# Table of Contents





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

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# FORM 10-QSB

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|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | 
|- |  | --------------------------------------------------------------------------------------- | 

# For the period ended September 30, 2006

| | o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 | 
| | - |  | ----------------------------------------------------------------------------------------- | 

For the transition period from _________ to _________

# Commission File Number: 0-50914

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

|Minnesota                       |  | 41-1427114          | 
|------------------------------- |  | ------------------- | 
|(State or other jurisdiction of |  | (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.
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, 2006, was 2,649,827.

Transitional Small Business Disclosure Format (check one):
Yeso     
Nox





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# BIOTEL INC.
INDEX
____________________________________

|        |  |                                | Page Number
|------- |  | ------------------------------ | -----------
|PART I  |  |                                |            
|        |  | Item 1:                        |            
|       
|        |  |                                |            
|        |  |                                |            
|        |  |                                |            
|        |  |                                |            
|        |  |                                |            
|       
|        |  | Item 2:                        |            
|       
|        |  | Item 3:                        |            
|       
|PART II | 
|       
|        |  | Item 1Item 5:  Not applicable |            
|       
|        |  | Item 6:                        |            
|       
|        |  | Signatures                     |            

i

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# Table of Contents

# Part I

# Item 1:    Financial Information

# BIOTEL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                 | September 30,2006Unaudited |  | June 30,2006Audited
|------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- |  | -------------------
|ASSETS                                                                                                                                          
|CURRENT ASSETS:                                                                                                                                  |                            |  |                    
|Cash and cash equivalents                                                                                                                        |                            |  | $                  
|Trade accounts receivable, net of allowancefor doubtful accounts of $52,924 and $50,034    at September 30, 2006 and June 30, 2006, respectively |                            |  |                    
|Inventories, net                                                                                                                                 |                            |  |                    
|Deferred tax asset                                                                                                                               |                            |  |                    
|Prepaid expenses                                                                                                                                 |                            |  |                    
|Prepaid income taxes                                                                                                                             |                            |  |                    
|Other current assets                                                                                                                             |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|Total Current Assets                                                                                                                             |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|PROPERTY, PLANT & EQUIPMENT, Net                                                                                                                 |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|OTHER ASSETS:                                                                                                                                    |                            | 
|Goodwill                                                                                                                                         |                            |  |                    
|Other assets                                                                                                                                     |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|Total Other Assets                                                                                                                               |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|                                                                                                                                                 |                            |  | $                  
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            
|CURRENT LIABILITIES:                                                                                                                             |                            | 
|Revolving line of credit                                                                                                                         |                            |  | $                  
|Current portion of notes payable                                                                                                                 |                            |  |                    
|Trade accounts payable                                                                                                                           |                            |  |                    
|Accrued payroll and related liabilities                                                                                                          |                            |  |                    
|Deferred service contract revenue                                                                                                                |                            |  |                    
|Other accrued expenses                                                                                                                           |                            |  |                    
|Accrued income taxes                                                                                                                             |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|Total Current Liabilities                                                                                                                        |                            |  |                    
|                                                                                                                                                
|LONG-TERM LIABILITIES:                                                                                                                           |                            | 
|Notes payable                                                                                                                                    |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|COMMITMENTS AND CONTINGENCIES                                                                                                                    |                            | 
|                                                                                                                                                
|Total Liabilities                                                                                                                                |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|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; 2,649,827 shares issued                                                                                                              |                            |  |                    
|Additional paid-in capital                                                                                                                       |                            |  |                    
|Retained earnings                                                                                                                                |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|Total Stockholders Equity                                                                                                                       |                            |  |                    
|                                                                                                                                                 |                            |  |                    
|                                                                                                                                                
|                                                                                                                                                 |                            |  | $                  
|                                                                                                                                                 |                            |  |                    

1

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# Table of Contents

# BIOTEL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited

|                                    | For the three months endedSeptember 30,
|----------------------------------- | ---------------------------------------
|
|                                   
|SALES AND SERVICES                  |                                        
|                                   
|COST OF SALES AND SERVICES          |                                        
|                                    |                                        
|                                   
|GROSS PROFIT                        |                                        
|                                    |                                        
|                                   
|OPERATING EXPENSES                  |                                        
|Selling and administrative          |                                        
|Research and development            |                                        
|                                    |                                        
|                                   
|Total operating expenses            |                                        
|                                    |                                        
|                                   
|INCOME (LOSS) FROM OPERATIONS       |                                        
|                                    |                                        
|                                   
|OTHER INCOME (EXPENSE)              |                                        
|Interest income                     |                                        
|Interest expense                    |                                        
|Miscellaneous                       |                                        
|                                    |                                        
|                                   
|Total other income (expense)        |                                        
|                                    |                                        
|                                   
|NET INCOME (LOSS) BEFORE            |                                        
|PROVISION (CREDIT) FOR INCOME TAXES |                                        
|                                   
|PROVISION (CREDIT) FOR INCOME TAXES |                                        
|                                    |                                        
|                                   
|NET INCOME (LOSS)                   |                                        
|                                    |                                        
|                                   
|INCOME PER SHARE                    |                                        
|BASIC                               |                                        
|                                    |                                        
|DILUTED                             |                                        
|                                    |                                        

2

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# Table of Contents

# BIOTEL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited

|                                                            | For the three months endedSeptember 30,
|----------------------------------------------------------- | ---------------------------------------
|
|OPERATING ACTIVITIES                                        |                                        
|Net income                                                  |                                        
|Adjustments to reconcile net income (loss) to net cash      |                                        
|provided by operating activities                            |                                        
|Depreciation and amortization                               |                                        
|Stock-based compensation                                    |                                        
|Increase in allowance for doubtful accounts                 |                                        
|Increase in inventory valuation allowance                   |                                        
|Loss on disposal of fixed assets                            |                                        
|Changes in deferred and accrued amounts                     |                                        
|Trade accounts receivable                                   |                                        
|Prepaid expenses                                            |                                        
|Inventories                                                 |                                        
|Other assets                                                |                                        
|Trade accounts payable                                      |                                        
|Accrued payroll and related liabilities                     |                                        
|Other accrued expenses                                      |                                        
|Deferred service contract revenue                           |                                        
|Income taxes payable                                        |                                        
|                                                            |                                        
|                                                           
|Net cash provided by operating activities                   |                                        
|                                                            |                                        
|                                                           
|INVESTING ACTIVITIES                                        |                                        
|Purchases of property and equipment                         |                                        
|                                                            |                                        
|                                                           
|Net cash used for investing activities                      |                                        
|                                                            |                                        
|                                                           
|FINANCING ACTIVITIES                                        |                                        
|Net change on line of credit                                |                                        
|Payments of long-term debt                                  |                                        
|                                                            |                                        
|                                                           
|Net cash provided for (used for) financing activities       |                                        
|                                                            |                                        
|                                                           
|Net increase in cash and cash equivalents                   |                                        
|                                                           
|CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2006 and 2005      |                                        
|                                                            |                                        
|                                                           
|CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30, 2006 and 2005 |                                        
|                                                            |                                        
|                                                           
|CASH PAID FOR                                               |                                        
|Interest Expense                                            |                                        
|                                                            |                                        
|Income Taxes                                                |                                        
|                                                            |                                        

3

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# Table of Contents

# BIOTEL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the three months ended September 30, 2006 and 2005

|                            | Common Stock |  | AdditionalPaid-InCapital |        | RetainedEarnings |  | Total    
|--------------------------- | ------------ |  | ------------------------ | ------ | ---------------- |  | ---------
|
|                           
|Balance, June 30, 2005      |              |  | $                        | 26,498 |                  |  | 2,649,827
|                           
|Net Income                  |              |  |                          |       |                  |  |         
|                            |              |  |                          |        |                  |  |          
|                           
|Balance, September 30, 2005 |              |  | $                        | 26,498 |                  |  | 2,649,827
|                            |              |  |                          |        |                  |  |          
|                           
|Balance, June 30, 2006      |              |  | $                        | 26,498 |                  |  | 2,649,827
|                           
|Stock-based compensation    |              |  |                          |        |                  |  |          
|                           
|Net Loss                    |              |  |                          |       |                  |  |         
|                            |              |  |                          |        |                  |  |          
|                           
|Balance, September 30, 2006 |              |  | $                        | 26,498 |                  |  | 2,649,827
|                            |              |  |                          |        |                  |  |          

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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-KSB for the fiscal year ended June 30, 2006, filed by
Biotel Inc. (the Company) on September 28, 2006.



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



NOTE 2  INVENTORIES



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



September 30,2006
        
        June 30,2006Raw materials and supplies
        
        $
        1,314,674
        
        $
        1,296,078Work in process
        
        
        2,405
        
        
        Finished Goods
        
        
        296,516
        
        
        351,340Evaluation units and replacements
        
        
        9,959
        
        
        7,0821,623,554
        
        
        1,654,500Valuation Allowance
        
        
        (522,760
        )
        
        (513,211
        )$
        1,100,794
        
        $
        1,141,289




NOTE 3  WARRANTY RESERVE



The Company offers warranties
of up to a year to its customers depending on the specific product sold. The Companys warranties require it to repair or
replace defective products during the warranty period at no cost to the customer. The Company records a liability for estimated
costs that may be incurred under its warranties based on recorded sales. Although historical warranty costs have been within
expectations, there can be no assurance that future warranty costs will not exceed historical amounts. The Company periodically
assesses the adequacy of its recorded liability and adjusts the balance as necessary. At September 30 and June 30, 2006, the
warranty reserve totaled $84,786 and $97,471, respectively, and this amount is included in Other Accrued Expenses. The following
is a reconciliation of the aggregate warranty liability as of September 30, 2006:

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# Table of Contents

Balance, June 30, 2006
        
        $
        97,471Claims Paid
        
        
        (8,246
        )Additional warranties issued and revisions inestimates of previously issued warranties
        
        
        (4,439
        )Balance, September 30, 2006
        
        $
        84,786




NOTE 4  STOCK-BASED COMPENSATION



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



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



September 30,
2006
        
        September 30,
2005Net income, as reported
        
        $
        (10,842
        )
        $
        173,595Add:  Stock-based employee compensation expenseincluded in reported net income, net of related tax effects
        
        
        20,380
        
        
        Deduct:  Total stock-based employee compensationexpense determined under fair value based methodfor all awards, net of related tax effects
        
        
        (20,380
        )
        
        (27,089
        )Pro forma net income
        
        $
        (10,842
        )
        $
        146,506Earnings per share:Basic - as reported
        
        $
        ( 
        )
        $
        0.07Basic - pro forma
        
        $
        ( 
        )
        $
        0.06Diluted - as reported
        
        $
        ( 
        )
        $
        0.06Diluted - pro forma
        
        $
        ( 
        )
        $
        0.05




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# Table of Contents

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, 2006 and 2005, Biotel Inc. had 333,000 and 354,000 outstanding options, respectively. Currently option prices range from $.375 to $2.00 per share with a weighted average remainingcontract life of2.62 years. No options were exercised during the three months ended September 30, 2006 and 2005. Option vesting and expiration is determined by the Board of Directors at the time they are awarded. No options may be awarded with an expiration greater than 10 years.



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






Outstanding
        
        ExercisableShares
Available
        
        Number
of Shares
        
        
        Weighted
Average
Exercise
Price
        
        Number
of Shares
        
        
        Weighted
Average
Exercise
PriceBalance at June 30, 2005
        
        296,000
        
        354,000
        
        $
        1.1379
        
        185,750
        
        $
        0.9040Balance at September 30, 2005
        
        296,000
        
        354,000
        
        $
        1.2641
        
        274,500
        
        $
        1.1181Balance 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
        
        $
        1.1989
        
        281,000
        
        $
        1.1440






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, 2006 was 2,649,827 and 2,758,628, respectively, and for the three months ended September 30, 2005, was 2,649,827 and 2,782,327, 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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# Table of Contents

|                                   |  | Three months ended September 30, 2006 |          
|---------------------------------- |  | ------------------------------------- | ---------
|                                   |  | OEM Medical
Equipment Sales           |          
|                                  
|Domestic Revenues                  |  | $                                     | 2,045,449
|International Revenues             |  |                                       | 150,608  
|Revenues from external customers   |  |                                       | 2,196,057
|Intersegment revenues              |  |                                       | 37,696   
|Interest expense                   |  |                                       | 954      
|Income tax expense                 |  |                                       | (27,944  
|Depreciation                       |  |                                       | 68,881   
|Segment profit                     |  |                                       | (40,999  
|Goodwill                           |  |                                       | 695,551  
|Total segment assets               |  |                                       | 4,286,445
|Purchase of property and equipment |  |                                       | 118,460  
|                                  
|                                  
|                                   |  | Three months ended September 30, 2005 |          
|                                   |  | OEM Medical
Equipment Sales           |          
|                                  
|Domestic revenues                  |  | $                                     | 2,257,662
|International revenues             |  |                                       | 46,994   
|Revenues from external customers   |  |                                       | 2,304,656
|Intersegment revenues              |  |                                       | 47,154   
|Interest expense                   |  |                                       | 1,040    
|Income tax expense                 |  |                                       | 68,164   
|Depreciation and Amortization      |  |                                       | 53,602   
|Segment profit                     |  |                                       | 126,342  
|Goodwill                           |  |                                       | 695,551  
|Total segment assets               |  |                                       | 4,380,995
|Purchase of property and equipment |  |                                       | 33,732   





NOTE 7  SUBSEQUENT EVENTS



Effective July 1, 2006, the Companys Braemar, Inc. subsidiary acquired the assets of Carolina Medical, Inc. and is conducting engineering and manufacturing operations at the King, North Carolina facility previously leased by Carolina Medical. Effective November 8, 2006, Carolina Medical, Inc. was dissolved.

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# Table of Contents

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

Cautionary Statement

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

Critical Accounting Policies

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

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

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

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

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

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

Property, equipment and leasehold improvements are recorded at cost. Depreciation is calculated using the straight-line or declining-balance methods over estimated useful lives of three to 10 years for equipment, three to five years for automobiles and two to 31 years for leasehold improvements.

SFAS No. 142,Goodwill and Other Intangible Assets. Goodwill is deemed to have an indefinite useful life and is not amortized but is subject to impairment tests performed at least annually. During fiscal 2006 and 2005, Biotel performed the required impairment tests of goodwill and determined our recorded goodwill had not been impaired.

Amounts billed to customers for service contracts are recognized as income over the term of the agreements, and the associated costs are recognized as incurred.

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

Revenues from product sales are recognized at date of shipment.

Research and development costs are charged to operations as incurred. These costs are for proprietary research and development activities that are expected to contribute to the future profitability.

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# Table of Contents

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes relate primarily to differences between financial and income tax reporting for the basis of inventory, accounts receivable, property and equipment, and accrued liabilities. The deferred tax accounts represent future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes may also be recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

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

Overview

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

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

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

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

Results of Operations

Biotels net revenues for the three months ended September 30, 2006, were $2,424,000, 4.1% below net revenues of $2,527,000 for the three months ended September 30, 2005. This decrease is a result of changes in orders from one major customer. This customer had taken increased shipments in the fourth quarter of fiscal year 2006 and also delayed other shipments into the second quarter of fiscal 2007. In the three months ended September 30, 2006 and 2005, 19% and 26% of Biotels revenues were derived from one customer. The loss of this customer would have immediate significant adverse effect on our financial results.

Gross profit margin decreased to $987,000 (40.7%) for the first three months of fiscal year 2007, compared to $1,036,000 (41.0%) in the first three months of fiscal year 2006. Cost of sales and service decreased to $1,437,000 for the first quarter of fiscal year 2007, compared to $1,491,000 for the first quarter of fiscal year 2006. Cost of sales and service decreased in accordance with the decrease in sales. Gross profit margin decreased in part due to changes in product mix resulting in a lower gross margin. Model mix variations are a normal part of the purchase cycle of Biotel customers.

Selling, general and administrative expenses increased to $619,000 (25.5% of sales) for the three months ended September 30, 2006, compared to $524,000 (20.7% of sales) for the three months ended September 30, 2005. This increase was due in part to the adoption of SFAS No. 123(R),Accounting for Stock-Based Compensation, which resulted in $20,380 in compensation expense for the first quarter. Management believes Biotel will recognize similar compensation expense in each of the three upcoming quarters remaining in fiscal year 2007.

Selling, general and administrative expenses for the three months ended September 30, 2006 also includes $80,000 in compensation paid to the former owner of Agility. This amount was paid as a result of an amendment to the purchase agreement which was executed on August 31, 2006. By executing this agreement, the Company actually eliminated its remaining contingent obligation of up to $150,000 under the original purchase agreement and completed all payments due under the Agility purchase agreement.

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# Table of Contents

Research and development expenditures for the first quarter of fiscal year 2007 were $371,000, an increase of 67.8% compared to $221,000 in the first quarter of fiscal year 2006.  The increase was primarily the result of increases in research and development efforts in the first quarter of fiscal year 2007 related to new Holter and event recorder products. Biotel believes its research and development expenses related to new Holter and event recorder products presently in product development have peaked.  Biotel plans include significant investment in research and development during fiscal year 2007.

Interest expenditures decreased to $12,000 for the three month period ended September 30, 2006, compared to interest expenditures of $18,000 for the three months ended September 30, 2005. Interest expenditures decreased corresponding to the reduction in long term debt.

A net loss of $11,000 was posted for the first quarter of fiscal year 2007, versus net earnings of $174,000 in the first quarter of fiscal year 2006. Net earnings for the first quarter of fiscal year 2007 were affected by the decrease in revenues and changes in product mix during the period, as well as increased expenditures for research and development. Net earnings in the first quarter of fiscal 2007 were also affected by the adoption of SFAS No. 123(R),Accounting for Stock-Based Compensation, as outlined above, and the final payment on the Agility agreement, as amended.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

Working capital decreased to $2,040,000 at September 30, 2006, compared to $2,131,000 at June 30, 2006. The decrease in working capital was largely due to the decrease in accounts receivable as a result of decreased revenue.

Cash and cash equivalents was $113,000 at September 30, 2006, compared to $51,000 at June 30, 2006. The increase in cash was influenced by many factors, primarily operating activities and improvements in cost structures. The ratio of current assets to current liabilities (current ratio) was 2.27 to one at September 30, 2006 and 2.30 to one at June 30, 2006.

Accounts receivable decreased to $1,954,000 at September 30, 2006, versus $2,201,000 at June 30, 2006. The decrease in accounts receivable was related to slow sales activity in the first quarter of fiscal 2007 and strong collections during that period. 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.

In the first three months of fiscal year 2007, $120,000 was used for capital expenditures, compared with $34,000 in the first three months of fiscal year 2006. 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 $1,101,000 as of September 30, 2006, compared to $1,141,000 as of June 30, 2006. Biotels subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.

Current liabilities decreased to $1,610,000 at September 30, 2006, compared to $1,642,000 on June 30, 2006. This decrease was primarily due to the payment of estimated income taxes in September, 2006.

Long term liabilities were reduced to $185,000 at September 30, 2006, compared to $242,000 at June 30, 2006, a reduction of approximately $57,000 as a result of payments made on notes outstanding.

As of September 30, 2006, stockholders equity had increased to $3,320,000 from $3,311,000 at June 30, 2006. The increase in stockholders equity was a result of the increase in additional paid in capital due to stock-based compensation.

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

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# Item 3:   Controls and Procedures

(a)           As of September 30, 2006, an evaluation was performed by Biotels Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon, and as of the date of, that evaluation, the President and Chief Financial Officer concluded that the registrants disclosure controls and procedures were effective.

(b)Changes in internal controls. There were no significant changes in Biotels internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

Part II

Item 1.   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:   November 10, 2006 | By:        
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|                         
|                         
|Date:   November 10, 2006 | By:        
|                          |            

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