Biotel (BTELE) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the period ended December 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o      Accelerated filer  o      Non-Accelerated filer  o      Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 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 February 10, 2009, was 2,763,827.

		BIOTEL INC. INDEX
PART I			Page Number
Item 1:	Financial Information		3
	Consolidated Balance Sheets – December 31, 2008 and June 30, 2008		3
	Consolidated Statements of Income – Three Months ended December 31, 2008 and 2007		4
	Consolidated Statements of Income – Six Months ended December 31, 2008 and 2007		5
	Consolidated Statements of Cash Flows		6
	Consolidated Statements of Stockholders’ Equity		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3:	Qualitative and Quantitative Disclosure about Market Risk		17
Item 4:	Controls and Procedures		17
PART II
Item 1–Item 4:	Not applicable		17
Item 5:	Other Information		17
Item 6:	Exhibits		17
Signatures			18

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Part I

Item 1:Financial Information

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2008 Unaudited		June 30, 2008 *
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	895,311	$	945,121
Trade accounts receivable, net of allowance for doubtful accounts of $49,518 and $55,440 at December 31, 2008 and June 30, 2008, respectively		1,748,842		1,766,512
Prepaid income taxes		—		39,310
Inventories, net		2,164,412		1,428,163
Deferred tax asset		244,018		244,018
Prepaid expenses		153,282		109,903
Total Current Assets		5,205,865		4,533,027
PROPERTY & EQUIPMENT, Net		1,104,950		1,092,710
OTHER ASSETS
Goodwill		695,551		695,551
Other assets		13,820		13,820
Total Other Assets		709,371		709,371
	$	7,020,186	$	6,335,108
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Revolving line of credit	$	—	$	187,146
Trade accounts payable		680,682		651,635
Accrued payroll and related liabilities		218,291		237,503
Deferred service contract revenue		98,288		133,359
Other accrued expenses		185,886		198,540
Income taxes payable		292,554		—
Total Current Liabilities		1,475,701		1,408,183
LONG-TERM LIABILITIES
Deferred taxes payable		224,967		224,967
COMMITMENTS AND CONTINGENCIES		—		—
Total Liabilities		1,700,668		1,633,150
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 stated value; 2,000,000 shares authorized; no shares issued		—		—
Common stock, $.01 stated value; 10,000,000 shares authorized; 2,763,827 shares issued		27,638		27,638
Additional paid-in capital		2,146,088		2,145,594
Retained earnings		3,145,792		2,528,726
Total Stockholders’ Equity		5,319,518		4,701,958
	$	7,020,186	$	6,335,108

* Derived from the 10KSB for the year ended June 30, 2008.

3

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	For the three months ended December 31,
	2008			2007
SALES AND SERVICES	$	3,185,954		$	2,859,069
COST OF SALES AND SERVICES		1,722,510			1,581,432
GROSS PROFIT		1,463,444			1,277,637
OPERATING EXPENSES
Selling and administrative		599,724			618,255
Research and development		411,984			343,753
Total operating expenses		1,011,708			962,008
INCOME FROM OPERATIONS		451,736			315,629
OTHER INCOME (EXPENSE)
Interest income		2,272			4,187
Interest expense		(25	)		(187	)
Miscellaneous		—			951
Total other income (expense)		2,247			4,951
NET INCOME BEFORE
PROVISION FOR INCOME TAXES		453,983			320,580
PROVISION FOR INCOME TAXES		165,071			114,571
NET INCOME	$	288,912		$	206,009
INCOME PER SHARE
BASIC	$	0.10		$	0.08
DILUTED	$	0.10		$	0.07

4

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	For the six months ended December 31,
	2008			2007
SALES AND SERVICES	$	6,354,128		$	5,609,848
COST OF SALES AND SERVICES		3,441,555			3,077,175
GROSS PROFIT		2,912,573			2,532,673
OPERATING EXPENSES
Selling and administrative		1,182,384			1,202,636
Research and development		778,141			753,009
Total operating expenses		1,960,525			1,955,645
INCOME FROM OPERATIONS		952,048			577,028
OTHER INCOME (EXPENSE)
Interest income		4,496			8,465
Interest expense		(590	)		(285	)
Miscellaneous		13,000			1,888
Total other income (expense)		16,906			10,068
NET INCOME BEFORE
PROVISION FOR INCOME TAXES		968,954			587,096
PROVISION FOR INCOME TAXES		351,888			211,190
NET INCOME	$	617,066		$	375,906
INCOME PER SHARE
BASIC	$	0.22		$	0.14
DILUTED	$	0.22		$	0.13

5

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	For the six months ended December 31,
	2008			2007
OPERATING ACTIVITIES
Net income	$	617,066		$	375,906
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		174,560			130,384
Stock-based compensation		494			24,785
Increase (decrease) in allowance for doubtful accounts		(5,922	)		7,570
Increase (decrease) in inventory valuation allowance		22,230			(3,924	)
Changes in deferred and accrued amounts
Trade accounts receivable		23,592			(129,057	)
Prepaid expenses		(4,069	)		4,670
Inventories		(758,479	)		(339,480	)
Trade accounts payable		29,047			(5,545	)
Accrued payroll and related liabilities		(19,212	)		(32,581	)
Other accrued expenses		(12,654	)		(8,111	)
Deferred service contract revenue		(35,071	)		(35,515	)
Income taxes payable		292,554			19,105
Net cash provided by operating activities		324,136			8,207
INVESTING ACTIVITIES
Purchases of property and equipment		(186,800	)		(249,960	)
Net cash used for investing activities		(186,800	)		(249,960	)
FINANCING ACTIVITIES
Net change on line of credit		(187,146	)		—
Net cash used for financing activities		(187,146	)		—
Net change in cash and cash equivalents		(49,810	)		(241,753	)
CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2008 and 2007		945,121			508,314
CASH AND CASH EQUIVALENTS AS OF DECEMBER 31, 2008 and 2007	$	895,311		$	266,561
CASH PAID FOR
Interest Expense	$	617		$	233
Income Taxes	$	20,000		$	189,630

6

BIOTEL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the six months ended December 31, 2008 and 2007

	Common Stock			Additional Paid-In Capital		Retained Earnings		Total
	Amount		Shares
Balance, June 30, 2007	$	26,738	2,673,827	$	2,043,175	$	1,862,587	$	3,932,500
Stock-based compensation		—	—		24,785		—		24,785
Net income		—	—		—		375,906		375,906
Balance, December 31, 2007	$	26,738	2,673,827	$	2,067,960	$	2,238,493	$	4,333,191
Balance, June 30, 2008	$	27,638	2,763,827	$	2,145,594	$	2,528,726	$	4,701,958
Stock-based compensation		—	—		494		—		494
Net income		—	—		—		617,066		617,066
Balance, December 31, 2008	$	27,638	2,763,827	$	2,146,088	$	3,145,792	$	5,319,518

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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, 2008, filed by Biotel Inc. (the “Company”) on September 29, 2008.

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, 2008 and June 30, 2008, inventories consist of the following:

	December 31, 2008			June 30, 2008
Raw materials and supplies	$	2,078,426		$	1,374,588
Finished goods		293,983			229,169
Evaluation units and replacements		2,233			12,406
		2,374,642			1,616,163
Valuation allowance		(210,230	)		(188,000	)
	$	2,164,412		$	1,428,163

NOTE 3 – WARRANTY RESERVE

Biotel provides warranties against defects in materials and workmanship in our products. Warranty periods for our products range from 90 days to two years. The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer. The Company records a liability for estimated costs that may be incurred under its warranties based on recorded sales. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed our expectations. The Company periodically assesses the adequacy of its recorded liability and adjusts the balance as necessary. At December 31, 2008 and June 30, 2008, the warranty reserve totaled $89,332 and $87,512, respectively. At December 31, 2007 and June 30, 2007, the warranty reserve totaled $89,353 and $75,906, respectively. Warranty reserve is included in Other Accrued Expenses. The following is a reconciliation of the aggregate warranty liability as of December 31, 2008 and 2007.

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	December 31, 2008			December 31, 2007
Beginning of Period, June 30, 2008 and 2007	$	87,512		$	75,906
Claims Paid		(23,786	)		(52,672	)
Additional warranties issued and revisions in estimates of previously issued warranties		25,606			66,119
End of Period, December 31, 2008 and 2007	$	89,332		$	89,353

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, 2008 and 2007, Biotel Inc. had 196,000 and 301,000 outstanding options, respectively. Currently option prices range from $.375 to $2.01 per share with a weighted average remaining contract life of 1.48 years. During the three months ended December 31, 2008 and 2007, no options were exercised. During the six months ended December 31, 2008 and 2007, no options were exercised. Option vesting and expiration is determined by the Board of Directors at the time the options are awarded. No options may be awarded with an expiration greater than 10 years.

9

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

	Outstanding				Exercisable
	Number of Shares		Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Balance at June 30, 2007	301,000		$	1.2899	254,500	$	1.2583
Balance at December 31, 2007	301,000		$	1.2899	293,500	$	1.2773
Balance at June 30, 2008	211,000		$	1.5853	203,500	$	1.5780
Granted	10,000		$	2.0100
Expired	(25,000	)	$	1.8200
Balance at December 31, 2008	196,000		$	1.5770	183,500	$	1.5490

The total intrinsic value of options exercised during the three and six months ended December 31, 2008 was $0. The total intrinsic value of options outstanding and exercisable at December 31, 2008 was $92,700 and $91,925, respectively, which was calculated using the closing stock price as of December 31, 2008 less the exercise price of in-the-money options.

NOTE 5 – EARNINGS PER SHARE OF COMMON STOCK

The weighted average number of shares used in the computation of basic and diluted income per common share for the three months ended December 31, 2008 were 2,763,827 and 2,827,060, respectively, and for the three months ended December 31, 2007 were 2,673,827 and 2,854,249, 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, 2008 were 2,763,827 and 2,842,840, respectively, and for the six months ended December 31, 2007 were 2,673,827 and 2,858,582, 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.

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.

10

	Three months ended December 31, 2008
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate		Totals
Domestic revenues	$	2,585,468	$	146,268		$	—	$	2,731,736
International revenues		403,443		50,775			—		454,218
Revenues from external customers		2,988,911		197,043			—		3,185,954
Intersegment revenues		17,821		(17,821	)		—		—
Interest expense		—		—			25		25
Income tax expense		143,117		18,741			3,213		165,071
Depreciation and amortization		81,141		1,586			5,787		88,514
Segment profit		251,173		31,501			6,238		288,912
Goodwill		695,551		—			—		695,551
Total segment assets		5,708,138		67,079			1,244,969		7,020,186
Purchase of property and equipment		76,999		—			—		76,999
	Three months ended December 31, 2007
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate		Totals
Domestic revenues	$	2,252,775	$	176,562		$	—	$	2,429,337
International revenues		352,706		77,026			—		429,732
Revenues from external customers		2,605,481		253,588			—		2,859,069
Intersegment revenues		54,013		(54,013	)		—		—
Interest expense		—		—			187		187
Income tax expense		80,172		21,769			12,630		114,571
Depreciation and amortization		59,359		2,063			5,372		66,794
Segment profit		139,309		42,182			24,518		206,009
Goodwill		695,551		—			—		695,551
Total segment assets		4,992,062		159,520			580,219		5,731,801
Purchase of property and equipment		160,753		—			8,544		169,297

11

	Six months ended December 31, 2008
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate		Totals
Domestic revenues	$	5,227,048	$	311,477		$	—	$	5,538,525
International revenues		769,933		45,670					815,603
Revenues from external customers		5,996,981		357,147					6,354,128
Intersegment revenues		45,555		(45,555	)				—
Interest expense		—		—			590		590
Income tax expense		314,578		35,502			1,808		351,888
Depreciation and amortization		159,570		3,524			11,466		174,560
Segment profit		552,793		60,762			3,511		617,066
Goodwill		695,551		—			—		695,551
Total segment assets		5,708,138		67,079			1,244,969		7,020,186
Purchase of property and equipment		181,667					5,133		186,800
	Six months ended December 31, 2007
	OEM Medical Sales & Services		Direct Medical Equipment Sales			Corporate		Totals
Domestic revenues	$	4,533,852	$	331,027		$	—	$	4,864,879
International revenues		631,545		113,424			—		744,969
Revenues from external customers		5,165,397		444,451			—		5,609,848
Intersegment revenues		88,456		(88,456	)				—
Interest expense		—		—			285		285
Income tax expense		142,583		39,955			28,652		211,190
Depreciation and amortization		115,508		4,127			10,749		130,384
Segment profit		242,844		77,441			55,621		375,906
Goodwill		695,551		—			—		695,551
Total segment assets		4,992,062		159,520			580,219		5,731,801
Purchase of property and equipment		241,416		—			8,544		249,960

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

Cautionary Statement

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

Critical Accounting Policies

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

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

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

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

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

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

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

Goodwill is accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is deemed to have an indefinite useful life and is not amortized but is subject to impairment tests performed at least annually. During fiscal 2008 and 2007, Biotel performed the required impairment tests of goodwill and determined our recorded goodwill had not been impaired.

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

13

Revenues from product sales are recognized at date of shipment.

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

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

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

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

Overview

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

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

Biotel subsidiary, Braemar, Inc., through its Columbia, South Carolina facility which was formerly Advanced Biosensor, sells maintenance services, Holter recorders and event recorders manufactured by Braemar, diagnostic Holter software provided by others and Holter supplies to hospitals and clinics.

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, 2008

Biotel’s net revenues for the three months ended December 31, 2008, were $3,186,000, 11.4% more than net revenues of $2,859,000 for the three months ended December 31, 2007. This increase was the result of continued strong sales of medical devices and research services during the second quarter of fiscal 2009. Medical device sales included shipments of the Braemar DL900 advanced Holter monitor and Braemar ER920W wireless event recorder which were introduced in the second half of fiscal 2008. Sales of the Braemar ER920W wireless arrhythmia monitor continued to be strong in the second quarter as a major customer continued to order significant quantities of stocking units for inventory and product launch. We expect sales to this customer to continue into the third quarter but to slow significantly in the second half of the year.

14

Gross profit was $1,463,000 for the quarter ended December 31, 2008, 14.5% greater than the gross profit of $1,278,000 for the second quarter of fiscal year 2008. Gross profit increased as a result of the increase in revenue for the second quarter of fiscal 2009. Gross profit margin improved to 45.9% for the three months ended December 31, 2008 compared to 44.7% for the three months ended December 31, 2007. Cost of sales and service increased to $1,723,000 (54.1% of sales) for the three months ended December 31, 2008, compared to $1,581,000 (55.3% of sales) for the second quarter of fiscal year 2008. The increase in cost of sales and service was a result of the increase in sales for the second quarter of fiscal 2009. Cost of sales and service as a percentage of revenue decreased, primarily due to product mix.

Selling, general and administrative expenses of $600,000 (18.8% of sales) for the three months ended December 31, 2008 decreased from $618,000 (21.6% of sales) for the three months ended December 31, 2007. Selling, general and administrative expenses were lower in the second quarter of fiscal 2009 as a result of the decrease in legal expenses. The decrease in selling, general and administrative expenses as a percentage of revenue was primarily due to the increase in revenue in the second quarter of fiscal 2009 versus the second quarter of fiscal 2008. Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.

Research and development expenditures for the second quarter of fiscal year 2009 were $412,000, an increase of 19.9% compared to $344,000 in the second quarter of fiscal year 2008. Research and development expenses in the second quarter of fiscal year 2009 included expenditures for development of products to be released in the second half of fiscal year 2009. Biotel expects research and development investment in fiscal 2009 to be comparable to prior year levels as the Company addresses developing markets in Holter, event recording and wireless arrhythmia management.

Interest expense decreased to $25 for the three-month period ended December 31, 2008, compared to interest expense of $187 for the three months ended December 31, 2007.

Net earnings of $289,000 were posted for the second quarter of fiscal year 2009, versus net earnings of $206,000 in the second quarter of fiscal year 2008. The increase in net earnings was primarily the result of the increase in sales during the second quarter of fiscal year 2009.

Six Months ended December 31, 2008

Biotel’s net revenues for the six months ended December 31, 2008, were $6,354,000, 13.3% more than net revenues of $5,610,000 for the six months ended December 31, 2007. This increase was the result of strong sales of medical devices and research services during the first half of fiscal 2009. Medical device sales included shipments of the Braemar DL900 advanced Holter monitor and Braemar ER920W wireless event recorder which were introduced in the second half of fiscal 2008. Sales of the Braemar ER920W wireless arrhythmia monitor were strong in the first half of fiscal year 2009 as a major customer ordered significant quantities of stocking units for inventory and product launch. We expect sales to this customer to continue into the third quarter but to slow significantly in the second half of the year.

Gross profit was $2,913,000 for the six months ended December 31, 2008, 15.1% greater than the gross profit of $2,533,000 for the first half of fiscal year 2008. Gross profit increased as a result of the increase in revenue for the first half of fiscal 2009. Gross profit margin improved to 45.8% for the six months ended December 31, 2008 compared to 45.2% for the six months ended December 31, 2007. Improvement in gross profit margin was primarily the result of increased sales volume and control of fixed costs. Cost of sales and service increased to $3,442,000 (54.2% of sales) for the six months ended December 31, 2008, compared to $3,077,000 (54.8% of sales) for the first half of fiscal year 2008. The increase in cost of sales and service was a result of the increase in sales for the first half of fiscal 2009.

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Selling, general and administrative expenses of $1,182,000 (18.6% of sales) for the six months ended December 31, 2008 decreased from $1,203,000 (21.4% of sales) for the six months ended December 31, 2007. Selling, general and administrative expenses were lower in the first half of fiscal 2009 as a result of the decrease in legal expenses. The decrease in selling, general and administrative expenses as a percentage of revenue was primarily due to the increase in revenue in the second quarter of fiscal 2009 versus the second quarter of fiscal 2008. Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.

Research and development expenditures for the first half of fiscal year 2009 were $778,000, an increase of 3.3% compared to $753,000 in the first half of fiscal year 2008. Biotel expects research and development investment in fiscal 2009 to be comparable to prior year levels as the Company addresses developing markets in Holter, event recording and wireless arrhythmia management.

Interest expense increased to $590 for the six-month period ended December 31, 2008, compared to interest expense of $285 for the six months ended December 31, 2007.

Net earnings of $617,000 were posted for the first half of fiscal year 2009, versus net earnings of $376,000 in the first half of fiscal year 2008. The increase in net earnings was primarily the result of the increase in sales during the first half of fiscal year 2009.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

Working capital increased to $3,730,000 at December 31, 2008, compared to $3,125,000 at June 30, 2008. The increase in working capital is largely the result of the Company’s continued profitability.

Cash and cash equivalents were $895,000 at December 31, 2008, compared to $945,000 at June 30, 2008. The decrease in cash was primarily the result of payment of the revolving line of credit, as well as increases in inventory in the first half of fiscal 2009. The ratio of current assets to current liabilities (“current ratio”) was 3.53 to one at December 31, 2008 and 3.22 to one at June 30, 2008.

Accounts receivable decreased to $1,749,000 at December 31, 2008, versus $1,767,000 at June 30, 2008, as a result of strong collections in the month of December, 2008. 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 second quarter of fiscal year 2009, $77,000 was used for capital expenditures, compared with $169,000 in the second quarter of fiscal year 2008. 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 $2,164,000 as of December 31, 2008 versus $1,428,000 as of June 30, 2008. This increase is due to purchase of materials for January sales and new products to be released within the next several months. Biotel’s subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.

Current liabilities increased to $1,476,000 at December 31, 2008, compared to $1,408,000 on June 30, 2008. The increase is primarily due to the increase in accrued income taxes.

Biotel has long term liabilities consisting of deferred taxes payable totaling $225,000. Biotel has no long term debt.

As of December 31, 2008, stockholders’ equity had increased to $5,320,000 from $4,702,000 at June 30, 2008. The increase in stockholders’ equity was a result of the Company’s continued profitability.

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

Item 3:Qualitative and Quantitative Disclosure about Market Risk

Not applicable.

Item 4:Controls and Procedures

(a)          As of December 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 first half of fiscal 2009 in Biotel’s internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

Part II

Item 1.Legal Proceedings. Not applicable.

Item 1A.Risk Factors. Not applicable.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.

Item 3.Defaults Upon Senior Securities. Not applicable.

Item 4.Submission of Matters to a Vote of Security Holders. Not applicable.

Item 5.Other Information. On February 12, 2009, Biotel issued a news release containing its financial results for the period ending December 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 February 12, 2009, containing the Company’s financial results for the period ending December 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:  February 12, 2009	By:	/s/ B. Steven Springrose
		Its:  Chief Executive Officer and President
Date:  February 12, 2009	By:	/s/ Judy E. Naus
		Its:  Chief Financial Officer

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