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 September 30, 2009                                                  
|  |                                                                                          
|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 xNoo

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 oAccelerated fileroNon-Accelerated fileroSmaller reporting companyx

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b2 of the
Exchange Act). 
Yes oNox

The number of shares of
registrants common stock, par value $0.01 per share, outstanding as of as of
November 5, 2009, was 2,763,827.







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

|                 |  |                                                                                                   |  |            
|---------------- |  | ------------------------------------------------------------------------------------------------- |  | -----------
|PART I           |  |                                                                                                   |  | Page Number
|                 |  |                                                                                                   |  |            
|Item 1:          |  | Financial Information                                                                             |  | 3          
|                 |  |                                                                                                   |  |            
|                 |  | Consolidated Balance Sheets  September 30, 2009 and June 30, 2009                                |  | 3          
|                 |  | Consolidated Statements of Income  Three Months ended September 30,
 2009 and 2008               |  | 4          
|                 |  | Consolidated Statements of Cash Flows  Three Months ended September 30,
 2009 and 2008           |  | 5          
|                 |  | Consolidated Statements of Stockholders Equity  Three Months ended September 30,
 2009 and 2008 |  | 6          
|                 |  | Notes to Consolidated Financial Statements (Unaudited)                                            |  | 7          
|                 |  |                                                                                                   |  |            
|Item 2:          |  | Managements Discussion and Analysis of Financial Condition and
 Results of Operations            |  | 12         
|                 |  |                                                                                                   |  |            
|Item 3:          |  | Qualitative and Quantitative Disclosure about Market Risk                                         |  | 15         
|                 |  |                                                                                                   |  |            
|Item 4:          |  | Controls and Procedures                                                                           |  | 15         
|                 |  |                                                                                                   |  |            
|PART II          |  |                                                                                                   |  |            
|                 |  |                                                                                                   |  |            
|Item 1:          |  | Legal Proceedings                                                                                 |  | 16         
|Item 2  Item 5: |  | Not applicable                                                                                    |  | 16         
|Item 6:          |  | Exhibits                                                                                          |  | 16         
|                 |  |                                                                                                   |  |            
|Signatures       |  |                                                                                                   |  | 17         

i

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Table of Contents

Part I

Item 1:Financial
Information

BIOTEL INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

|                                                                                                                                                 |  |                            |           |               |   |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | --------- | ------------- | - | --------- | 
|                                                                                                                                                 |  | September 30,2009Unaudited |           | June 30,2009* |  
|                                                                                                                                                
|ASSETS                                                                                                                                           |  |                            |           |               |   |           | 
|CURRENT ASSETS                                                                                                                                   |  |                            |           |               |   |           | 
|Cash and cash equivalents                                                                                                                        |  | $                          | 1,552,605 |               | $ | 1,160,409 | 
|Trade accounts receivable, net of allowance
 for doubtful accounts of $48,657 and $48,965 at September 30, 2009 and June
 30, 2009, respectively |  |                            | 1,836,816 |               |   | 2,202,378 | 
|Inventories, net                                                                                                                                 |  |                            | 1,559,616 |               |   | 1,878,397 | 
|Deferred tax asset                                                                                                                               |  |                            | 250,674   |               |   | 250,674   | 
|Prepaid expenses                                                                                                                                 |  |                            | 330,791   |               |   | 120,098   | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|Total Current Assets                                                                                                                             |  |                            | 5,530,502 |               |   | 5,611,956 | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|PROPERTY & EQUIPMENT, Net                                                                                                                        |  |                            | 1,047,439 |               |   | 1,081,314 | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|OTHER ASSETS                                                                                                                                     |  |                            |           |               |   |           | 
|Goodwill                                                                                                                                         |  |                            | 695,551   |               |   | 695,551   | 
|Other assets                                                                                                                                     |  |                            | 13,820    |               |   | 13,820    | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|Total Other Assets                                                                                                                               |  |                            | 709,371   |               |   | 709,371   | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|                                                                                                                                                 |  | $                          | 7,287,312 |               | $ | 7,402,641 | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                             |  |                            |           |               |   |           | 
|CURRENT LIABILITIES                                                                                                                              |  |                            |           |               |   |           | 
|Trade accounts payable                                                                                                                           |  |                            | 604,863   |               |   | 557,094   | 
|Accrued payroll and related liabilities                                                                                                          |  |                            | 218,138   |               |   | 277,803   | 
|Deferred service contract revenue                                                                                                                |  |                            | 82,696    |               |   | 93,855    | 
|Other accrued expenses                                                                                                                           |  |                            | 259,732   |               |   | 283,502   | 
|Income taxes payable                                                                                                                             |  |                            | 5,087     |               |   | 202,265   | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|Total Current Liabilities                                                                                                                        |  |                            | 1,170,516 |               |   | 1,414,519 | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|LONG-TERM LIABILITIES                                                                                                                            |  |                            |           |               |   |           | 
|Deferred taxes payable                                                                                                                           |  |                            | 329,183   |               |   | 329,183   | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|COMMITMENTS AND CONTINGENCIES (See Note 8)                                                                                                       |  |                            |           |               |   |           | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|Total Liabilities                                                                                                                                |  |                            | 1,499,699 |               |   | 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; 2,763,827 shares issued                                                          |  |                            | 27,638    |               |   | 27,638    | 
|Additional paid-in capital                                                                                                                       |  |                            | 2,159,157 |               |   | 2,158,638 | 
|Retained earnings                                                                                                                                |  |                            | 3,600,818 |               |   | 3,472,663 | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|Total Stockholders Equity                                                                                                                       |  |                            | 5,787,613 |               |   | 5,658,939 | 
|                                                                                                                                                 |  |                            |           |               |   |           | 
|                                                                                                                                                 |  | $                          | 7,287,312 |               | $ | 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 INCOME
Unaudited

|                                            |  |                                           |           |      |   |           |  
|------------------------------------------- |  | ----------------------------------------- | --------- | ---- | - | --------- | -
|                                            |  | For the three months ended
 September 30, |          
|                                            |  | 2009                                      |           | 2008 |  
|                                            |  |                                           |           |      |  
|SALES AND SERVICES                          |  | $                                         | 3,263,307 |      | $ | 3,168,174 |  
|                                            |  |                                           |           |      |   |           |  
|COST OF SALES AND SERVICES                  |  |                                           | 1,966,770 |      |   | 1,719,045 |  
|                                            |  |                                           |           |      |   |           |  
|GROSS PROFIT                                |  |                                           | 1,296,537 |      |   | 1,449,129 |  
|                                            |  |                                           |           |      |   |           |  
|OPERATING EXPENSES                          |  |                                           |           |      |   |           |  
|Selling and administrative                  |  |                                           | 666,365   |      |   | 582,661   |  
|Research and development                    |  |                                           | 406,869   |      |   | 366,157   |  
|                                            |  |                                           |           |      |   |           |  
|Total operating expenses                    |  |                                           | 1,073,234 |      |   | 948,818   |  
|                                            |  |                                           |           |      |   |           |  
|INCOME FROM OPERATIONS                      |  |                                           | 223,303   |      |   | 500,311   |  
|                                            |  |                                           |           |      |   |           |  
|OTHER INCOME (EXPENSE)                      |  |                                           |           |      |   |           |  
|Interest income                             |  |                                           | 1,424     |      |   | 2,224     |  
|Interest expense                            |  |                                           |          |      |   | (565      | )
|Miscellaneous                               |  |                                           | (14,250   | )    |   | 13,000    |  
|                                            |  |                                           |           |      |   |           |  
|Total other income                          |  |                                           | (12,826   | )    |   | 14,659    |  
|                                            |  |                                           |           |      |   |           |  
|NET INCOME BEFOREPROVISION FOR INCOME TAXES |  |                                           | 210,477   |      |   | 514,970   |  
|                                            |  |                                           |           |      |   |           |  
|PROVISION FOR INCOME TAXES                  |  |                                           | 82,322    |      |   | 186,817   |  
|                                            |  |                                           |           |      |   |           |  
|NET INCOME                                  |  | $                                         | 128,155   |      | $ | 328,153   |  
|                                            |  |                                           |           |      |   |           |  
|INCOME PER SHARE                            |  |                                           |           |      |   |           |  
|BASIC                                       |  | $                                         | 0.05      |      | $ | 0.12      |  
|DILUTED                                     |  | $                                         | 0.04      |      | $ | 0.11      |  

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

4

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BIOTEL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

|                                                                                  |  |                                         |           |      |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | ---- | - | -------- | -
|                                                                                  |  | For the three months endedSeptember 30, |          
|                                                                                  |  | 2009                                    |           | 2008 |  
|                                                                                  |  |                                         |           |      |   |          |  
|OPERATING ACTIVITIES                                                              |  |                                         |           |      |   |          |  
|Net income                                                                        |  | $                                       | 128,155   |      | $ | 328,153  |  
|Adjustments to reconcile net income to net cash
 provided by operating activities |  |                                         |           |      |   |          |  
|Depreciation and amortization                                                     |  |                                         | 93,911    |      |   | 86,043   |  
|Stock-based compensation                                                          |  |                                         | 519       |      |   |         |  
|Decrease in allowance for doubtful accounts                                       |  |                                         | (308      | )    |   | (2,333   | )
|Decrease in inventory valuation allowance                                         |  |                                         | 9,924     |      |   | 11,888   |  
|Gain on disposal of property and equipment                                        |  |                                         | (750      | )    |   |         |  
|Changes in deferred and accrued amounts                                           |  |                                         |           |      |   |          |  
|Trade accounts receivable                                                         |  |                                         | 365,870   |      |   | (303,841 | )
|Prepaid expenses                                                                  |  |                                         | (210,693  | )    |   | (6,654   | )
|Inventories                                                                       |  |                                         | 308,857   |      |   | (365,881 | )
|Trade accounts payable                                                            |  |                                         | 47,769    |      |   | 153,519  |  
|Accrued payroll and related liabilities                                           |  |                                         | (59,665   | )    |   | (44,051  | )
|Other accrued expenses                                                            |  |                                         | (23,770   | )    |   | (10,118  | )
|Deferred service contract revenue                                                 |  |                                         | (11,159   | )    |   | (10,934  | )
|Income taxes payable                                                              |  |                                         | (197,178  | )    |   | 166,794  |  
|                                                                                  |  |                                         |           |      |   |          |  
|Net cash provided by operating activities                                         |  |                                         | 451,482   |      |   | 2,585    |  
|                                                                                  |  |                                         |           |      |   |          |  
|INVESTING ACTIVITIES                                                              |  |                                         |           |      |   |          |  
|Purchases of property and equipment                                               |  |                                         | (60,036   | )    |   | (109,801 | )
|Proceeds from sale of property and equipment                                      |  |                                         | 750       |      |   |         |  
|                                                                                  |  |                                         |           |      |   |          |  
|Net cash used for investing activities                                            |  |                                         | (59,286   | )    |   | (109,801 | )
|                                                                                  |  |                                         |           |      |   |          |  
|FINANCING ACTIVITIES                                                              |  |                                         |           |      |   |          |  
|Net change on line of credit                                                      |  |                                         |          |      |   | (187,146 | )
|                                                                                  |  |                                         |           |      |   |          |  
|Net cash used for financing activities                                            |  |                                         |          |      |   | (187,146 | )
|                                                                                  |  |                                         |           |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                         | 392,196   |      |   | (294,362 | )
|                                                                                  |  |                                         |           |      |   |          |  
|CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2009 and
 2008                           |  |                                         | 1,160,409 |      |   | 945,121  |  
|                                                                                  |  |                                         |           |      |   |          |  
|CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30, 2009
 and 2008                      |  | $                                       | 1,552,605 |      | $ | 650,759  |  
|                                                                                  |  |                                         |           |      |   |          |  
|CASH PAID FOR                                                                     |  |                                         |           |      |   |          |  
|Interest                                                                          |  | $                                       |          |      | $ | 442      |  
|Income Taxes                                                                      |  | $                                       | 279,500   |      | $ | 20,000   |  

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 STOCKHOLDERS EQUITY
For the three months ended September 30, 2009 and 2008Unaudited

|                             |  |              |        |        |                  |                          |  |       |           |  |   |           |  |   |           | 
|---------------------------- |  | ------------ | ------ | ------ | ---------------- | ------------------------ |  | ----- | --------- |  | - | --------- |  | - | --------- | 
|                             |  |              |        |        |                  | AdditionalPaid-InCapital |  |       |           |  |  
|                             |  | Common Stock |        |        | RetainedEarnings |                          |  |      
|                             |  | Amount       |        | Shares |                  |                          |  | Total |          
|                             |  |              |        |        |                  |                          |  |       |           |  |  
|Balance, June 30, 2008       |  | $            | 27,638 |        |                  | 2,763,827                |  | $     | 2,145,594 |  | $ | 2,528,726 |  | $ | 4,701,958 | 
|                             |  |              |        |        |                  |                          |  |       |           |  |   |           |  |   |           | 
|Net income                   |  |              |       |        |                  |                         |  |       |          |  |   | 328,153   |  |   | 328,153   | 
|                             |  |              |        |        |                  |                          |  |       |           |  |   |           |  |   |           | 
|Balance,
September 30, 2008  |  | $            | 27,638 |        |                  | 2,763,827                |  | $     | 2,145,594 |  | $ | 2,856,879 |  | $ | 5,030,111 | 
|                             |  |              |        |        |                  |                          |  |       |           |  |   |           |  |   |           | 
|Balance, June 30, 2009       |  | $            | 27,638 |        |                  | 2,763,827                |  | $     | 2,158,638 |  | $ | 3,472,663 |  | $ | 5,658,939 | 
|                             |  |              |        |        |                  |                          |  |       |           |  |   |           |  |   |           | 
|Stock-based compensation     |  |              |       |        |                  |                         |  |       | 519       |  |   |          |  |   | 519       | 
|                             |  |              |        |        |                  |                          |  |       |           |  |   |           |  |   |           | 
|Net income                   |  |              |       |        |                  |                         |  |       |          |  |   | 128,155   |  |   | 128,155   | 
|                             |  |              |        |        |                  |                          |  |       |           |  |   |           |  |   |           | 
|Balance,
 September 30, 2009 |  | $            | 27,638 |        |                  | 2,763,827                |  | $     | 2,159,157 |  | $ | 3,600,818 |  | $ | 5,787,613 | 

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 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 CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles  a replacement of FASB Statement No. 162, (SFAS 168).
SFAS 168 establishes the FASB Accounting Standards CodificationTM (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 and will not have an impact on the
Companys financial position or results of operations but will change the
referencing system for accounting standards.

7

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Table of Contents

NOTE 2  INVENTORIES

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

| |                                    |  |                     |           |                |   |           |  
| | ---------------------------------- |  | ------------------- | --------- | -------------- | - | --------- | -
| |                                    |  | September 30,
 2009 |           | June 30,
 2009 |  
| |                                    |  |                     |           |                |  
| | Raw materials and supplies         |  | $                   | 1,580,619 |                | $ | 1,782,903 |  
| | Finished goods                     |  |                     | 130,231   |                |   | 235,534   |  
| | Evaluation units and
 replacements |  |                     | 3,237     |                |   | 4,507     |  
| |                                    |  |                     |           |                |   |           |  
| |                                    |  |                     | 1,714,087 |                |   | 2,022,944 |  
| | Valuation allowance                |  |                     | (154,471  | )              |   | (144,547  | )
| |                                    |  |                     |           |                |   |           |  
| |                                    |  | $                   | 1,559,616 |                | $ | 1,878,397 |  

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 7). 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 September 30, 2009
and June 30, 2009, the warranty reserve totaled $187,452 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 September 30, 2009 and 2008.

|                                                                                         |  |                     |         |                     |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------- | ------- | ------------------- | - | ------- | -
|                                                                                         |  | September 30,
 2009 |         | September 30,
 2008 |  
|                                                                                         |  |                     |         |                     |  
|Beginning of Period, June 30, 2009 and 2008                                              |  | $                   | 186,424 |                     | $ | 87,512  |  
|                                                                                         |  |                     |         |                     |   |         |  
|Claims Paid                                                                              |  |                     | (20,956 | )                   |   | (10,090 | )
|Additional warranties issued and revisions in estimates of previously
 issued warranties |  |                     | 21,984  |                     |   | 11,659  |  
|                                                                                         |  |                     |         |                     |   |         |  
|End of Period, September 30, 2009 and 2008                                               |  | $                   | 187,452 |                     | $ | 89,081  |  

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 September 30, 2009 and 2008, Biotel Inc. had 211,000
and 201,000 outstanding options, respectively. Currently, option prices range
from $.375 to $2.05 per share with a weighted average remaining contract life
of 3.60 years. During the three months ended September 30, 2009 and 2008, 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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Table of Contents

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

|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|------------------------------ |  | ----------------- | ------- | ---------------------------------- | - | ----------------- |  | ---------------------------------- | ------- |  | - | ------ | 
|                               |  | Outstanding       |         | Exercisable                        |  
|                               |  | Number
 of Shares |         | Weighted
 Average
 Exercise
 Price |   | Number
 of Shares |  | Weighted
 Average
 Exercise
 Price |        
|                               |  |                   |         |                                    |   |                   |  |                                    |        
|Balance at June 30, 2008       |  |                   | 211,000 |                                    | $ | 1.5853            |  |                                    | 203,500 |  | $ | 1.5780 | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Expired                        |  |                   | (10,000 | )                                  | $ | 1.5500            |  |                                    |         |  |   |        | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at September 30,
 2008 |  |                   | 201,000 |                                    | $ | 1.5871            |  |                                    | 198,500 |  | $ | 1.5831 | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at June 30, 2009       |  |                   | 211,000 |                                    | $ | 1.6391            |  |                                    | 198,500 |  | $ | 1.6171 | 
|                               |  |                   |         |                                    |   |                   |  |                                    |         |  |   |        | 
|Balance at September 30,
 2009 |  |                   | 211,000 |                                    | $ | 1.6391            |  |                                    | 201,000 |  | $ | 1.6206 | 

The
total intrinsic value of options exercised during the three months ended
September 30, 2009 was $0. The total intrinsic value of options outstanding and
exercisable at September 30, 2009 was $234,900 and $227,500, respectively,
which was calculated using the closing stock price as of September 30, 2009
less the exercise price of in-the-money options.

NOTE 5  EARNINGS PER SHARE OF
COMMON STOCK

The
weighted average number of shares used in the computation of basic and diluted
income per common share for the three months ended September 30, 2009 were
2,763,827 and 2,865,726, respectively, and for the three months ended September
30, 2008 were 2,763,827 and 2,853,677, respectively.

NOTE 6  OPERATIONS AND INDUSTRY
SEGMENTS

The
Company reports on two segments of business: OEM Medical Sales & Service
and Direct Medical Equipment Sales. The industry segment information
corresponds with the Companys different customer and product types and
therefore complies with the requirements of FASB ASC 280-10.

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.

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|                                    |  |                                       |           |                                 |   |           |  |        |           |   |   |           | 
|----------------------------------- |  | ------------------------------------- | --------- | ------------------------------- | - | --------- |  | ------ | --------- | - | - | --------- | 
|                                    |  | Three months ended September 30, 2009 |          
|                                    |  | OEM Medical
 Sales & Services         |           | Direct Medical
 Equipment Sales |   | Corporate |  | Totals |          
|                                    |  |                                       |           |                                 |   |           |  |        |           |   |   |           | 
|Domestic revenues                   |  | $                                     | 2,951,176 |                                 | $ | 106,975   |  | $      |          |   | $ | 3,058,151 | 
|International revenues              |  |                                       | 177,937   |                                 |   | 27,219    |  |        |          |   |   | 205,156   | 
|Revenues from external
 customers   |  |                                       | 3,129,113 |                                 |   | 134,194   |  |        |          |   |   | 3,263,307 | 
|Income tax expense                  |  |                                       | 116,616   |                                 |   | 7,961     |  |        | (42,255   | ) |   | 82,322    | 
|Depreciation and
 amortization      |  |                                       | 88,990    |                                 |   |          |  |        | 4,921     |   |   | 93,911    | 
|Segment profit                      |  |                                       | 196,800   |                                 |   | 13,381    |  |        | (82,026   | ) |   | 128,155   | 
|Goodwill                            |  |                                       | 695,551   |                                 |   |          |  |        |          |   |   | 695,551   | 
|Total segment assets                |  |                                       | 5,176,267 |                                 |   | 57,088    |  |        | 2,053,957 |   |   | 7,287,312 | 
|Purchase of property and
 equipment |  |                                       | 59,186    |                                 |   |          |  |        | 850       |   |   | 60,036    | 

|                                    |  |                                       |           |                                 |   |           |   |        |           |   |   |           | 
|----------------------------------- |  | ------------------------------------- | --------- | ------------------------------- | - | --------- | - | ------ | --------- | - | - | --------- | 
|                                    |  | Three months ended September 30, 2008 |          
|                                    |  | OEM Medical
 Sales & Services         |           | Direct Medical
 Equipment Sales |   | Corporate |   | Totals |          
|                                    |  |                                       |           |                                 |   |           |   |        |           |   |   |           | 
|Domestic revenues                   |  | $                                     | 2,623,759 |                                 | $ | 185,854   |   | $      |          |   | $ | 2,809,613 | 
|International revenues              |  |                                       | 366,490   |                                 |   | (7,929    | ) |        |          |   |   | 358,561   | 
|Revenues from external
 customers   |  |                                       | 2,990,249 |                                 |   | 177,925   |   |        |          |   |   | 3,168,174 | 
|Intersegment revenues               |  |                                       | 27,734    |                                 |   | (27,734   | ) |        |          |   |   |          | 
|Interest expense                    |  |                                       |          |                                 |   |          |   |        | 565       |   |   | 565       | 
|Income tax expense                  |  |                                       | 171,461   |                                 |   | 16,761    |   |        | (1,405    | ) |   | 186,817   | 
|Depreciation and
 amortization      |  |                                       | 78,427    |                                 |   | 1,938     |   |        | 5,678     |   |   | 86,043    | 
|Segment profit                      |  |                                       | 301,619   |                                 |   | 29,261    |   |        | (2,727    | ) |   | 328,153   | 
|Goodwill                            |  |                                       | 695,551   |                                 |   |          |   |        |          |   |   | 695,551   | 
|Total segment assets                |  |                                       | 5,573,606 |                                 |   | 129,334   |   |        | 1,028,385 |   |   | 6,731,325 | 
|Purchase of property and
 equipment |  |                                       | 104,668   |                                 |   |          |   |        | 5,133     |   |   | 109,801   | 

NOTE 7  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. 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.

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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.

NOTE 8  COMMITMENTS AND CONTINGENCIES

Carolina
Medical, Inc., a subsidiary of the Company that was dissolved in November,
2006, was the subject of environmental oversight by the North Carolina Division
of Environmental and Natural Resources (DENR) in Surry County, North Carolina,
involving alleged ground water contamination coming from property that had been
previously owned/or leased by Carolina Medical, Inc. In June, 2006, Carolina
Medical entered into a Termination of Lease, Release, Hold Harmless and
Indemnification 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.

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

Cautionary Statement

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

Critical Accounting Policies

The
consolidated financial statements of Biotel include the accounts of Biotel Inc.
and its wholly-owned subsidiaries, Braemar, Inc. and Agility Centralized
Research Services, Inc. (collectively, Biotel), which are all located in the
United States. Significant intercompany accounts and transactions are
eliminated in consolidation.

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

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

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

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

Inventories
are valued at lower of cost (using the average and first-in first-out cost
methods) or market. 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 II. Item 1.
Legal Proceedings). 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 accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is deemed to
have an indefinite useful life and is not amortized but is subject to
impairment tests performed at least annually. During fiscal 2009 and 2008,
Biotel performed the required impairment tests of goodwill and determined the
recorded goodwill had not been impaired.

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

Revenues
from product sales are recognized at date of shipment.

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 II.
Item 1. Legal Proceedings), 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
are not forecasting major national customers for our Fusion MCT products and
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 diminish 7% and Holter reimbursement will diminish 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 September 30, 2009

Biotels
net revenues for the three months ended September 30, 2009, were $3,263,000,
3.0% more than net revenues of $3,168,000 for the three months ended September
30, 2008. This increase was the result of strong sales of medical devices
during the first quarter of fiscal 2010. Sales of Holter products and fluid
management products were strong in the first quarter of fiscal 2010. Sales of
event recorders were 28.2% less in the first quarter of fiscal year 2009 versus
the first quarter of 2008. Sales of Braemar wireless arrhythmia monitors are
expected to diminish versus fiscal year 2009 as a result of certain actions as
required to publicly announce the merger agreement and by the terms of the
merger agreement between Biotel and CardioNet, Inc., that was subsequently
terminated by CardioNet (see Part II. Item 1. Legal Proceedings). Additionally,
two major customers issued purchase orders for wireless and event recorder
products in the period following announcement of the merger agreement. These
orders appear to have been last time buy opportunities for such customers, and
the purchases propelled sales revenues through the first quarter just ended.
These orders have been substantially filled, revenues are expected to diminish,
and Biotel does not project profitability through the remainder of the fiscal
year.

Gross
profit was $1,297,000 for the quarter ended September 30, 2009, 10.5% less than
the gross profit of $1,449,000 for the first quarter of fiscal year 2009. Gross
profit decreased as a result of product mix. Gross profit margin declined to
39.7% for the three months ended September 30, 2009 compared to 45.7% for the
three months ended September 30, 2008. Cost of sales and service increased to
$1,967,000 (60.3% of sales) for the three months ended September 30, 2009, compared
to $1,719,000 (54.3% of sales) for the first quarter of fiscal year 2009. The
increase in cost of sales and service was a result of the higher sales volume
and product mix in the first quarter of fiscal 2010. Cost of sales and service
as a percentage of revenue increased, primarily due to product mix.

Selling,
general and administrative expenses of $666,000 (20.4% of sales) for the three
months ended September 30, 2009 increased from $583,000 (18.4% of sales) for
the three months ended September 30, 2008. Selling, general and administrative
expenses were higher in the first 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 a 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 six employees. These combined
reductions have a projected annual savings of $600,000. Selling expenses include salaries,
commissions, benefits, travel expenses and other selling expenses.

Research
and development expenditures for the first quarter of fiscal year 2010 were
$407,000, an increase of 11.2% compared to $366,000 in the first quarter of
fiscal year 2009. Research and development expenses in the first 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 period ended September 30,
2009, compared to interest expense of $565 for the three months ended September
30, 2008.

Net
earnings of $128,000 were posted for the first quarter of fiscal year 2010,
versus net earnings of $328,000 in the first quarter of fiscal year 2009. The
decrease in net earnings was primarily the result of the decrease in gross profit margin and increase in research
and development and legal expenses in the first three months of fiscal
2010. We expect to continue to incur a significant level of legal expenses during
the next twelve months.

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Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

Working
capital increased to $4,360,000 at September 30, 2009, compared to $4,197,000
at June 30, 2009. The increase in working capital is largely the result of the
Companys continued profitability.

Cash
and cash equivalents were $1,553,000 at September 30, 2009, compared to
$1,160,000 at June 30, 2009. The ratio of current assets to current liabilities
(current ratio) was 4.72 to one at September 30, 2009 and 3.97 to one at June
30, 2009.

Accounts
receivable decreased to $1,837,000 at September 30, 2009, versus $2,202,000 at
June 30, 2009, as a result of strong collections in September, 2009. 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 quarter of fiscal year 2010, $60,000 was used for capital
expenditures, compared with $110,000 in the first quarter 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.

Inventory
decreased to $1,560,000 as of September 30, 2009 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 $1,171,000 at September 30, 2009, compared to
$1,415,000 on June 30, 2009, 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 September 30, 2009, stockholders equity had increased to $5,788,000 from
$5,659,000 at June 30, 2009. The increase in stockholders equity was a result
of the Companys continued profitability.

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 September 30, 2009, 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 three 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.

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Table of Contents

Part II

Item 1. Legal Proceedings.

On
April 2, 2009, Biotel Inc. entered into a Merger Agreement with CardioNet,
Inc., pursuant to which CardioNet, Inc. was to acquire all of 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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 owed CardioNet $1.4 million for a termination
fee and expenses as a result of CardioNets termination of the Merger
Agreement. Biotel believes that CardioNet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 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 claims it is
owed as a result of its termination of the Merger Agreement.

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.

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.

Item 6. Exhibits

Listing
of Exhibits:

| |      |                                                                                                                                                                    
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 19   | Letter
 included with Annual Report on Form 10K sent to shareholders in connection
 with the Proxy Statement for registrants 2009 Annual Meeting of
 Shareholders.
| | 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: November 13, 2009 | By:                                         | /s/ B. Steven Springrose | 
|                        | Its:
 Chief Executive Officer and President |                         
|                        |                                             |                          | 
|Date: November 13, 2009 | By:                                         | /s/ Judy E. Naus         | 
|                        | Its:
 Chief Financial Officer               |                         

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