Biotel (BTELE) 10QSB 2008 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the period ended March 31, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number : 0-50914

BIOTEL INC.

(Exact name of registrant as specified in its charter)

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

1285 Corporate Center Drive, Suite 150

Eagan, MN 55121

(Address of principal executive offices, including zip code)

(651) 286-8620

(Registrant’s telephone number, including area code)

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

Yes x   No o

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

Yes o   No x

The number of shares of registrant’s common stock, par value $0.01 per share, outstanding as of as of March 31, 2008, was 2,673,827.

Transitional Small Business Disclosure Format (check one):

Yes o   No x

BIOTEL INC.

INDEX

PART I			Page Number
	Item 1:	Financial Information
		Consolidated Balance Sheets – March 31, 2008 and June 30, 2007	1
		Consolidated Statements of Income – Three Months and
		Nine Months ended March 31, 2008 and 2007	2
		Consolidated Statements of Cash Flows	4
		Consolidated Statements of Stockholders’ Equity	5
		Notes to Consolidated Financial Statements (Unaudited)	6
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3/3A(T):	Controls and Procedures	15
PART II
	Item 1–Item 4:	Not applicable	15
	Item 5:	Other Information	15
	Item 6:	Exhibits	15
	Signatures

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Part I

Item 1: Financial Information

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2008 Unaudited		June 30, 2007 Audited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	199,001	$	508,314
Trade accounts receivable, net of allowance for doubtful accounts of $44,777 and $35,707 at March 31, 2008 and June 30, 2007, respectively		1,952,316		1,966,415
Inventories, net		1,688,860		1,122,259
Deferred tax asset		138,342		200,342
Prepaid expenses		127,971		184,149
Total Current Assets		4,106,490		3,981,479
PROPERTY, PLANT & EQUIPMENT, Net		1,035,013		704,327
OTHER ASSETS:
Goodwill		695,551		695,551
Other assets		12,400		12,400
Total Other Assets		707,951		707,951
	$	5,849,454	$	5,393,757
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$	736,230	$	678,094
Accrued payroll and related liabilities		242,449		243,766
Deferred service contract revenue		115,277		177,969
Other accrued expenses		222,575		277,488
Accrued income taxes		87,850		83,940
Total Current Liabilities		1,404,381		1,461,257
COMMITMENTS AND CONTINGENCIES		—		—
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; 2,673,827 shares issued		26,738		26,738
Additional paid-in capital		2,080,352		2,043,175
Retained earnings		2,337,983		1,862,587
Total Stockholders’ Equity		4,445,073		3,932,500
	$	5,849,454	$	5,393,757

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

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BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	For the three months ended March 31,
	2008			2007
SALES AND SERVICES	$	2,698,940		$	2,989,879
COST OF SALES AND SERVICES		1,461,676			1,705,385
GROSS PROFIT		1,237,264			1,284,494
OPERATING EXPENSES
Selling and administrative expenses		619,791			616,333
Research and development		465,083			341,518
Total operating expenses		1,084,874			957,851
INCOME FROM OPERATIONS		152,390			326,643
OTHER INCOME (EXPENSE)
Interest income		1,515			981
Interest expense		(261	)		(7,302	)
Miscellaneous		4,984			(17,947	)
Total other income (expense)		6,238			(24,268	)
NET INCOME BEFORE PROVISION FOR INCOME TAXES		158,628			302,375
PROVISION FOR INCOME TAXES		59,138			112,291
NET INCOME	$	99,490		$	190,084
INCOME PER SHARE
BASIC	$	0.04		$	0.07
DILUTED	$	0.03		$	0.07

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

2

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	For the nine months ended March 31,
	2008			2007
SALES AND SERVICES	$	8,308,788		$	8,118,606
COST OF SALES AND SERVICES		4,538,851			4,758,808
GROSS PROFIT		3,769,937			3,359,798
OPERATING EXPENSES
Selling and administrative expenses		1,822,427			1,796,712
Research and development		1,218,092			1,044,635
Total operating expenses		3,040,519			2,841,347
INCOME FROM OPERATIONS		729,418			518,451
OTHER INCOME (EXPENSE)
Interest income		9,980			2,719
Interest expense		(546	)		(28,168	)
Miscellaneous		6,872			(17,254	)
Total other income (expense)		16,306			(42,703	)
NET INCOME BEFORE PROVISION FOR INCOME TAXES		745,724			475,748
PROVISION FOR INCOME TAXES		270,328			176,796
NET INCOME	$	475,396		$	298,952
INCOME PER SHARE
BASIC	$	0.18		$	0.11
DILUTED	$	0.17		$	0.11

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

3

BIOTEL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	For the nine months ended March 31,
	2008			2007
OPERATING ACTIVITIES
Net income	$	475,396		$	298,952
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		207,581			245,619
Stock-based compensation		37,177			62,507
Deferred income tax		62,000			—
Increase in allowance for doubtful accounts		9,070			2,982
Increase (decrease) in inventory valuation allowance		(158,493	)		16,416
Loss (gain) on disposal of fixed assets		(4,984	)		16,588
Changes in deferred and accrued amounts
Trade accounts receivable		5,029			321,803
Prepaid expenses		56,178			(62,788	)
Inventories		(408,108	)		(16,461	)
Other assets		—			7,708
Trade accounts payable		58,137			15,810
Accrued payroll and related liabilities		(1,317	)		47,621
Other accrued expenses		(54,913	)		(36,089	)
Deferred service contract revenue		(62,692	)		(11,877	)
Income taxes payable		3,910			(71,707	)
Net cash provided by operating activities		223,971			837,084
INVESTING ACTIVITIES
Purchases of property and equipment		(541,534	)		(337,356	)
Proceeds from sale of property and equipment		8,250			13,300
Net cash used for investing activities		(533,284	)		(324,056	)
FINANCING ACTIVITIES
Proceeds from issuance of common stock		—			15,000
Net change on line of credit		—			(110,000	)
Payments of long-term debt		—			(183,010	)
Net cash used for financing activities		—			(278,010	)
Net change in cash and cash equivalents		(309,313	)		235,018
CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2007 and 2006		508,314			51,186
CASH AND CASH EQUIVALENTS AS OF MARCH 31, 2008 and 2007	$	199,001		$	286,204

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

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BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the nine months ended March 31, 2008 and 2007

	Common Stock			Additional Paid-In		Retained
	Amount		Shares	Capital		Earnings		Total
Balance, June 30, 2006	$	26,498	2,649,827	$	1,941,324	$	1,342,854	$	3,310,676
Options exercised	$	240	24,000		14,760				15,000
Stock-based compensation					62,507				62,507
Net Income		—	—		—		298,952		298,952
Balance, March 31, 2007	$	26,738	2,673,827	$	2,018,591	$	1,641,806	$	3,687,135
Balance, June 30, 2007	$	26,738	2,673,827	$	2,043,175	$	1,862,587	$	3,932,500
Stock-based compensation					37,177				37,177
Net Income		—	—		—		475,396		475,396
Balance, March 31, 2008	$	26,738	2,673,827	$	2,080,352	$	2,337,983	$	4,445,073

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

5

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 March 31, 2008 and June 30, 2007, inventories consist of the following:

	March 31, 2008			June 30, 2007
Raw materials and supplies	$	1,583,432		$	1,154,869
Finished goods		316,970			337,216
Evaluation units and replacements		6,938			7,147
		1,907,340			1,499,232
Valuation allowance		(218,480	)		(376,973	)
	$	1,688,860		$	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 March 31, 2008 and June 30, 2007, the warranty reserve totaled $92,493 and $75,906, respectively. At March 31, 2007 and June 30, 2006, the warranty reserve totaled $79,191 and $97,471, respectively. Warranty reserve is included in Other Accrued Expenses. The following is a reconciliation of the aggregate warranty liability as of March 31, 2008 and 2007.

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	March 31, 2008			March 31, 2007
Beginning of Period, June 30, 2007 and 2006	$	75,906		$	97,471
Claims Paid		(80,507	)		(39,009	)
Additional warranties issued and revisions in estimates of previously issued warranties		97,094			20,729
End of Period, March 31, 2008 and 2007	$	92,493		$	79,191

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 March 31, 2008 and 2007, Biotel Inc. had 301,000 outstanding options. Currently option prices range from $.375 to $2.00 per share with a weighted average remaining contract life of 1.59 years. During the three months ended March 31, 2008, no options were exercised, and 24,000 options were exercised during the three months ended March 31, 2007. No options were exercised during the nine months ended March 31, 2008, and 24,000 options were exercised during the nine months ended March 31, 2007. 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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			Outstanding				Exercisable
	Shares Available		Number of Shares		Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Balance at June 30, 2006	322,000		328,000		$	1.1898	230,000	$	1.0510
Granted	(10,000	)	10,000
Expired	5,000		(5,000	)
Balance at September 30, 2006	317,000		333,000		$	1.2260	281,000	$	1.1440
Balance at December 31, 2006	317,000		333,000		$	1.2260	286,500	$	1.1876
Exercised	24,000		(24,000	)
Expired	8,000		(8,000	)
Balance at March 31, 2007	349,000		301,000		$	1.2386	254,500	$	1.2584
Balance at June 30, 2007	349,000		301,000		$	1.2899	254,500	$	1.2230
Balance at September 30, 2007	349,000		301,000		$	1.2899	254,500	$	1.2230
Balance at December 31, 2007	349,000		301,000		$	1.2899	293,500	$	1.2773
Balance at March 31, 2008	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 March 31, 2008 was 2,673,827 and 2,854,994, respectively, and for the three months ended March 31, 2007 was 2,657,827 and 2,761,264, respectively. The weighted average number of shares used in the computation of basic and diluted income per common share for the nine months ended March 31, 2008 was 2,673,827 and 2,857,172, respectively, and for the nine months ended March 31, 2007 was 2,652,455 and 2,758,078, respectively.

NOTE 6 – OPERATIONS AND INDUSTRY SEGMENTS

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

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

	Three months ended March 31, 2008
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	2,063,581	$	146,121		$	—		$	2,209,702
International revenues		450,824		38,414			—			489,238
Revenues from external customers		2,514,405		184,535			—			2,698,940
Intersegment revenues		9,502		(9,502	)		—			—
Interest expense		—		—			261			261
Income tax expense		41,805		13,029			4,304			59,138
Depreciation and amortization		69,750		2,063			5,382			77,195
Segment profit		65,839		25,298			8,353			99,490
Goodwill		695,551		—			—			695,551
Total segment assets		5,299,621		108,753			441,080			5,849,454
Purchase of property and equipment		290,234		—			1,340			291,574
	Three months ended March 31, 2007
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	2,563,261	$	130,404		$	—		$	2,693,665
International revenues		256,477		39,737			—			296,214
Revenues from external customers		2,819,738		170,141			—			2,989,879
Intersegment revenues		49,028		(49,028	)		—			—
Interest expense		—		—			7,302			7,302
Income tax expense		113,819		5,233			(6,761	)		112,291
Depreciation and amortization		77,767		2,193			6,141			86,101
Segment profit		193,075		10,157			(13,148	)		190,084
Goodwill		695,551		—			—			695,551
Total segment assets		4,386,592		137,313			697,622			5,221,527
Purchase of property and equipment		95,265		—			—			95,265

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	Nine months ended March 31, 2008
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	6,595,161	$	477,149		$	—		$	7,072,310
International revenues		1,084,641		151,837			—			1,236,478
Revenues from external customers		7,679,802		628,986			—			8,308,788
Intersegment revenues		75,907		(75,907	)		—			—
Interest expense		—		—			546			546
Income tax expense		184,388		52,984			32,956			270,328
Depreciation and amortization		185,260		6,190			16,131			207,581
Segment profit		308,683		102,739			63,974			475,396
Goodwill		695,551		—			—			695,551
Total segment assets		5,299,621		108,753			441,080			5,849,454
Purchase of property and equipment		531,650		—			9,884			541,534
	Nine months ended March 31, 2007
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate			Totals
Domestic revenues	$	7,218,735	$	537,690		$	—		$	7,756,425
International revenues		256,477		105,704			—			362,181
Revenues from external customers		7,475,212		643,394			—			8,118,606
Intersegment revenues		137,518		(137,518	)		—			—
Interest expense		1,272		—			26,896			28,168
Income tax expense		138,312		40,393			(1,909	)		176,796
Depreciation and amortization		220,373		6,947			18,299			245,619
Segment profit		243,931		78,286			(23,265	)		298,952
Goodwill		695,551		—			—			695,551
Total segment assets		4,386,592		137,313			697,622			5,221,527
Purchase of property and equipment		335,854		—			1,502			337,356

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 March 31, 2008

Biotel’s net revenues for the three months ended March 31, 2008, were $2,699,000, 9.7% less than net revenues of $2,990,000 for the three months ended March 31, 2007. This decrease is a result of a temporary decrease in shipments to medical corporations in anticipation of new product releases. Biotel completed product development efforts at its Braemar subsidiary on a new Holter recorder platform in the third quarter of fiscal year 2008. The new Holter recorder platform was market released with initial deliveries to a major customer in March. In the three months ended March 31, 2008, 23% of Biotel’s revenues were derived from one customer; and in the three months ended March 31, 2007, 49% of Biotel’s revenues were derived from three customers. The loss of any of these customers would have an immediate significant adverse effect on our financial results.

Gross profit was $1,237,000 for the quarter ended March 31, 2008, 3.7% less than the gross profit of $1,284,000 for the third quarter of fiscal year 2007. Gross profit margin improved to 45.8% in the three months ended March 31, 2008 compared to 43.0% for the three months ended March 31, 2007. 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. Cost of sales and service decreased to $1,462,000 (54.2% of sales) for the three months ended March 31, 2008, compared to $1,705,000 (57.0% of sales) for the third quarter of fiscal year 2007.

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Selling, general and administrative expenses increased slightly to $620,000 (23.0% of sales) for the three months ended March 31, 2008, compared to $616,000 (20.6% of sales) for the three months ended March 31, 2007. Selling, general and administrative expenses in fiscal 2008 include increased personnel expenses with the addition of an Information Technology employee.

Research and development expenditures for the third quarter of fiscal year 2008 were $465,000, an increase of 36.2% compared to $342,000 in the third quarter of fiscal year 2007. This increase was primarily the result of expenditures associated with development of new Holter, wireless and event recorder products. In addition to concluding development efforts on a new Holter recorder platform, Biotel continues product development activity at Braemar toward the market release of the ER900 wireless products and successive wireless product offerings. 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 $261 for the three-month period ended March 31, 2008, compared to interest expense of $7,302 for the three months ended March 31, 2007. Interest expense decreased as a result of the elimination of long term debt and minimal use of the line of credit.

Net earnings of $99,000 were posted for the third quarter of fiscal year 2008, versus net earnings of $190,000 in the third quarter of fiscal year 2007. Net earnings for the third quarter of fiscal year 2008 declined as a result of decreased revenues, increased R&D expenses to complete the new product releases, and costs associated with closing Braemar’s North Carolina facility on June 30, 2008.

Nine Months ended March 31, 2008

Biotel’s net revenues for the nine months ended March 31, 2008, were $8,309,000, an increase of 2.3% over revenues of $8,119,000 for the nine months ended March 31, 2007. This increase is a result of growing sales to medical corporations during the first nine months of fiscal 2008, with a notable increase in sales of services at Agility. In the nine months ended March 31, 2008, 31% of Biotel’s revenues were derived from two customers, and in the nine months ended March 31, 2007, 44% of Biotel’s revenues were derived from three customers. The loss of either of these customers would have an immediate significant adverse effect on our financial results.

Gross profit was $3,770,000 for the nine months ended March 31, 2008, 12.2% greater than the gross profit of $3,360,000 for the first nine months of fiscal year 2007. Gross profit margin improved to 45.4% for the nine months ended March 31, 2008 compared to 41.4% for the nine months ended March 31, 2007. 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. Cost of sales and service decreased to $4,539,000 (54.6% of sales) for the nine months ended March 31, 2008, compared to $4,759,000 (58.6% of sales) for the first nine months of fiscal year 2007.

Selling, general and administrative expenses increased to $1,822,000 (21.9% of sales) for the nine months ended March 31, 2008, compared to $1,797,000 (22.1% of sales) for the nine months ended March 31, 2007. 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.

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            Research and development expenditures for the first nine months of fiscal year 2008 were $1,218,000, an increase of 16.6% compared to $1,045,000 for the first nine months 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.

Interest expense decreased to $546 for the nine-month period ended March 31, 2008, compared to interest expense of $28,168 for the nine months ended March 31, 2007. Interest expense decreased as a result of the elimination of long term debt and minimal use of the line of credit.

Net earnings of $475,000 were posted for the first nine months of fiscal year 2008, versus net earnings of $299,000 in the first nine months of fiscal year 2007. Net earnings for the first nine 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 $2,702,000 at March 31, 2008, 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 $199,000 at March 31, 2008, compared to $508,000 at June 30, 2007. The decrease in cash was primarily the result of payments of estimated income taxes, inventory increases, and other accrued liabilities in March, 2008. The ratio of current assets to current liabilities (“current ratio”) was 2.92 to one at March 31, 2008 and 2.72 to one at June 30, 2007.

Accounts receivable decreased slightly to $1,952,000 at March 31, 2008, versus $1,966,000 at June 30, 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 nine months of fiscal year 2008, $542,000 was used for capital expenditures, compared with $337,000 in the first nine 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 $1,689,000 as of March 31, 2008 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 $1,404,000 at March 31, 2008, compared to $1,461,000 on June 30, 2007.

Biotel has no long term liabilities.

As of March 31, 2008, stockholders’ equity had increased to $4,445,000 from $3,932,000 at June 30, 2007. The increase in stockholder’s 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 March 31, 2008, an evaluation was performed by Biotel’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon, and as of the date of, that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the registrant’s disclosure controls and procedures were effective.

(b)       Changes in internal controls. There were no changes in the third 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. On May 14, 2008, Biotel issued a news release containing its financial results for the period ending March 31, 2008. The news release is attached as Exhibit 99.1.

Item 6. Exhibits

Listing of Exhibits:

31.1 Certification of Chief Executive Officer.

31.2 Certification of Chief Financial Officer.

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1 Biotel Inc. news release dated May 14, 2008, containing the company’s financial results for the period ending March 31, 2008.

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Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Biotel Inc.
Date:  May 14, 2008	By:	/s/ B. Steven Springrose
		Its: Chief Executive Officer and President

Date:  May 14, 2008	By:	/s/ Judy E. Naus
		Its: Chief Financial Officer

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