | - | - | --------- | -
|                          |  |              |        |        |                    |           |  | Additional
 Paid-In
 Capital |           |  |   |           |   |   |          
|                          |  | Common Stock |        |        | Retained
 Earnings |           |  |                              |          
|                          |  | Amount       |        | Shares |                    |           |  | Total                        |          
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Balance, June 30, 2008    |  | $            | 27,638 |        |                    | 2,763,827 |  | $                            | 2,145,594 |  | $ | 2,528,726 |   | $ | 4,701,958 |  
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Stock-based compensation  |  |              |       |        |                    |          |  |                              | 12,524    |  |   |          |   |   | 12,524    |  
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Net income                |  |              |       |        |                    |          |  |                              |          |  |   | 769,892   |   |   | 769,892   |  
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Balance, March 31, 2009   |  | $            | 27,638 |        |                    | 2,763,827 |  | $                            | 2,158,118 |  | $ | 3,298,618 |   | $ | 5,484,374 |  
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Balance, June 30, 2009    |  | $            | 27,638 |        |                    | 2,763,827 |  | $                            | 2,158,638 |  | $ | 3,472,663 |   | $ | 5,658,939 |  
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Stock-based compensation  |  |              |        |        |                    |           |  |                              | 1,558     |  |   |          |   |   | 1,558     |  
|Exercise of stock options |  |              | 200    |        |                    | 20,000    |  |                              | 7,300     |  |   |          |   |   | 7,500     |  
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Net income                |  |              |       |        |                    |          |  |                              |          |  |   | (44,148   | ) |   | (44,148   | )
|                          |  |              |        |        |                    |           |  |                              |           |  |   |           |   |   |           |  
|Balance, March 31, 2010   |  | $            | 27,838 |        |                    | 2,783,827 |  | $                            | 2,167,496 |  | $ | 3,428,515 |   | $ | 5,623,849 |  

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

7

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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-K
for the fiscal year ended June 30, 2009, filed by Biotel Inc. (the Company)
on September 28, 2009.

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.

Recently Issued Accounting Standards

In
June 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification TM
and the Hierarchy of Generally Accepted Accounting Principles  a replacement
of FASB Statement No. 162, (SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification TM(Codification) as the source of authoritative generally accepted
accounting principles (GAAP) for nongovernmental entities. The Codification
does not change GAAP. Instead, it takes the thousands of individual
pronouncements that currently comprise GAAP and reorganizes them into
approximately 90 accounting Topics, and displays all Topics using a consistent
structure. Contents in each Topic are further organized first by Subtopic, then
Section and finally Paragraph. The Paragraph level is the only level that
contains substantive content. Citing particular content in the Codification
involves specifying the unique numeric path to the content through the Topic,
Subtopic, Section and Paragraph structure. FASB suggests that all citations
begin with FASB ASC, where ASC stands for Accounting
Standards Codification. Changes to the ASC subsequent to June 30,
2009 are referred to as Accounting Standards Updates (ASU). In conjunction
with the issuance of SFAS 168, the FASB also issued its first Accounting
Standards Update No. 2009-1, Topic 105Generally Accepted Accounting
Principles (ASU 2009-1) which includes SFAS 168 in its entirety as a
transition to the ASC. ASU 2009-1 is effective for interim and annual periods
ending after September 15, 2009. These changes will not have an impact on the
Companys financial position or results of operations but will change the
referencing system for accounting standards.

NOTE 2  INVENTORIES

As
of March 31, 2010 and June 30, 2009, inventories consist of the following:

|                                  |  |                 |           |                |   |           |  
|--------------------------------- |  | --------------- | --------- | -------------- | - | --------- | -
|                                  |  | March 31,
 2010 |           | June 30,
 2009 |  
|                                  |  |                 |           |                |   |           |  
|Raw materials and supplies        |  | $               | 1,630,149 |                | $ | 1,782,903 |  
|Finished goods                    |  |                 | 193,673   |                |   | 235,534   |  
|Evaluation units and replacements |  |                 | 9,461     |                |   | 4,507     |  
|                                  |  |                 |           |                |   |           |  
|                                  |  |                 | 1,833,283 |                |   | 2,022,944 |  
|Valuation allowance               |  |                 | (179,916  | )              |   | (144,547  | )
|                                  |  |                 |           |                |   |           |  
|                                  |  | $               | 1,653,367 |                | $ | 1,878,397 |  

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The
Company has on order a significant inventory of raw materials with long lead
times that may be in excess of the amount needed due to the reduced level of
sales of its wireless products as a result of the terminated merger agreement
with CardioNet, Inc. (see Note 9). In the event the Company continues to
experience a reduced level of sales for its wireless products, the book value
of a portion of this inventory, which could be significant, may need to be
reduced due to obsolescence.

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 March 31, 2010 and
June 30, 2009, the warranty reserve totaled $139,852 and $186,424,
respectively. Warranty reserve is included in Other Accrued Expenses. The
following is a reconciliation of the aggregate reserve for warranty liability
as of March 31, 2010 and 2009.

|                                                                                         |  |                 |         |                 |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------- | ------- | --------------- | - | ------- | -
|                                                                                         |  | March 31,
 2010 |         | March 31,
 2009 |  
|                                                                                         |  |                 |         |                 |   |         |  
|Beginning of Period, June
 30, 2009 and 2008                                             |  | $               | 186,424 |                 | $ | 87,512  |  
|                                                                                         |  |                 |         |                 |   |         |  
|Claims Paid                                                                              |  |                 | (94,912 | )               |   | (58,911 | )
|Additional warranties
 issued and revisions in estimates of previously issued warranties |  |                 | 48,340  |                 |   | 71,642  |  
|                                                                                         |  |                 |         |                 |   |         |  
|End of Period, March 31,
 2010 and 2009                                                  |  | $               | 139,852 |                 | $ | 100,243 |  

NOTE 4  STOCK-BASED COMPENSATION

The
Company accounts for compensation cost under its stock option plan in
accordance with the Financial Accounting Standards Board Accounting Standards
Codification (FASB ASC).

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 March 31, 2010 and 2009, Biotel Inc. had 191,000 and
211,000 outstanding options, respectively. Currently, option prices range from
$.625 to $2.05 per share with a weighted average remaining contract life of
3.45 years. During the three months ended March 31, 2010, no options were
exercised; and during the three months ended March 31, 2009, no options were
exercised. During the nine months ended March 31, 2010, 20,000 options were
exercised; and during the nine months ended March 31, 2009, 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.

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

|                          |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|------------------------- |  | ----------------- | -------- | ---------------------------------- | - | ----------------- |  | ---------------------------------- | ------- |  | - | ------ | 
|                          |  | Outstanding       |          | Exercisable                        |  
|                          |  | Number
 of Shares |          | Weighted
 Average
 Exercise
 Price |   | Number
 of Shares |  | Weighted
 Average
 Exercise
 Price |        
|                          |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2008  |  |                   | 211,000  |                                    | $ | 1.5853            |  |                                    | 203,500 |  | $ | 1.5780 | 
|                          |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Cancelled                 |  |                   | (120,000 | )                                  | $ | 2.0000            |  |                                    |         |  |   |        | 
|Granted                   |  |                   | 145,000  |                                    | $ | 2.0472            |  |                                    |         |  |   |        | 
|Expired                   |  |                   | (25,000  | )                                  | $ | 1.8200            |  |                                    |         |  |   |        | 
|                          |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at March 31, 2009 |  |                   | 211,000  |                                    | $ | 1.6391            |  |                                    | 198,500 |  | $ | 1.6171 | 
|                          |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2009  |  |                   | 211,000  |                                    | $ | 1.6391            |  |                                    | 198,500 |  | $ | 1.6171 | 
|                          |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Exercised                 |  |                   | (20,000  | )                                  | $ | 0.3750            |  |                                    |         |  |   |        | 
|                          |  |                   |          |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at March 31, 2010 |  |                   | 191,000  |                                    | $ | 1.7715            |  |                                    | 183,500 |  | $ | 1.7617 | 

The
total intrinsic value of options exercised during the nine months ended March
31, 2010 was $16,500. The total intrinsic value of options outstanding and
exercisable at March 31, 2010 was $40,500 and $40,500, respectively, which was
calculated using the closing stock price as of March 31, 2010 less the exercise
price of in-the-money options.

NOTE 5  INCOME TAXES

The
components of the provision (credit) for income taxes are as follows for the
three months ended March 31, 2010 and 2009:

|                                      |  |      |         |      |   |        | 
|------------------------------------- |  | ---- | ------- | ---- | - | ------ | 
|                                      |  | 2010 |         | 2009 |  
|                                      |  |      |         |      |   |        | 
|Current provision (credit)
 for taxes |  | $    | (61,018 | )    | $ | 99,311 | 

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

|                                        |  |      |       |      |  |      |  
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | -
|                                        |  | 2010 |       | 2009 | 
|                                        |  |      |       |      |  |      |  
|Computed at the federal
 statutory rate |  |      | -34.0 | %    |  | 34.0 | %
|State income taxes                      |  |      | -3.3  | %    |  | 3.3  | %
|Other                                   |  |      | 4.6   | %    |  | 2.1  | %
|                                        |  |      |       |      |  |      |  
|                                        |  |      | -32.7 | %    |  | 39.4 | %

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The
components of the provision (credit) for income taxes are as follows for the
nine months ended March 31, 2010 and 2009.

|                                      |  |      |          |      |   |         | 
|------------------------------------- |  | ---- | -------- | ---- | - | ------- | 
|                                      |  | 2010 |          | 2009 |  
|                                      |  |      |          |      |   |         | 
|Current provision (credit)
 for taxes |  | $    | (54,018  | )    | $ | 451,199 | 
|Research and development
 tax credits |  |      | (65,000  | )    |   |        | 
|                                      |  |      |          |      |   |         | 
|Total provision (credit)              |  | $    | (119,018 | )    | $ | 451,199 | 

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

|                                        |  |      |       |      |  |      |  
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | -
|                                        |  | 2010 |       | 2009 | 
|                                        |  |      |       |      |  |      |  
|Computed at the federal
 statutory rate |  |      | -34.0 | %    |  | 34.0 | %
|State income taxes                      |  |      | -3.3  | %    |  | 3.3  | %
|Research and development tax credits    |  |      | -39.8 | %    |  |     |  
|Other                                   |  |      | 4.2   | %    |  | -0.3 | %
|                                        |  |      |       |      |  |      |  
|                                        |  |      | -72.9 | %    |  | 37.0 | %

NOTE 6  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 March 31, 2010 were
2,783,827 and 2,734,862, respectively, and for the three months ended March 31,
2009 were 2,763,827 and 2,788,708, respectively. The weighted average number of
shares used in the computation of basic and diluted income per common share for
the nine months ended March 31, 2010 were 2,771,637 and 2,816,957,
respectively, and for the nine months ended March 31, 2009 were 2,763,827 and
2,826,804, respectively.

NOTE 7  REVOLVING LINE OF CREDIT

The
Company has a $1,500,000 credit line with a bank. The line bears interest at
the banks prime rate (3.25% at March 31, 2010) plus .25%. The line of credit
was renewed on February 5, 2010 and will expire on February 5, 2011. There was
no outstanding balance on this line of credit as of March 31, 2010 and 2009.

NOTE 8  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 FASB ASC 280-10.

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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 March 31, 2010 |          
|                                    |  | OEM Medical
 Sales & Services     |           | Direct Medical
 Equipment Sales |   | Corporate |  | Totals |          
|                                    |  |                                   |           |                                 |   |           |  |        |           |   |   |           |  
|Domestic revenues                   |  | $                                 | 1,993,786 |                                 | $ | 123,760   |  | $      |          |   | $ | 2,117,546 |  
|International revenues              |  |                                   | 241,229   |                                 |   | 50,268    |  |        |          |   |   | 291,497   |  
|Revenues from external
 customers   |  |                                   | 2,235,015 |                                 |   | 174,028   |  |        |          |   |   | 2,409,043 |  
|Income tax provision
 (credit)      |  |                                   | (11,683   | )                               |   | 15,966    |  |        | (65,301   | ) |   | (61,018   | )
|Depreciation and
 amortization      |  |                                   | 95,998    |                                 |   |          |  |        | 4,921     |   |   | 100,919   |  
|Segment profit (loss)               |  |                                   | (25,516   | )                               |   | 26,696    |  |        | (126,760  | ) |   | (125,580  | )
|Goodwill                            |  |                                   | 695,551   |                                 |   |          |  |        |          |   |   | 695,551   |  
|Total segment assets                |  |                                   | 4,643,917 |                                 |   | 92,299    |  |        | 2,414,437 |   |   | 7,150,653 |  
|Purchase of property and
 equipment |  |                                   | 72,455    |                                 |   |          |  |        | 6,280     |   |   | 78,735    |  

|                                    |  |                                   |           |                                 |   |           |  |        |           |   |   |           | 
|----------------------------------- |  | --------------------------------- | --------- | ------------------------------- | - | --------- |  | ------ | --------- | - | - | --------- | 
|                                    |  | Three months ended March 31, 2009 |          
|                                    |  | OEM Medical
 Sales & Services     |           | Direct Medical
 Equipment Sales |   | Corporate |  | Totals |          
|                                    |  |                                   |           |                                 |   |           |  |        |           |   |   |           | 
|Domestic revenues                   |  | $                                 | 2,646,916 |                                 | $ | 125,148   |  | $      |          |   | $ | 2,772,064 | 
|International revenues              |  |                                   | 325,130   |                                 |   | 23,590    |  |        |          |   |   | 348,720   | 
|Revenues from external
 customers   |  |                                   | 2,972,046 |                                 |   | 148,738   |  |        |          |   |   | 3,120,784 | 
|Income tax provision
 (credit)      |  |                                   | 98,938    |                                 |   | 16,368    |  |        | (15,995   | ) |   | 99,311    | 
|Depreciation and
 amortization      |  |                                   | 86,033    |                                 |   | 1,410     |  |        | 5,787     |   |   | 93,230    | 
|Segment profit (loss)               |  |                                   | 175,456   |                                 |   | 8,421     |  |        | (31,051   | ) |   | 152,826   | 
|Goodwill                            |  |                                   | 695,551   |                                 |   |          |  |        |          |   |   | 695,551   | 
|Total segment assets                |  |                                   | 5,642,874 |                                 |   | 76,008    |  |        | 1,402,922 |   |   | 7,121,804 | 
|Purchase of property and
 equipment |  |                                   | 92,680    |                                 |   |          |  |        |          |   |   | 92,680    | 

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|                                    |  |                                  |           |                                 |   |           |  |        |           |   |  |           |  
|----------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | --------- |  | ------ | --------- | - |  | --------- | -
|                                    |  | Nine months ended March 31, 2010 |          
|                                    |  | OEM Medical
 Sales & Service     |           | Direct Medical
 Equipment Sales |   | Corporate |  | Totals |          
|                                    |  |                                  |           |                                 |   |           |  |        |           |   |  |           |  
|Domestic
 revenues                  |  | $                                | 7,003,732 |                                 | $ | 332,629   |  | $      |          |   |  | 7,336,361 |  
|International
 revenues             |  |                                  | 663,696   |                                 |   | 124,286   |  |        |           |   |  | 787,982   |  
|Revenues
 from external customers   |  |                                  | 7,667,428 |                                 |   | 456,915   |  |        |          |   |  | 8,124,343 |  
|Intersegment
 revenues              |  |                                  |           |                                 |   |           |  |        |           |   |  |          |  
|Interest
 expense                   |  |                                  |          |                                 |   |          |  |        |          |   |  |          |  
|Income tax
 provision (credit)      |  |                                  | 59,767    |                                 |   | 31,382    |  |        | (210,167  | ) |  | (119,018  | )
|Depreciation
 and amortization      |  |                                  | 277,249   |                                 |   |          |  |        | 14,763    |   |  | 292,012   |  
|Segment
 profit (loss)              |  |                                  | 72,241    |                                 |   | 52,632    |  |        | (169,021  | ) |  | (44,148   | )
|Goodwill                            |  |                                  | 695,551   |                                 |   |          |  |        |          |   |  | 695,551   |  
|Total
 segment assets               |  |                                  | 4,643,917 |                                 |   | 92,299    |  |        | 2,414,437 |   |  | 7,150,653 |  
|Purchase of
 property and equipment |  |                                  | 199,601   |                                 |   |          |  |        | 7,130     |   |  | 206,731   |  

|                                    |  |                                  |           |                                 |   |           |   |        |           |   |   |           | 
|----------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | --------- | - | ------ | --------- | - | - | --------- | 
|                                    |  | Nine months ended March 31, 2009 |          
|                                    |  | OEM Medical
 Sales & Service     |           | Direct Medical
 Equipment Sales |   | Corporate |   | Totals |          
|                                    |  |                                  |           |                                 |   |           |   |        |           |   |   |           | 
|Domestic
 revenues                  |  | $                                | 7,866,143 |                                 | $ | 441,787   |   | $      |          |   | $ | 8,307,930 | 
|International
 revenues             |  |                                  | 1,102,884 |                                 |   | 64,098    |   |        |          |   |   | 1,166,982 | 
|Revenues
 from external customers   |  |                                  | 8,969,027 |                                 |   | 505,885   |   |        |          |   |   | 9,474,912 | 
|Intersegment
 revenues              |  |                                  | 27,734    |                                 |   | (27,734   | ) |        |           |   |   |          | 
|Interest
 expense                   |  |                                  |          |                                 |   |          |   |        | 590       |   |   | 590       | 
|Income tax
 provision (credit)      |  |                                  | 413,516   |                                 |   | 51,870    |   |        | (14,187   | ) |   | 451,199   | 
|Depreciation
 and amortization      |  |                                  | 245,602   |                                 |   | 4,934     |   |        | 17,254    |   |   | 267,790   | 
|Segment
 profit (loss)              |  |                                  | 728,249   |                                 |   | 69,183    |   |        | (27,540   | ) |   | 769,892   | 
|Goodwill                            |  |                                  | 695,551   |                                 |   |          |   |        |          |   |   | 695,551   | 
|Total
 segment assets               |  |                                  | 5,642,874 |                                 |   | 76,008    |   |        | 1,402,922 |   |   | 7,121,804 | 
|Purchase of
 property and equipment |  |                                  | 274,346   |                                 |   |          |   |        | 5,133     |   |   | 279,479   | 

NOTE 9  LEGAL
PROCEEDINGS

On
April 2, 2009, Biotel Inc. entered into a Merger Agreement with CardioNet,
Inc., pursuant to which CardioNet, Inc. was to acquire Biotel Inc.s
outstanding securities for $4.82 per share. In a letter dated July 14, 2009,
CardioNet, Inc., advised Biotel Inc. that it was terminating the Merger
Agreement due to Biotel Inc.s breach of a covenant to withdraw and terminate a
business relationship with another company. On July 15, 2009, CardioNet, Inc.
notified Biotel Inc. that Biotel Inc. owed CardioNet, Inc. $1.4 million for a
termination fee and expenses as a result of CardioNets termination of the
Merger Agreement. Biotel Inc. believes CardioNet, Inc.s termination of the
Merger Agreement was without merit. On July 16, 2009, Biotel Inc. commenced a
lawsuit in Hennepin County District Court, State of Minnesota, claiming CardioNet,
Inc. breached and improperly terminated the Merger Agreement. Biotel Inc. is
seeking specific performance and damages. On August 3, 2009, the case was
removed to the United States District Court, District of Minnesota. On
September 4, 2009, CardioNet, Inc. submitted an answer and counterclaim denying
Biotel Inc.s claims and asserting a counterclaim for the $1.4 million
CardioNet, Inc. claims it is owed as a result of its termination of the Merger
Agreement. On February 25, 2010, CardioNet filed an amended answer and
complaint expanding its defenses and counterclaims for breach of contract to
include allegations that Biotel breached certain representations and warranties
in the Merger Agreement related to Biotels intellectual property. In
accordance with FASB ASC 450-20-25, no accrual has been recorded in the
financial statements as the Company is not able to determine the result of the
litigation. Legal expense associated with this lawsuit is expensed as incurred.

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On
September 29, 2009, Braemar, Inc., a Biotel subsidiary, was served in
connection with a lawsuit brought by LifeWatch Services, Inc. and Card Guard
Scientific Survival, Ltd., against Braemar in the United States District Court
for the Northern District of Illinois naming Braemar, a customer of Braemar and
an unrelated company as defendants, claiming that Braemars ER920W Wireless
Cardiac Event Monitor product and a similar product Braemar sold to the
customer named in the action infringe two of LifeWatchs patents. The action seeks
an injunction against Braemar and its customer and damages for the alleged
infringement, including treble damages for willful infringement of one of the
patents. Braemar has agreed to indemnify its customer for any losses the
customer may incur based on the alleged infringement. Braemar does not believe
its products infringe either of the patents and intends to vigorously defend
the litigation on behalf of itself and its customer. At this time, it is not
possible to determine the likelihood or amount of liability, if any, on the
part of Braemar or its customer. In accordance with FASB ASC 450-20-25, no
accrual has been recorded in the financial statements as Biotel is not able to
determine the result of the litigation. Legal expense associated with this lawsuit
is expensed as incurred.

NOTE 10 
COMMITMENTS AND CONTINGENCIES

Carolina
Medical, Inc., a subsidiary of the Company that was dissolved in November,
2006, was the subject of environmental oversight by the North Carolina Division
of Environmental and Natural Resources in Surry County, North Carolina,
involving alleged ground water contamination coming from property that had been
previously owned/or leased by Carolina Medical, Inc. In June, 2006, Carolina
Medical entered into a Termination of Lease, Release, Hold Harmless and
Indemnification Agreement with the landlord, King Investment Partners, related
to any environmental matters or potential environmental matters at the King
Investment Partners property located in King, North Carolina. In the
Agreement, King Investment Partners acknowledged full and complete satisfaction
of any and all past, present or future claims and causes of action, including
any environmental claims related to the property, and agreed to indemnify the
Company for any environmental claims related to the property. In order to
protect the Company from any claim with respect to the property that may exceed
the landlords ability to indemnify the Company, Biotel has obtained insurance
to cover any liability for environmental claims that the Company may have
relating to the property up to a maximum of $10 million during the ten-year
period ending in 2019. The annual cost of the insurance is $16,000.

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

NOTE 11  SUBSEQUENT
EVENTS

These
financial statements have not been updated for subsequent events occurring
after May 14, 2010, which is the date these financial statements were available
to be issued.

14

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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.

Inventories
are valued at lower of cost (using the average and first-in first-out cost
methods) or market. The Company has on order a significant inventory of raw
materials with long lead times that may be in excess of the amount needed due
to the reduced level of sales of its wireless products as a result of the
terminated merger agreement with CardioNet, Inc. (see Overview below and Part
I. Item 1. Note 9 of Notes to Consolidated Financial Statements). In the event
the Company continues to experience a reduced level of sales for its wireless
products, the book value of a portion of this inventory, which could be
significant, may need to be reduced due to obsolescence.

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

Goodwill
is deemed to have an indefinite useful life and is not amortized but is subject
to impairment tests performed at least annually. During fiscal 2009 and 2008,
Biotel performed the required impairment tests of goodwill and determined the
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.

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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.

Following
the announcement of Biotels planned merger with CardioNet, Inc. (see Part I.
Item 1. Note 9 of Notes to Consolidated Financial Statements), many of our
customers made other plans for the purchase of wireless products they had
intended to purchase from us. We expect that many of these customers will not
purchase their future requirements for wireless products from us
notwithstanding the termination of the merger agreement. We will market Fusion
and ER920W devices to regional scanning services. While Biotel is hopeful for a
strong market for its Fusion MCT and ER920W wireless devices, the prospective
regional customers presently have a minimal market share in this business
sector. Regional scanning services do not have the purchasing power of national
scanning services, but they maintain strong relationships with their end users.
Because of the patchwork of reimbursement pricing among Medicare local
carriers, some regional customers may prefer ER920W wireless event recorders
while others prefer Fusion products. Following a strong fiscal year 2009
selling ER920W devices to a major customer, Biotel is expecting diminished
wireless sales activity in the current fiscal year. Furthermore, Medicare has recently
announced that event recorder reimbursement will be reduced by 7% and Holter
reimbursement will be reduced by 16% in 2010. This may place downward pressure
on pricing and sales of our traditional non-wireless product lines. Agilitys
business has diminished due to fewer contracted atrial fibrillation clinical
trials, the principal source of Agilitys revenues. Agility is incurring
operating losses but has won new arrhythmia clinical research business
projected to begin in June, 2010.

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Results of Operations

Three Months ended March 31, 2010

Biotels
net revenues for the three months ended March 31, 2010, were $2,409,000, 22.8%
less than net revenues of $3,121,000 for the three months ended March 31, 2009.
This decrease was primarily the result of significantly diminished sales of
Braemars ER920W wireless event recorder following announcement of Biotels
planned merger with CardioNet, Inc. and the subsequent termination of that
agreement by CardioNet. (See Part I, Item 1. Note 9 of Notes to Consolidated
Financial Statements.)

Gross
profit was $1,041,000 for the quarter ended March 31, 2010, 21.0% less than the
gross profit of $1,318,000 for the third quarter of fiscal year 2009. Gross
profit decreased as a result of the decrease in revenue. Gross profit margin
improved to 43.2% for the three months ended March 31, 2010 compared to 42.2%
for the three months ended March 31, 2009, primarily as a result of a reduction
in workforce necessitated by the decline in revenue as a result of CardioNets
termination of the merger agreement (see Part I. Item 1. Note 9 of Notes to
Consolidated Financial Statements). Cost of sales and service decreased to
$1,368,000 (56.8% of sales) for the three months ended March 31, 2010, compared
to $1,803,000 (57.8% of sales) for the third quarter of fiscal year 2009. The
decrease in cost of sales and service was a result of the lower sales volume
and cost control efforts in the third quarter of fiscal 2010. Cost of sales and
service as a percentage of revenue decreased, primarily due to product mix and
cost control efforts.

Selling,
general and administrative expenses of $910,000 (37.8% of sales) for the three
months ended March 31, 2010 increased from $631,000 (20.2% of sales) for the
three months ended March 31, 2009. Selling, general and administrative expenses
were higher in the third quarter of fiscal 2010 primarily because of legal
expense incurred as a result of activities surrounding the merger agreement
between Biotel and CardioNet, Inc. signed on April 2, 2009, and subsequently
terminated by CardioNet. We expect the higher level of legal expenses to
continue for the next several quarters. In view of current business
projections, we have made non-personnel expense cuts and reduced personnel by
seven employees. These combined reductions have a projected annual savings of
$750,000. Selling expenses include salaries, commissions, benefits, travel
expenses and other selling expenses.

Research
and development expenditures for the third quarter of fiscal year 2010 were
$319,000, a decrease of 26.8% compared to $436,000 in the third quarter of
fiscal year 2009. Research and development expenses in the third quarter of
fiscal year 2010 included expenditures for development of new wireless products
addressing MCT patient procedures. MCT procedures allow patients to be remotely
monitored with alarms for up to 30 days, carry higher reimbursement in the
United States and are believed to provide a higher diagnostic yield than
traditional telephone event monitoring approaches. Biotel expects research and
development investment in fiscal 2010 to be comparable to prior year levels as
the Company addresses developing markets in Holter, event recording and
wireless arrhythmia management.

No
interest expense was incurred in the three-month periods ended March 31, 2010
and March 31, 2009.

A
net loss of $126,000 was posted for the third quarter of fiscal year 2010,
versus net income of $153,000 in the third quarter of fiscal year 2009. The
decrease in net income was primarily the result of reduced revenues, as well as
legal expenses incurred in the third quarter of fiscal 2010. We expect to
continue incur a significant level of legal expenses during the next twelve
months and have elected to expense those fees as incurred.

Nine Months ended March 31, 2010

Biotels
net revenues for the nine months ended March 31, 2010, were $8,124,000, 14.3%
less than net revenues of $9,475,000 for the nine months ended March 31, 2009.
This decrease was primarily the result of significantly diminished sales of
Braemars ER920W wireless event recorder following announcement of Biotels
planned merger with CardioNet, Inc. and the subsequent termination of that
agreement by CardioNet.

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Gross
profit was $3,371,000 for the nine months ended March 31, 2010, 20.3% less than
the gross profit of $4,230,000 for the first nine months of fiscal year 2009.
Gross profit decreased as a result of the decrease in revenue. Gross profit
margin declined to 41.5% for the nine months ended March 31, 2010, compared to
44.7% for the nine months ended March 31, 2009, as a result of the change in
product mix with the decreased sales of Braemars wireless event recorder. Cost
of sales and service decreased to $4,754,000 (58.5% of sales) for the nine
months ended March 31, 2010, compared to $5,244,000 (55.3% of sales) for the
first nine months of fiscal year 2009. The decrease in cost of sales and
service was a result of the lower sales volume and product mix in the first
nine months of fiscal 2010. Cost of sales and service as a percentage of
revenue increased, primarily due to lower sales volume.

Selling,
general and administrative expenses of $2,427,000 (29.9% of sales) for the nine
months ended March 31, 2010 increased from $1,813,000 (19.1% of sales) for the
nine months ended March 31, 2009. Selling, general and administrative expenses
were higher in the first nine months of fiscal 2010 primarily because of legal
expense incurred as a result of activities surrounding the merger agreement
between Biotel and CardioNet, Inc. signed on April 2, 2009, and subsequently
terminated by CardioNet.

Research
and development expenditures for the first nine months of fiscal year 2010 were
$1,098,000, compared to $1,214,000 in the first nine months of fiscal year
2009. Research and development expenses in fiscal year 2010 include
expenditures for development of new wireless products addressing MCT patient
procedures.

No interest
expense was incurred in the nine-month period ended March 31, 2010, and
interest expense of $590 was posted in the nine-month period ended March 31,
2009.

A
net loss of $44,000 was posted in the first nine months of fiscal 2010, versus
net income of $770,000 in the first nine months of fiscal year 2009. The
decrease in net income was primarily the result of reduced revenues and legal
expenses incurred in fiscal 2010. We expect to continue incur a significant
level of legal expenses during the next twelve months.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

Working
capital increased to $4,251,000 at March 31, 2010, compared to $4,197,000 at
June 30, 2009. The increase in working capital is largely the result of the
reduction in income taxes payable at March 31, 2010.

Cash
and cash equivalents were $1,852,000 at March 31, 2010, compared to $1,160,000
at June 30, 2009. The ratio of current assets to current liabilities (current
ratio) was 4.55 to one at March 31, 2010 and 3.97 to one at June 30, 2009.

Accounts
receivable decreased to $1,351,000 at March 31, 2010, versus $2,202,000 at June
30, 2009, as a result of diminished revenues in the first nine months of fiscal
2010. 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 nine months of fiscal year 2010, $207,000 was used for capital
expenditures, compared with $279,000 in the first nine months of fiscal year
2009. 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.

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Inventory
decreased to $1,653,000 as of March 31, 2010, versus $1,878,000 as of June 30,
2009. The level of inventory decreased as less material was purchased due to an
anticipated decline in sales over the next several months as a result of the terminated
merger agreement. Biotels subsidiaries manage inventories to provide safety
stock and product flow for customers while controlling the amount of inventory.

Current
liabilities decreased to $1,198,000 at March 31, 2010, compared to $1,415,000
on June 30, 2009, primarily as a result of the decrease in income taxes
payable.

Biotel has
long term liabilities consisting of deferred taxes payable totaling $329,000.
Biotel has no long term debt.

As of March
31, 2010, stockholders equity had decreased to $5,624,000 from $5,659,000 at
June 30, 2009. The decrease in stockholders equity was primarily due to the
Companys net loss in the first nine months of fiscal 2010.

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. 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 March 31, 2010, 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 nine months of fiscal 2010 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. Not applicable.

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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.

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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: May
 14, 2010 |  | By:         | /s/ B.
 Steven Springrose                   | 
|                    |  |             | Its:
 Chief Executive Officer and President
|                    |  |            
|                    |  |            
|Date: May
 14, 2010 |  | By:         | /s/ Judy E.
 Naus                           | 
|                    |  |             | Its:
 Chief Financial Officer              

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