Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB

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

THE SECURITIES EXCHANGE ACT OF 1934



For the period ended December 31, 2007



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

THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from _________ to _________



Commission File Number :0-50914



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BIOTEL INC.

(Exact name of registrant as specified in its charter)



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




1285 Corporate Center Drive, Suite 150

Eagan, MN55121

(Address of principal executive offices, including zip code)



(651) 286-8620

(Registrants telephone number, including area code)



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

Yesx
        Noo




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

Yeso
        Nox




The number of shares of registrants common stock, par value $0.01 per share, outstanding as of September 30, 2007, was 2,673,827.



Transitional Small Business Disclosure Format (check one):

Yeso
        Nox






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BIOTEL INC.INDEX






PART I
        
        
        PageNumberItem 1:
        Financial InformationConsolidated Balance Sheets  December 31, 2007 and June 30, 2007
        1Consolidated Statements of Income  Three Months and
        2Six Months ended December 31, 2007 and 2006
        3Consolidated Statements of Cash Flows
        4Consolidated Statements of Stockholders Equity
        5Notes to Consolidated Financial Statements (Unaudited)
        6Item 2:
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        11Item 3/3A(T):
        Controls and Procedures
        15PART IIItem 1Item 5:
        Not applicableItem 6:
        Exhibits
        15Signatures
        
        16






i

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Table of Contents

Part I

Item 1:
        Financial Information




BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



December 31,2007Unaudited
        
        June 30,2007AuditedASSETSCURRENT ASSETS:Cash and cash equivalents
        
        $
        266,561
        
        $
        508,314Trade accounts receivable, net of allowance for doubtful accountsof $43,277 and $35,707 at December 31, 2007 and June 30, 2007, respectively
        
        
        2,087,902
        
        
        1,966,415Inventories, net
        
        
        1,465,663
        
        
        1,122,259Deferred tax asset
        
        
        200,342
        
        
        200,342Prepaid expenses
        
        
        179,479
        
        
        184,149Total Current Assets
        
        
        4,199,947
        
        
        3,981,479PROPERTY, PLANT & EQUIPMENT, Net
        
        
        823,903
        
        
        704,327OTHER ASSETS:Goodwill
        
        
        695,551
        
        
        695,551Other assets
        
        
        12,400
        
        
        12,400Total Other Assets
        
        
        707,951
        
        
        707,951$
        5,731,801
        
        $
        5,393,757LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Trade accounts payable
        
        
        672,549
        
        
        678,094Accrued payroll and related liabilities
        
        
        211,185
        
        
        243,766Deferred service contract revenue
        
        
        142,454
        
        
        177,969Other accrued expenses
        
        
        269,377
        
        
        277,488Accrued income taxes
        
        
        103,045
        
        
        83,940Total Current Liabilities
        
        
        1,398,610
        
        
        1,461,257COMMITMENTS AND CONTINGENCIES
        
        
        
        
        
        STOCKHOLDERS EQUITY:Preferred stock, $.01 stated value; 2,000,000 sharesauthorized; no shares issued
        
        
        
        
        
        Common stock, $.01 stated value; 10,000,000 sharesauthorized; 2,673,827 shares issued
        
        
        26,738
        
        
        26,738Additional paid-in capital
        
        
        2,067,960
        
        
        2,043,175Retained earnings
        
        
        2,238,493
        
        
        1,862,587Total Stockholders Equity
        
        
        4,333,191
        
        
        3,932,500$
        5,731,801
        
        $
        5,393,757




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



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Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited



For the three months endedDecember 31,2007
        
        2006SALES AND SERVICES
        
        $
        2,859,069
        
        $
        2,705,159COST OF SALES AND SERVICES
        
        
        1,581,432
        
        
        1,616,644GROSS PROFIT
        
        
        1,277,637
        
        
        1,088,515OPERATING EXPENSESSelling and administrative expenses
        
        
        618,255
        
        
        561,663Research and development
        
        
        343,753
        
        
        332,130Total operating expenses
        
        
        962,008
        
        
        893,793INCOME FROM OPERATIONS
        
        
        315,629
        
        
        194,722OTHER INCOME (EXPENSE)Interest income
        
        
        4,187
        
        
        1,275Interest expense
        
        
        (187
        )
        
        (9,309
        )Miscellaneous
        
        
        951
        
        
        (198
        )Total other income (expense)
        
        
        4,951
        
        
        (8,232
        )NET INCOME BEFOREPROVISION FOR INCOME TAXES
        
        
        320,580
        
        
        186,490PROVISION FOR INCOME TAXES
        
        
        114,571
        
        
        66,781NET INCOME
        
        $
        206,009
        
        $
        119,709INCOME PER SHAREBASIC
        
        $
        0.08
        
        $
        0.05DILUTED
        
        $
        0.07
        
        $
        0.04




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



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Table of Contents

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited



For the six months endedDecember 31,2007
        
        2006SALES AND SERVICES
        
        $
        5,609,848
        
        $
        5,128,727COST OF SALES AND SERVICES
        
        
        3,077,175
        
        
        3,053,423GROSS PROFIT
        
        
        2,532,673
        
        
        2,075,304OPERATING EXPENSESSelling and administrative expenses
        
        
        1,202,636
        
        
        1,180,379Research and development
        
        
        753,009
        
        
        703,117Total operating expenses
        
        
        1,955,645
        
        
        1,883,496INCOME FROM OPERATIONS
        
        
        577,028
        
        
        191,808OTHER INCOME (EXPENSE)Interest income
        
        
        8,465
        
        
        1,738Interest expense
        
        
        (285
        )
        
        (20,866
        )Miscellaneous
        
        
        1,888
        
        
        693Total other income (expense)
        
        
        10,068
        
        
        (18,435
        )NET INCOME BEFOREPROVISION FOR INCOME TAXES
        
        
        587,096
        
        
        173,373PROVISION FOR INCOME TAXES
        
        
        211,190
        
        
        64,505NET INCOME
        
        $
        375,906
        
        $
        108,868INCOME PER SHAREBASIC
        
        $
        0.14
        
        $
        0.04DILUTED
        
        $
        0.13
        
        $
        0.04




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



3

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BIOTEL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited



For the six months endedDecember 31,2007
        
        2006OPERATING ACTIVITIESNet income
        
        $
        375,906
        
        $
        108,868Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
        
        
        130,384
        
        
        159,518Stock-based compensation
        
        
        24,785
        
        
        40,760Increase in allowance for doubtful accounts
        
        
        7,570
        
        
        5,230Increase (decrease) in inventory valuation allowance
        
        
        (3,924
        )
        
        10,528Loss on disposal of fixed assets
        
        
        
        
        
        488Changes in deferred and accrued amountsTrade accounts receivable
        
        
        (129,057
        )
        
        462,620Prepaid expenses
        
        
        4,670
        
        
        (28,366
        )Inventories
        
        
        (339,480
        )
        
        (51,202
        )Other assets
        
        
        
        
        
        (1,181
        )Trade accounts payable
        
        
        (5,545
        )
        
        37,213Accrued payroll and related liabilities
        
        
        (32,581
        )
        
        (6,262
        )Other accrued expenses
        
        
        (8,111
        )
        
        (19,582
        )Deferred service contract revenue
        
        
        (35,515
        )
        
        (6,524
        )Income taxes payable
        
        
        19,105
        
        
        (145,549
        )Net cash provided by operating activities
        
        
        8,207
        
        
        566,559INVESTING ACTIVITIESPurchases of property and equipment
        
        
        (249,960
        )
        
        (255,115
        )Proceeds from sale of property and equipment
        
        
        
        
        
        7,500Net cash used for investing activities
        
        
        (249,960
        )
        
        (247,615
        )FINANCING ACTIVITIESNet change on line of credit
        
        
        
        
        
        (110,000
        )Payments of long-term debt
        
        
        
        
        
        (158,346
        )Net cash used for financing activities
        
        
        
        
        
        (268,346
        )Net change in cash and cash equivalents
        
        
        (241,753
        )
        
        50,598CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2007 and 2006
        
        
        508,314
        
        
        51,186CASH AND CASH EQUIVALENTS AS OF DECEMBER 31, 2007 and 2006
        
        $
        266,561
        
        $
        101,784




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



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BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For the six months ended December 30, 2007 and 2006



Common Stock
        
        AdditionalPaid-InCapital
        
        RetainedEarnings
        
        TotalAmount
        
        SharesBalance, June 30, 2006
        
        $
        26,498
        
        2,649,827
        
        $
        1,941,324
        
        $
        1,342,854
        
        $
        3,310,676Stock-based compensation
        
        
        
        
        
        
        
        40,760
        
        
        
        
        
        40,760Net Income
        
        
        
        
        
        
        
        
        
        
        108,868
        
        
        108,868Balance, December 30, 2006
        
        $
        26,498
        
        2,649,827
        
        $
        1,982,084
        
        $
        1,451,722
        
        $
        3,460,304Balance, June 30, 2007
        
        $
        26,738
        
        2,673,827
        
        $
        2,043,175
        
        $
        1,862,587
        
        $
        3,932,500Stock-based compensation
        
        
        
        
        
        
        
        24,785
        
        
        
        
        
        24,785Net Income
        
        
        
        
        
        
        
        
        
        
        375,906
        
        
        375,906Balance, December 30, 2007
        
        $
        26,738
        
        2,673,827
        
        $
        2,067,960
        
        $
        2,238,493
        
        $
        4,333,191




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



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BIOTEL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



NOTE 1  BASIS OF PRESENTATION



The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-KSB for the fiscal year ended June 30, 2007, filed by Biotel Inc. (the Company) on September 28, 2007.



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



NOTE 2  INVENTORIES



As of December 31 and June 30, 2007, inventories consist of the following:



December 31,2007
        
        June 30,2007Raw materials and supplies
        
        $
        1,551,233
        
        $
        1,154,869Finished goods
        
        
        281,835
        
        
        337,216Evaluation units and replacements
        
        
        5,644
        
        
        7,1471,838,712
        
        
        1,499,232Valuation allowance
        
        
        (373,049
        )
        
        (376,973
        )$
        1,465,663
        
        $
        1,122,259




NOTE 3  WARRANTY RESERVE



The Company offers warranties of up to a year to its customers depending on the specific product sold. The Companys warranties require it to repair or replace defective products during the warranty period at no cost to the customer. The Company records a liability for estimated costs that may be incurred under its warranties based on recorded sales. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed our expectations. The Company periodically assesses the adequacy of its recorded liability and adjusts the balance as necessary. At December 31 and June 30, 2007, the warranty reserve totaled $89,353 and $75,906, respectively. At December 31 and June 30, 2006, the warranty reserve totaled $84,043 and $97,471, respectively. Warranty reserve is included in Other Accrued Expenses. The following is a
reconciliation of the aggregate warranty liability as of December 31, 2007 and 2006.



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December 31,2007
        
        December 31,2006Beginning of Period, June 30, 2007 and 2006
        
        $
        75,906
        
        $
        97,471Claims Paid
        
        
        (52,672
        )
        
        (23,589
        )Additional warranties issued and revisions in estimates of previously issued warranties
        
        
        66,119
        
        
        10,161End of Period, December 31, 2007 and 2006
        
        $
        89,353
        
        $
        84,043




NOTE 4  STOCK-BASED COMPENSATION



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



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



Options to purchase shares of the Companys common stock are granted at a price not less than 100% of the fair market value of the common stock, as determined by the Board of Directors using the best available market data, on the date the options are granted. As of December 31, 2007 and 2006, Biotel Inc. had 301,000 and 333,000 outstanding options, respectively. Currently option prices range from $.375 to $2.00 per share with a weighted average remaining contract life of 1.61 years. During the three months ended December 31, 2007 and 2006, no options were exercised. No options were exercised during the six months ended December 31, 2007 and 2006. 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.



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






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Table of Contents

Outstanding
        
        ExercisableSharesAvailable
        
        Numberof Shares
        
        WeightedAverageExercisePrice
        
        Numberof Shares
        
        WeightedAverageExercisePriceBalance at June 30, 2006
        
        322,000
        
        328,000
        
        $
        1.1898
        
        230,000
        
        $
        1.0510Granted
        
        (10,000
        )
        10,000Expired
        
        5,000
        
        (5,000
        )Balance at September 30, 2006
        
        317,000
        
        333,000
        
        $
        1.2260
        
        281,000
        
        $
        1.1440Balance at December 31, 2006
        
        317,000
        
        333,000
        
        $
        1.2260
        
        286,500
        
        $
        1.1876Balance at June 30, 2007
        
        349,000
        
        301,000
        
        $
        1.2899
        
        254,500
        
        $
        1.2230Balance at September 30, 2007
        
        349,000
        
        301,000
        
        $
        1.2899
        
        254,500
        
        $
        1.2230Balance at December 31, 2007
        
        349,000
        
        301,000
        
        $
        1.2899
        
        293,500
        
        $
        1.2773




NOTE 5   EARNINGS PER SHARE OF COMMON STOCK



The weighted average number of shares used in the computation of basic and diluted income per common share for the three months ended December 31, 2007 was 2,673,827 and 2,854,249, respectively, and for the three months ended December 31, 2006 was 2,649,827 and 2,752,173, respectively. The weighted average number of shares used in the computation of basic and diluted income per common share for the six months ended December 31, 2007 was 2,673,827 and 2,858,582, respectively, and for the six months ended December 31, 2006 was 2,649,827 and 2,758,806, respectively.



NOTE 6  OPERATIONS AND INDUSTRY SEGMENTS



The Company reports on two segments of business:  OEM Medical Equipment Sales and Direct Medical Equipment Sales. The industry segment information corresponds with the Companys different customer and product types and therefore complies with the requirements of SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information.



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



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Three months ended December 31, 2007OEM MedicalSales & Services
        
        Direct MedicalEquipment Sales
        
        Corporate
        
        TotalsDomestic revenues
        
        $
        2,252,775
        
        $
        176,562
        
        $
        
        
        $
        2,429,337International revenues
        
        
        352,706
        
        
        77,026
        
        
        
        
        
        429,732Revenues from external customers
        
        
        2,605,481
        
        
        253,588
        
        
        
        
        
        2,859,069Intersegment revenues
        
        
        54,013
        
        
        (54,013
        )
        
        
        
        
        Interest expense
        
        
        
        
        
        
        
        
        187
        
        
        187Income tax expense
        
        
        80,172
        
        
        21,769
        
        
        12,630
        
        
        114,571Depreciation and amortization
        
        
        59,359
        
        
        2,063
        
        
        5,372
        
        
        66,794Segment profit
        
        
        139,309
        
        
        42,182
        
        
        24,518
        
        
        206,009Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,992,062
        
        
        159,520
        
        
        580,219
        
        
        5,731,801Purchase of property and equipment
        
        
        160,753
        
        
        
        
        
        8,544
        
        
        169,297






Three months ended December 31, 2006OEM MedicalSales & Services
        
        Direct MedicalEquipment Sales
        
        Corporate
        
        TotalsDomestic revenues
        
        $
        2,287,732
        
        $
        192,592
        
        $
        
        
        $
        2,480,324International revenues
        
        
        171,684
        
        
        53,151
        
        
        
        
        
        224,835Revenues from external customers
        
        
        2,459,416
        
        
        245,743
        
        
        
        
        
        2,705,159Intersegment revenues
        
        
        50,795
        
        
        (50,795
        )
        
        
        
        
        Interest expense
        
        
        318
        
        
        
        
        
        8,991
        
        
        9,309Income tax expense
        
        
        52,437
        
        
        17,859
        
        
        (3,515
        )
        
        66,781Depreciation and amortization
        
        
        73,725
        
        
        2,327
        
        
        6,142
        
        
        82,194Segment profit
        
        
        91,854
        
        
        34,678
        
        
        (6,823
        )
        
        119,709Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,218,548
        
        
        190,983
        
        
        594,371
        
        
        5,003,902Purchase of property and equipment
        
        
        139,818
        
        
        
        
        
        
        
        
        139,818






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Six months ended December 31, 2007OEM MedicalSales & Services
        
        Direct MedicalEquipment Sales
        
        Corporate
        
        TotalsDomestic revenues
        
        $
        4,533,852
        
        $
        331,027
        
        $
        
        
        $
        4,864,879International revenues
        
        
        631,545
        
        
        113,424
        
        
        
        
        
        744,969Revenues from external customers
        
        
        5,165,397
        
        
        444,451
        
        
        
        
        
        5,609,848Intersegment revenues
        
        
        88,456
        
        
        (88,456
        )
        
        
        
        
        Interest expense
        
        
        
        
        
        
        
        
        285
        
        
        285Income tax expense
        
        
        142,583
        
        
        39,955
        
        
        28,652
        
        
        211,190Depreciation and amortization
        
        
        115,508
        
        
        4,127
        
        
        10,749
        
        
        130,384Segment profit
        
        
        242,844
        
        
        77,441
        
        
        55,621
        
        
        375,906Goodwill
        
        
        695,551
        
        
        
        
        
        
        
        
        695,551Total segment assets
        
        
        4,992,062
        
        
        159,520
        
        
        580,219
        
        
        5,731,801Purchase of property and equipment
        
        
        241,416
        
        
        
        
        
        8,544
        
        
        249,960




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






NOTE 7  SUBSEQUENT EVENT



Biotel has begun the process of consolidating operations of its Braemar manufacturing facilities. Production previously done at Braemars King, North Carolina plant is being moved to Braemars Eagan, Minnesota facility, and operations will cease at the North Carolina facility as of June 30, 2008. This consolidation is expected to achieve significant cost savings for Biotel Inc.



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

Critical Accounting Policies

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

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

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

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

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

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


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

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 2007 and 2006, Biotel performed the required impairment tests of goodwill and determined our recorded goodwill had not been impaired.

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



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

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

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

Results of Operations

Three Months ended December 31, 2007

Biotels net revenues for the three months ended December 31, 2007, were $2,859,000, 5.7% above net revenues of $2,705,000 for the three months ended December 31, 2006. This increase is a result of increased sales to medical corporations during the second quarter of fiscal 2008. In the three months ended December 31, 2007, 40.1% of Biotels revenues were derived from three customers; and in the three months ended December 31, 2006, 34.0% of Biotels revenues were derived from two customers. The loss of any of these customers would have immediate significant adverse effect on our financial results.

Gross profit margin was $1,278,000 for the quarter ended December 31, 2007, 17.4% greater than the gross profit margin of $1,089,000 for the first quarter of fiscal year 2007. Cost of sales and service decreased to $1,581,000 (55.3% of sales) for the three months ended December 31, 2007, compared to $1,617,000 (59.8% of sales) for the second quarter of fiscal year 2007. Cost of sales and service decreased as a result of cost control efforts and product mix. Gross profit margin improved primarily as a result of changes in product mix, including an increase in service revenues which carry a higher gross margin. Model mix variations are a normal part of the purchase cycle of Biotel customers.



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Selling, general and administrative expenses increased to $618,000 (21.6% of sales) for the three months ended December 31, 2007, compared to $562,000 (20.8% of sales) for the three months ended December 31, 2006. Selling, general and administrative expenses in fiscal 2008 include increased personnel expenses with the addition of an Information Technology employee and legal fees associated with an employment dispute which was settled favorably in January, 2008.

Research and development expenditures for the second quarter of fiscal year 2008 were $344,000, an increase of 3.6% compared to $332,000 in the second quarter of fiscal year 2007. This increase was primarily the result of expenditures associated with development of new Holter, wireless and event recorder products. Biotel received FDA 510(k) clearance to market its ER900 Wireless Event Recorder in October, 2007. The ER900 Wireless event recorder is a cardiac looping recorder and cellular transmitter, the first in a series of Braemar wireless products that transmit cardiac information through cellular networks without patient interaction. ER900 Wireless software programs are able to detect arrhythmias, whether asymptomatic or symptomatic, and automatically transmit relevant clinical information to the monitoring center for review and management. While patients with life threatening
arrhythmias should be managed in the hospital, patients with less severe problems benefit from the speed and simplicity of mobile cardiac assessment.

Interest expense decreased to $187 for the three-month period ended December 31, 2007, compared to interest expense of $9,300 for the three months ended December 31, 2006. Interest expense decreased as a result of the elimination of long term debt and minimal use of the line of credit.

Net earnings of $206,000 were posted for the second quarter of fiscal year 2008, versus net earnings of $120,000 in the second quarter of fiscal year 2007. Net earnings for the second quarter of fiscal year 2008 improved as a result of increased sales and improved gross margin.

Six Months ended December 31, 2007

Biotels net revenues for the six months ended December 31, 2007, were $5,610,000, an increase of 9.4% over revenues of $5,129,000 for the six months ended December 31, 2006. This increase is a result of increased sales to medical corporations during the first six months of fiscal 2008. In the six months ended December 31, 2007 and 2006, 30.2% and 33.6%, respectively, of Biotels revenues were derived from two customers. The loss of either of these customers would have immediate significant adverse effect on our financial results.

Gross profit margin was $2,533,000 for the six months ended December 31, 2007, 22.1% greater than the gross profit margin of $2,075,000 for the first six months of fiscal year 2007. Cost of sales and service increased to $3,077,000 (54.9% of sales) for the six months ended December 31, 2007, compared to $3,053,000 (59.5% of sales) for the first half of fiscal year 2007. Cost of sales and service increased as a result of increased sales. Gross profit margin improved primarily as a result of changes in product mix, including an increase in service revenues which carry a higher gross margin. Model mix variations are a normal part of the purchase cycle of Biotel customers.

Selling, general and administrative expenses increased to $1,203,000 (21.4% of sales) for the six months ended December 31, 2007, compared to $1,180,000 (23.0% of sales) for the six months ended December 31, 2006. Selling, general and administrative expenses in fiscal 2008 include increased personnel expenses with the addition of an Information Technology employee and legal fees associated with an employment dispute which was settled favorably in January, 2008.

Research and development expenditures for the first six months of fiscal year 2008 were $753,000, an increase of 7.1% compared to $703,000 in the second quarter of fiscal year 2007. The increase was primarily the result of expenditures associated with development of new Holter, wireless, and event recorder products. Biotel plans increased investment in research and development during fiscal year 2008 as it addresses developing markets in Holter, event recording, and wireless arrhythmia management.



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Interest expense decreased to $285 for the six-month period ended December 31, 2007, compared to interest expense of $20,900 for the six months ended December 31, 2006. Interest expense decreased as a result of the elimination of long term debt and minimal use of the line of credit.

Net earnings of $376,000 were posted for the first six months of fiscal year 2008, versus net earnings of $109,000 in the first six months of fiscal year 2007. Net earnings for the first six months of fiscal year 2008 improved as a result of increased sales and improved gross margin.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

Working capital increased to $2,801,000 at December 31, 2007, compared to $2,520,000 at June 30, 2007. The increase in working capital is largely the result of the Companys continued profitability.

Cash and cash equivalents were $267,000 at December 31, 2007, compared to $508,000 at June 30, 2007. The decrease in cash was primarily the result of payments of estimated income taxes and other accrued liabilities in December, 2007. The ratio of current assets to current liabilities (current ratio) was 3.0 to one at December 31, 2007 and 2.72 to one at June 30, 2007.

Accounts receivable increased to $2,088,000 at December 31, 2007, versus $1,966,000 at June 30, 2007. The 6.2% increase in accounts receivable was related to strong sales during the month of December, 2007. To the extent that credit terms are extended to customers, Biotels cash position is diminished and debt may be required to supplement cash flows. Accordingly, Biotel attempts to make timely collections from its customers in accordance with credit terms, extend credit only to credit worthy customers with a strong payment history, and to keep credit terms as short as is practicable.

During the first six months of fiscal year 2008, $250,000 was used for capital expenditures, compared with $255,000 in the first six months of fiscal year 2007. Biotel primarily invests in molds, tooling and fixtures for custom components used in its product lines. Levels of capital investment are expected to vary from year to year.

Inventory increased to $1,466,000 as of December 31, 2007 versus $1,122,000 as of June 30, 2007. This increase is primarily the result of purchases of materials for manufacture of products in anticipation of the closing of the North Carolina manufacturing facility. Biotels subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.

Current liabilities decreased to $1,399,000 at December 31, 2007, compared to $1,461,000 on June 30, 2007. This decrease was primarily due to payment of estimated income taxes and payroll-related obligations during the first six months of fiscal 2008.

Biotel has no long term liabilities.

As of December 31, 2007, stockholders equity had increased to $4,333,000 from $3,932,000 at June 30, 2007. The increase in stockholders equity was a result of the increase in retained earnings.

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



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Items 3/3A(T):Controls and Procedures

(a)        As of December 31, 2007, 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 second quarter of fiscal 2008 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 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:


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:  February 11, 2008
        By:
        /s/ B. Steven SpringroseIts:  Chief Executive Officer and PresidentDate:  February 11, 2008
        By:
        /s/ Judy E. NausIts:  Chief Financial Officer






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