Biotel (BTELE) 10-Q 2011 Q1 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 September 30, 2010.
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.

Yesx Noo

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 fileroAccelerated filero Non-Accelerated filero Smaller reporting companyx

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

The number of shares of registrant’s common stock, par value $0.01 per share, outstanding as of November 12, 2010, was 2,783,827.

BIOTEL INC.
INDEX

PART I			Page Number
	Item 1:	Financial Information	2
		Consolidated Balance Sheets – September 30, 2010 and June 30, 2010.	2
		Consolidated Statements of Income – Three Months ended September 30, 2010 and 2009	3
		Consolidated Statements of Cash Flows – Three Months ended September 30, 2010 and 2009	4
		Consolidated Statements of Stockholders’ Equity – Three Months ended September 30, 2010 and 2009	5
		Notes to Consolidated Financial Statements (Unaudited)	6
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3:	Qualitative and Quantitative Disclosure about Market Risk	15
	Item 4:	Controls and Procedures	15
PART II
	Item 1 and 1A:	Not applicable	15
	Item 2:	Not applicable	15
	Item 3 and 4:	Not applicable	16
	Item 5:	Not applicable	16
	Item 6:	Exhibits	16
	Signatures		17

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Part I

Item 1: Financial Information

BIOTEL INC.
CONSOLIDATED BALANCE SHEETS

	September 30, 2010 Unaudited		June 30, 2010 *
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,811,705	$	1,576,651
Trade accounts receivable, net of allowance for doubtful accounts of $40,690 at September 30 and June 30, 2010		1,994,516		2,066,917
Income taxes receivable		78,104		80,501
Inventories, net		1,379,709		1,311,933
Deferred tax asset		316,221		316,221
Prepaid expenses		267,883		247,597
Total Current Assets		5,848,138		5,599,820
PROPERTY & EQUIPMENT, Net		954,509		985,030
OTHER ASSETS
Goodwill		695,551		695,551
Other assets		12,400		13,820
Total Other Assets		707,951		709,371
	$	7,510,598	$	7,294,221
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	809,845	$	773,646
Accrued payroll and related liabilities		196,521		246,576
Deferred service contract revenue		63,330		72,941
Unearned revenue		58,100		149,200
Other accrued expenses		326,779		322,987
Income taxes payable		106,065		—
Total Current Liabilities		1,560,640		1,565,350
LONG-TERM LIABILITIES
Deferred tax liability		343,232		343,232
COMMITMENTS AND CONTINGENCIES (See Note 9)
Total Liabilities		1,903,872		1,908,582
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; 2,783,827 shares issued at September 30, 2010 and June 30, 2010		27,838		27,838
Additional paid-in capital		2,168,535		2,168,015
Retained earnings		3,410,353		3,189,786
Total Stockholders’ Equity		5,606,726		5,385,639
	$	7,510,598	$	7,294,221

*Derived from the 10K for the year ended June 30, 2010.

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

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BIOTEL INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited

	For the three months ended September 30,
	2010			2009
SALES AND SERVICES	$	3,123,814		$	3,263,307
COST OF SALES AND SERVICES		1,789,124			1,966,770
GROSS PROFIT		1,334,690			1,296,537
OPERATING EXPENSES
Selling and administrative		702,749			666,365
Research and development		302,353			406,869
Total operating expenses		1,005,102			1,073,234
INCOME FROM OPERATIONS		329,588			223,303
OTHER INCOME (EXPENSE)
Interest income		1,434			1,424
Miscellaneous		(1,157	)		(14,250	)
Total other income (expense)		277			(12,826	)
NET INCOME BEFORE PROVISION FOR INCOME TAXES		329,865			210,477
PROVISION FOR INCOME TAXES		109,298			82,322
NET INCOME	$	220,567		$	128,155
INCOME PER SHARE
BASIC	$	0.08		$	0.05
DILUTED	$	0.08		$	0.04

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

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BIOTEL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

	For the three months ended September 30,
	2010			2009
OPERATING ACTIVITIES
Net income	$	220,567		$	128,155
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		102,525			93,911
Stock-based compensation		520			519
Deferred income taxes		—			(308	)
Decrease in refundable income taxes		2,397			—
Decrease in allowance for doubtful accounts		—			9,924
Increase (decrease) in inventory valuation allowance		22,307			(750	)
Loss on disposal of property and equipment		1,157			—
Changes in deferred and accrued amounts
Trade accounts receivable		72,401			365,870
Prepaid expenses		(20,286	)		(210,693	)
Inventories		(90,083	)		308,857
Other assets		1,420			—
Trade accounts payable		36,199			47,769
Accrued payroll and related liabilities		(50,055	)		(59,665	)
Other accrued expenses		3,792			(23,770	)
Unearned revenue		(91,100	)		—
Deferred service contract revenue		(9,611	)		(11,159	)
Income taxes payable		106,065			(197,178	)
Net cash provided by operating activities		308,215			451,482
INVESTING ACTIVITIES
Purchases of property and equipment		(75,511	)		(60,036	)
Proceeds from sale of property and equipment		2,350			750
Net cash used for investing activities		(73,161	)		(59,286	)
Net increase in cash and cash equivalents		235,054			392,196
CASH AND CASH EQUIVALENTS AS OF JUNE 30, 2010 and 2009		1,576,651			1,160,409
CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30, 2010 and 2009	$	1,811,705		$	1,552,605
CASH PAID FOR
Interest	$	—		$	—
Income Taxes	$	—		$	279,500

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

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BIOTEL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended September 30, 2010 and 2009

	Common Stock				Additional Paid-In Capital		Retained Earnings
	Amount		Shares						Total
Balance, June 30, 2009	$	27,638		2,763,827	$	2,158,638	$	3,472,663	$	5,658,939
Stock-based compensation		—		—		519		—		519
Net income		—		—		—		128,155		128,155
Balance, September 30, 2009	$	27,638		2,763,827	$	2,159,157	$	3,600,818	$	5,787,613
Balance, June 30, 2010	$	27,838		2,783,827	$	2,168,015	$	3,189,786	$	5,385,639
Stock-based compensation		—		—		520		—		520
Net income		—		—		—		220,567		220,567
Balance, September 30, 2010	$	27,838		2,783,827	$	2,168,535	$	3,410,353	$	5,606,726

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

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BIOTEL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – BASIS OF PRESENTATION

          The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K for the fiscal year ended June 30, 2010, filed by Biotel Inc. (the “Company”) on September 28, 2010.

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

Recently Issued Accounting Standards

          In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “TheFASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes theFASB Accounting Standards Codification^TM(“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands forAccounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”). In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105–Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009. These changes will not have an impact on the Company’s financial position or results of operations but will change the referencing system for accounting standards.

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NOTE 2 – INVENTORIES

          As of September 30, 2010 and June 30, 2010, inventories consist of the following:

	September 30, 2010			June 30, 2010
Raw materials and supplies	$	1,441,336		$	1,308,624
Finished goods		188,630			231,339
Evaluation units and replacements		8,693			8,612
		1,638,659			1,548,575
Valuation allowance		(258,950	)		(236,642	)
	$	1,379,709		$	1,311,933

NOTE 3 – WARRANTY RESERVE

          Biotel provides warranties against defects in materials and workmanship in our products. Warranty periods for our products range from 90 days to two years. The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer. The Company records a liability for estimated costs that may be incurred under its warranties based on recorded sales. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed our expectations. The Company periodically assesses the adequacy of its recorded liability and adjusts the balance as necessary. At September 30, 2010 and June 30, 2010, the warranty reserve totaled $236,225 and $234,430, respectively. Warranty reserve is included in Other Accrued Expenses. The following is a reconciliation of the aggregate reserve for warranty liability as of September 30, 2010 and 2009.

	September 30, 2010			September 30, 2009
Beginning of Period, June 30, 2010 and 2009	$	234,430		$	186,424
Claims Paid		(68,868	)		(20,956	)
Additional warranties issued and revisions in estimates of previously issued warranties		70,663			21,984
End of Period, September 30, 2010 and 2009	$	236,225		$	187,452

NOTE 4 – STOCK-BASED COMPENSATION

          The Company accounts for compensation cost under its stock option plan in accordance with the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC).

          Options to purchase shares of the Company’s common stock are granted at a price not less than 100% of the fair market value of the common stock, as determined by the Board of Directors using the best available market data, on the date the options are granted. As of September 30, 2010 and 2009, Biotel Inc. had 141,000 and 211,000 outstanding options, respectively. Currently, option prices range from $.625 to $2.05 per share with a weighted average remaining contract life of 2.91 years. During the three months ended September 30, 2010 and 2009, no options were exercised. Option vesting and expiration is determined by the Board of Directors at the time the options are awarded. No options may be awarded with an expiration greater than 10 years.

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

	Outstanding				Exercisable
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Balance at June 30, 2009		211,000	$	1.6391		198,500	$	1.6171
Balance at September 30, 2009		211,000	$	1.6391		201,000	$	1.6206
Balance at June 30, 2010		141,000	$	1.6793		133,500	$	1.6537
Balance at September 30, 2010		141,000	$	1.6793		133,500	$	1.6537

          The total intrinsic value of options outstanding and exercisable at September 30, 2010 was $0.

NOTE 5 – INCOME TAXES

          The components of the provision for income taxes are as follows for the three months ended September 30, 2010 and 2009:

	2010		2009
Current provision for taxes	$	109,298	$	82,322

          A reconciliation of income tax provision at the statutory rate to the Company’s effective rate is as follows:

	2010			2009
Computed at the federal statutory rate		34.0	%		34.0	%
State income taxes		3.3	%		3.3	%
Other		(4.2	%)		1.8	%
		33.1	%		39.1	%

NOTE 6 – 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, 2010 were 2,783,827 and 2,745,447, respectively, and for the three months ended September 30, 2009 were 2,763,827 and 2,865,726, respectively.

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NOTE 7 – REVOLVING LINE OF CREDIT

          The Company has a $1,500,000 credit line with a bank. The line bears interest at the bank’s prime rate (3.25% at September 30, 2010) plus .25%. The line of credit was renewed on February 5, 2010 and will expire on February 5, 2011. There was no outstanding balance on this line of credit as of September 30, 2010 and 2009.

NOTE 8 – OPERATIONS AND INDUSTRY SEGMENTS

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

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

	Three months ended September 30, 2010
	OEM Medical Sales & Services		Direct Medical Equipment Sales		Corporate			Totals
Domestic revenues	$	2,749,115	$	112,051	$	—		$	2,861,166
International revenues		248,041		14,607		—			262,648
Revenues from external customers		2,997,156		126,658		—			3,123,814
Income tax provision		81,476		1,936		25,886			109,298
Depreciation and amortization		101,225		—		1,300			102,525
Segment profit		167,538		2,779		50,250			220,567
Goodwill		695,551		—		—			695,551
Total segment assets		5,007,884		73,877		2,428,837			7,510,598
Purchase of property and equipment		75,511		—		—			75,511
	Three months ended September 30, 2009
	OEM Medical Sales & Services		Direct Medical Equipment Sales		Corporate			Totals
Domestic revenues	$	2,951,176	$	106,975	$	—		$	3,058,151
International revenues		177,937		27,219		—			205,156
Revenues from external customers		3,129,113		134,194		—			3,263,307
Income tax provision (credit)		116,616		7,961		(42,255	)		82,322
Depreciation and amortization		88,990		—		4,921			93,911
Segment profit (loss)		196,800		13,381		(82,026	)		128,155
Goodwill		695,551		—		—			695,551
Total segment assets		5,176,267		57,088		2,053,957			7,287,312
Purchase of property and equipment		59,186		—		850			60,036

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NOTE 9 – COMMITMENTS AND CONTINGENCIES

          Carolina Medical, Inc., a subsidiary of the Company that was dissolved in November, 2006, was the subject of environmental oversight by the North Carolina Division of Environmental and Natural Resources (DENR) in Surry County, North Carolina, involving alleged ground water contamination coming from property that had been previously owned/or leased by Carolina Medical, Inc. In June, 2006, Carolina Medical entered into a Termination of Lease, Release, Hold Harmless and Indemnification with the landlord, King Investment Partners, related to any environmental matters or potential environmental matters at the King Investment Partners’ property located in King, North Carolina. In the Agreement, King Investment Partners acknowledged full and complete satisfaction of any and all past, present or future claims and causes of action, including any environmental claims related to the property, and agreed to indemnify the Company for any environmental claims related to the property. In order to protect the Company from any claim with respect to the property that may exceed the landlord’s ability to indemnify the Company, Biotel has obtained insurance to cover any liability for environmental claims that the Company may have relating to the property up to a maximum of $10 million during the ten-year period ending in 2019. The annual cost of the insurance is $16,000.

          On April 2, 2009, the Company entered into a Merger Agreement (the “Merger Agreement”) with CardioNet, Inc. (“CardioNet”) pursuant to which CardioNet was to acquire the Company’s outstanding securities for $4.82 per share (approximately $14 million in cash). In a letter dated July 14, 2009, CardioNet advised the Company that it was terminating the Merger Agreement due to the Company’s breach of a covenant to withdraw and terminate a business relationship with ScottCare Corporation (“ScottCare”). On July 15, 2009, CardioNet notified the Company that the Company owed CardioNet $1.4 million for a termination fee and expenses as a result of CardioNet’s termination of the Merger Agreement. The Company believes CardioNet’s termination of the Merger Agreement was without merit. On July 16, 2009, the Company commenced a lawsuit in Hennepin County District Court, State of Minnesota, claiming CardioNet breached and improperly terminated the Merger Agreement. The Company is seeking specific performance and damages. On August 3, 2009, the case was removed to the United States District Court, District of Minnesota. On September 4, 2009, CardioNet submitted an answer and counterclaim denying the Company’s claims and asserting a counterclaim for the $1.4 million CardioNet claims it is owed as a result of its termination of the Merger Agreement. On February 1, 2010, CardioNet filed its Amended Answer And Counterclaims, asserting additional defenses and counterclaims against the Company. On May 28, 2010, following the completion of discovery, the Company moved for partial summary judgment dismissing CardioNet’s counterclaims and certain defenses, and that motion remains pending with the court. On November 5, 2010, CardioNet and the Company entered into a second Merger Agreement (the “2010 Merger Agreement”) and a Settlement Agreement and Release (the “Settlement Agreement”). The 2010 Merger Agreement provides for the acquisition of the Company by CardioNet by the purchase of the Company’s outstanding shares of common stock for a total of $11 million adjusted up or down based on the Company’s working capital just prior to the closing of the transaction. The 2010 Merger Agreement is subject to the approval of the Company’s shareholders and other customary closing conditions. The Settlement Agreement provides that upon closing of the 2010 Merger Agreement the lawsuit between the parties will be settled and each party released from all claims the other has against it with respect to the Merger Agreement signed in 2009. The lawsuit has been stayed pending completion of the 2010 Merger Agreement.

          On September 25, 2009, LifeWatch Services, Inc., and Card Guard Scientific Survival, Ltd., the licensee and owner, respectively, of U.S. Patent Nos. 7,542,878 B2 (the ‘878 Patent) and 5,730,143 (the ‘143 Patent) commenced an actionLifeWatch Patent Matter against Braemar, Inc. (“Braemar”), and one of its customers, eCardio Diagnostics, LLC (“eCardio”), in Federal District Court for the Northern District of Illinois, File No. 09-CV-6001, alleging that Braemar and eCardio had infringed the ‘878 and ‘143 Patents. The Supply Agreement between Braemar and eCardio provides that Braemar will hold eCardio harmless from any liability it incurs in connection with a claim that Braemar’s products violate the intellectual property rights or infringe upon any patent of a third party. Braemar and eCardio have denied the allegations, and Braemar is defending the suit on behalf of both itself and eCardio. Since the action was commenced, the Plaintiffs have dismissed their claims relating to alleged infringement of the ‘878 Patent and have continued to pursue their claims relating to the alleged infringement of the ‘143 Patent.

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          Biotel Inc. maintains product liability insurance covering its subsidiaries. There are no known product liability claims, and management presently believes that there is no material risk of loss from product liability claims.

NOTE 10 – SUBSEQUENT EVENTS

          On November 5, 2010, the Company and CardioNet, Inc. entered into a Merger Agreement pursuant to which CardioNet is to acquire the Company’s outstanding shares of common stock for $11 million, or approximately $3.84 per share, before adjustment up or down based on the Company’s working capital just prior to the close of the merger. In connection with the 2010 Merger Agreement, the Company and CardioNet entered into a Settlement Agreement and Release to settle and dismiss the outstanding lawsuit between the parties, which will be effective upon the close of the merger. The merger is subject to approval of the Company’s shareholders and other customary closing conditions.

          These financial statements have not been updated for subsequent events occurring after November 15, 2010, which is the date these financial statements were available to be issued.

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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.

          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 deemed to have an indefinite useful life and is not amortized but is subject to impairment tests performed at least annually. During fiscal 2010 and 2009, Biotel performed the required impairment tests of goodwill and determined the 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.

          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.

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          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.

          Biotel has released its Fusion product line for clinical use and is monitoring system performance under beta evaluation. Procedures performed using Fusion devices are eligible for reimbursement under MCT procedure codes. Recently, there have been published reports that CMS (Medicare) will expand MCT coverage nationwide effective January 1, 2011. Up until the present, CMS reimbursement has been available in a more limited way, substantially used by ECG scanning services operating within four Eastern states and the District of Columbia. Biotel believes that CMS nationwide coverage will increase the adoption of MCT procedure codes by private insurers, open markets for regional ECG scanning services and increase the potential for installation of MCT equipment in the nation’s hospitals and clinics. Biotel believes that some hospitals and clinics may prefer to purchase Fusion systems and arrange service support for MCT patients rather than outsource their MCT procedures.

Results of Operations

Three Months ended September 30, 2010

          Biotel’s net revenues for the three months ended September 30, 2010, were $3,124,000, 4.3% less than net revenues of $3,263,000 for the three months ended September 30, 2009. Biotel’s Braemar subsidiary has continued to make sales of its ER9W wireless event recorders but at a lower level than in the comparable quarter of fiscal year 2010. The initial stocking purchases of ER9W by a major customer have fluctuated from quarter to quarter as wireless products are rolled out to meet market demand. Such deliveries of ER9W are expected to continue through fiscal year 2011. Wireless devices may be expected to have a service life of three to five years before obsolescence. After initial stocking of wireless products, Biotel expects replacement sales levels from the customers for those products. Agility has been increasing its ECG clinical research services as a result of new contracts, partially offsetting the decline in revenues from ER9W products.

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          Gross profit was $1,335,000 for the quarter ended September 30, 2010, 2.9% favorable to gross profit of $1,297,000 for the first quarter of fiscal year 2010. Gross profit increased as a result of product mix and cost control actions. Gross profit margin improved to 42.7% for the three months ended September 30, 2010 compared to 39.7% for the three months ended September 30, 2009, primarily as a result of a reduction in workforce necessitated by the decline in revenue as a result of CardioNet’s termination of a merger agreement (see Part I. Item 1. Note 9 of Notes to Consolidated Financial Statements). Cost of sales and service decreased to $1,789,000 (57.3% of sales) for the three months ended September 30, 2010, compared to $1,967,000 (60.3% of sales) for the first quarter of fiscal year 2010. The decrease in cost of sales and service was a result of the lower sales volume and cost control efforts in the first quarter of fiscal 2011. Cost of sales and service as a percentage of revenue decreased, primarily due to product mix and cost control efforts.

          Selling, general and administrative expenses of $703,000 (22.5% of sales) for the three months ended September 30, 2010 increased from $666,000 (20.4% of sales) for the three months ended September 30, 2009. Selling, general and administrative expenses were higher in the first quarter of fiscal 2011 primarily because of legal expense incurred as a result of activities surrounding the merger agreement between Biotel and CardioNet, Inc. signed on April 2, 2009, and subsequently terminated by CardioNet. Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.

          Research and development expenditures for the first quarter of fiscal year 2011 were $302,000, a decrease of 25.7% compared to $407,000 in the first quarter of fiscal year 2010. The decrease in research and development expenses resulted primarily because heavy development activities related to a new Holter product line and ER9 Wireless technology platform and product line were funded in previous fiscal years. Expenditures for MCT wireless product development activity benefited from the ER9 Wireless technology platform developed in previous fiscal years. MCT procedures allow patients to be remotely monitored with alarms for up to 30 days, carry higher reimbursement in the United States and are believed to provide a higher diagnostic yield than traditional telephone event monitoring approaches. Biotel expects research and development investment in fiscal 2010 to be comparable to prior year levels as the Company addresses developing markets in Holter, event recording and wireless arrhythmia management.

          No interest expense was incurred in the three-month periods ended September 30, 2010 and September 30, 2009.

          Net earnings of $221,000 were posted for the first quarter of fiscal year 2011, versus net income of $128,000 in the first quarter of fiscal year 2010. The increase in net income was primarily the result of the strong gross margin and the decrease in research and development expenditures during the first three months of fiscal 2011.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

          Working capital increased to $4,287,000 at September 30, 2010, compared to $4,034,000 at June 30, 2010. The increase in working capital is largely the result of Biotel’s strong cash position at the end of the first quarter of fiscal 2011.

          Cash and cash equivalents were $1,812,000 at September 30, 2010, compared to $1,577,000 at June 30, 2010. The ratio of current assets to current liabilities (“current ratio”) was 3.75 to one at September 30, 2010 and 3.58 to one at June 30, 2010.

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          Accounts receivable decreased to $1,995,000 at September 30, 2010, versus $2,067,000 at June 30, 2010, as a result of lower revenues in the first three months of fiscal 2011. 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 three months of fiscal year 2011, $76,000 was used for capital expenditures, compared with $60,000 in the first three months of fiscal year 2010. 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 $1,380,000 as of September 30, 2010, versus $1,312,000 as of June 30, 2010. The level of inventory increased in response to customer orders to be shipped in the second quarter of fiscal 2011. Biotel’s subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.

          Current liabilities decreased slightly to $1,561,000 at September 30, 2010, compared to $1,565,000 on June 30, 2010.

          Biotel has long term liabilities consisting of deferred taxes payable totaling $343,000. Biotel has no long term debt.

          As of September 30, 2010, stockholders’ equity had increased to $5,607,000 from $5,386,000 at June 30, 2010. The increase in stockholders’ equity was primarily due to the Company’s profitability in the first three months of fiscal 2011.

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

Item 3: Qualitative and Quantitative Disclosure about Market Risk

          Not applicable.

Item 4: Controls and Procedures

(a) As of September 30, 2010, an evaluation was performed by Biotel’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon, and as of the date of, that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the registrant’s disclosure controls and procedures were effective.

(b)Changes in internal controls. There were no changes in the first three months of fiscal 2011 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.

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Item 3. Defaults Upon Senior Securities. Not applicable.

Item 4. Reserved.

Item 5. Other Information. Not applicable.

Item 6. Exhibits

Listing of Exhibits:
10.1	Merger Agreement, dated as of November 5, 2010, among Biotel Inc., Garden Merger Sub, Inc. and CardioNet, Inc.*
10.2	Settlement Agreement, dated as of November 5, 2010, between Biotel Inc. and CardioNet, Inc.*
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.

* Incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 11, 2010.

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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 15, 2010	By:	/s/ B. Steven Springrose
		Its: Chief Executive Officer and President
Date: November 15, 2010	By:	/s/ Judy E. Naus
		Its: Chief Financial Officer

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