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

                                    FORM 10-K
(Mark One)

[X]     Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934. For the fiscal year ended September 30, 1998. (Fee
        required)

[ ]     Transitional report pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934. For the transition period from ______________ to
        ______________.

                          Commission File No. 0-27186

                           RAYTEL MEDICAL CORPORATION
             (Exact name of registrant as specified in its charter)

                   DELAWARE                              94-2787342
        (State or other jurisdiction                   (IRS Employer
      of incorporation or organization)              Identification No.)

               2755 CAMPUS DRIVE, SUITE 200, SAN MATEO, CA 94403
              (Address of principal executive offices) (Zip Code)

                                 (650) 349-0800
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                         COMMON STOCK, $0.001 par value

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   [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the registrant's Common Stock held by
non-affiliates as of November 30, 1999 was $23,401,617 based on the closing sale
price of the Common Stock, as reported on the Nasdaq National Market System on
that day.

The number of shares of the registrant's Common Stock outstanding on November
30, 1999 was 8,745,127.

                      DOCUMENTS INCORPORATED BY REFERENCE:

        DOCUMENT                             WHERE INCORPORATED

Annual Report to Stockholders for
fiscal year ended September 30, 1999             PART II
Proxy Statement for the Annual Meeting to
be held on March 2, 2000                         PART III



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                                     PART I.

        This report includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed in "Item 17. Management's Discussion
and Analysis of Financial Conditions and Results of Operations - Business
Environment and Future Financial Results" and elsewhere in this report, that
could cause actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"intends," "future," "goals" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.


ITEM 1. BUSINESS

        Raytel Medical Corporation is a provider of healthcare services,
focusing on the needs of patients with cardiovascular disease ("CVD"). The
Company believes, based on its industry experience, that it is the leading
provider of remote cardiac monitoring and testing services utilizing
transtelephonic monitoring technology in the United States.

        Raytel currently manages two hospital-based heart centers, one of which
is in Southern California and the second of which is in Southeast Texas. The
Company also owns and operates seven freestanding cardiovascular diagnostic
facilities and two hospital-based cardiac catheterization laboratories, and
manages three physician practices. In addition, the Company provides outpatient
diagnostic imaging services through operating and investment interests in seven
freestanding imaging centers, and manages a diagnostic imaging provider network
that operates in eight mid-Atlantic states.

        Raytel was incorporated in California in October 1981 under the name
Ratel Labs, Inc. and changed its name to Raytel Medical Imaging, Inc. in 1983
and to Raytel Systems Corporation in 1985. In August 1987, the Company was
reincorporated in Delaware under the name Raytel Systems Corporation. Following
the organization of its majority-owned subsidiary Raytel Corporation in 1990,
the Company changed its name to Raytel Holding Corporation. In October 1992, the
Company changed its name to Raytel Medical Corporation. Unless the context
otherwise requires, "Raytel" or the "Company" as used herein refers to Raytel
Medical Corporation, a Delaware corporation, and its consolidated subsidiaries.
The Company's executive offices are located at 2755 Campus Drive, Suite 200, San
Mateo, California 94403, and its telephone number is (650) 349-0800.


RECENT CORPORATE DEVELOPMENTS

        In September 1999, the Company announced that it had retained U.S.
Bancorp Piper Jaffray as its financial advisor to assist the Company in
considering a range of strategic alternatives for maximizing shareholder value.
These alternatives include possible strategic alliances, acquisitions or
mergers, the sale of all or some of the Company's businesses, or the continued
operation of the businesses as an independent company. There are no pending
agreements or commitments concerning any of these alternatives.

Heart Center Operations

        In addition, during the fiscal year ended September 30, 1999, the
following developments affecting the Company's heart center operations took
place:



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        The Baptist Hospital of Southeast Texas

        During February 1999, The Baptist Hospital of Southeast Texas ("Baptist
Hospital") merged with the Memorial Hermann Hospital System, based in Houston,
Texas, and as a result of that merger, Memorial Hermann and the Company agreed
to modify the existing management agreement entered into in October 1997.
Pursuant to the October 1997 agreement, the Company undertook the management of
the existing cardiac catheterization facility located at the hospital and the
development of a portion of the hospital as the Raytel Heart Center at Baptist
Hospital, which began operations in September 1998. Effective February 27, 1999,
the original agreement was terminated, and effective March 1, 1999, a revised
management services agreement was entered into between Raytel and Baptist
Hospital. The revised agreement provides that Raytel will perform multiple
functions at the Baptist Hospital to be designated the center of excellence for
the management of cardiovascular disease. Raytel's responsibilities include the
management of the center of excellence and the development of specialty clinics
to support the cardiovascular program.

        Granada Hills Community Hospital

        Effective March 27, 1999, Raytel and Granada Hills Community Hospital
("GHCH") terminated the management consulting agreement entered into in
September 1998 under which the Company managed the heart program at the
hospital, including the existing cardiac catheterization facility located at the
hospital, as the result of an advisory opinion from the Regional Office of the
Health Care Finance Agency for Region IX which raised issues regarding the
hospital's eligibility to continue to participate in the Medicare program. As a
result of this opinion, Raytel and GHCH entered into a new consulting services
agreement which provides for Raytel to perform more limited consulting services
for GHCH, including quality management and assurance, technology assessment and
management, strategic planning and other services.

        As a result of these developments and due to changes in the regulatory
environment impacting the development of heart centers, the Company is not
currently pursuing new opportunities in this area but will continue to manage
the two heart centers currently under contract.

        Development Agreements with St. Jude Medical, Inc.

        In June 1997, the Company entered into a licensing and joint development
agreement with Pacesetter, a wholly owned subsidiary of St. Jude Medical, Inc.
("St. Jude") for the development of a monitoring device for its new pacemaker
product. In November 1998, the Company entered into an exclusive agreement with
Ventritex, Inc., a wholly owned subsidiary of St. Jude, to complete the
development of the Housecall(TM) dedicated transtelephonic system for monitoring
Ventritex's implantable cardioverter defibrillators ("ICDs") and to monitor all
of Ventritex's existing Housecall(TM) ICD patients. On November 8, 1999, Raytel
and St. Jude Medical, Inc. announced the launch of the Housecall(TM)
Transtelephonic Monitoring System, the first commercially available system
capable of downloading a complete set of diagnostic data from an implantable
cardioverter-defibrillator (ICD) over the telephone. Under an exclusive
agreement with St. Jude Medical, Raytel will manufacture the Housecall
transmitters and receiving units. Raytel will also monitor St. Jude Medical ICD
patients with the Housecall system through Raytel Cardiac Services, Inc.

OVERVIEW OF CARDIOVASCULAR DISEASE AND ITS TREATMENT

        Cardiovascular disease is the leading cause of death in the United
States and represents the highest percentage of hospital patient days of stay.
CVD is a category of illnesses that generally develop progressively, and in many
cases asymptomatically, over a number of years. As a result, CVD frequently goes
undiagnosed until the patient suffers an acute episode such as a stroke or heart
attack. CVD manifests itself in a number of disease states, such as
atherosclerosis, electrophysiological defects, valvular dysfunction, congestive
heart failure, hypertension and congenital defects. Based upon 1996



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data, the American Heart Association (the "AHA") estimates that approximately
58.8 million people in the United States suffer from one or more forms of CVD.
According to the 1996 estimates, CVD claimed approximately 959,227 lives in
1996, representing 41.4% of all deaths, and of that total, coronary heart
disease (heart attack) caused approximately 476,124 deaths in the United States
during 1996 -- the single leading cause of death in the U.S. Due to the aging of
the United States population, the Company believes that the need for medical
services to diagnose and treat CVD will continue to increase significantly in
the future.


BUSINESS STRATEGY

        Raytel's principal objective is to maintain and extend its leadership
position as a provider of cardiac transtelephonic monitoring and testing
services. The Company is pursuing this objective through the following
strategies:

        Expand the Company's Telemedical Business. The Company intends to
utilize its technology and expertise to address additional transtelephonic
applications in the treatment and management of cardiac patients and thereby
widen the range of services that it offers. The Company believes that the focus
on new technologies and service opportunities, such as the development of
Housecall system for downloading diagnostic data from an implantable
cardioverter-defibrillator (ICD) over the telephone, will enhance its ability to
market its cardiac monitoring and testing services.

        Develop Affiliations with Providers. Raytel intends to expand its
telemedical business in cooperation with cardiology groups and hospitals with a
reputation for the delivery of high quality services among referring primary
care physicians and the general population in the communities that they serve.

        Expand Managed Care Relationships. The Company believes that interaction
with managed care organizations will become an increasingly important element in
the provision of cardiac care, including care for Medicare patients, and that
third-party payors will increasingly prefer to contract with providers offering
a wide range of cardiovascular services provided on a multi-state or regional
basis. Raytel actively markets its existing healthcare services to managed care
plans and provides value added services.

        Pursue Strategic Acquisitions. Raytel has built its existing
organization largely through a series of acquisitions. The Company believes that
it is often more cost-effective to acquire and reconfigure an existing business
than to establish a new business. The Company believes that its experience in
identifying, structuring and completing acquisitions of healthcare service
organizations and effectively integrating these organizations will enable it to
take advantage of future acquisition opportunities that arise as a result of the
trends toward consolidation of healthcare service providers. Raytel intends to
explore opportunities to expand its cardiac businesses through additional
strategic acquisitions.


RAYTEL CARDIAC MONITORING AND TESTING SERVICES

        The Company is the largest provider of cardiac monitoring and testing
services in the United States utilizing transtelephonic pacemaker monitoring
("TTM"), cardiac event detection ("CEDS") and Holter monitoring technologies.
The Company believes that its TTM-based services are the most cost-effective
means of testing the performance of implanted cardiac pacemakers and detecting
symptoms of transient arrhythmias.



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        Pacemaker Monitoring

        The Company believes, based on its industry experience, that it is the
largest provider of transtelephonic pacemaker monitoring services in the United
States, currently serving over 80,000 patients with implanted pacemaker systems.

        Pacemaker systems are designed to assist the human heart in maintaining
an adequate pumping rate. A pacemaker is an electronic device that is implanted
in the patient and is designed to monitor and, if necessary, to stimulate the
patient's heartbeat. As it senses the heart's failure to respond to normal
physiologic signals, the pacemaker emits electrical pulses directly into the
atrium and/or the ventricle of the heart, causing the heart muscle to contract
and pump blood through the patient's body. A pacemaker system consists of the
generator which includes the device and a battery and the leads from the device
to the patient's heart.

        The purpose of pacemaker monitoring is to enable the patient to maintain
a normal lifestyle without the fear of an unexpected system failure. Pacemaker
monitoring can detect failures in the pacemaker system as well as changes in the
patient's heart rhythms that can cause the system to become ineffective. In
TTM-based pacemaker monitoring, the pacemaker system and its interaction with
the patient's heart is tested by conducting periodic, prescheduled ECG
examinations. The patient is provided with a battery-powered ECG transmitter
which detects the heart's impulses from the surface of the skin, converts these
impulses into an acoustic signal and transmits the signal over ordinary
telephone lines to one of the Company's three technical operations centers,
where the signal is converted and displayed on a computer screen or strip chart
recorder.

        The Company's pacemaker monitoring services are prescribed by the
patient's physician. After receipt of a prescription and enrollment by the
Company, the patient is sent a transmitter and trained to use the device over
the telephone by one of the Company's technologists. Unlike most
physician-operated monitoring services, the Company's monitoring services are
provided 24 hours a day, seven days a week in order to accommodate unscheduled
calls from patients experiencing problems.

        Each patient is tested on a schedule recommended by his or her
prescribing physician with such prescription updated annually. The Company
generates most of its pacemaker monitoring revenues from reimbursement by
Medicare and payors of supplemental Medicare benefits. Patients are typically
tested between three and twelve times per year. The Company is reimbursed for
pacemaker monitoring services on a per-call basis. Routine pacemaker testing is
performed in accordance with a prearranged, computer generated schedule. A
trained technologist telephones the patient and requests that the patient
initiate transmission of ECG data which is received by recorders in one of the
Company's technical operations centers. Once a continuous graph displaying the
rhythm of the heart and the pacemaker is generated, this data is interpreted by
the technologist to determine the status of the implanted pacemaker and its
relationship to the patient's cardiac rhythm. If problems with the pacemaker
system are noted or a serious abnormality is detected, including an abnormality
in the heart's own rhythm (an arrhythmia), the patient's physician is notified
immediately by telephone. After each test, the results are promptly reviewed by
a supervising technologist and a cardiologist and a written report is mailed to
the patient's physician.

        Cardiac Event Detection Service

        The Company operates the Cardiac Event Detection Service ("CEDS"), which
tests and documents transtelephonically an ambulatory patient's cardiac rhythm
irregularities while the patient is experiencing symptoms. CEDS testing aids in
the diagnosis of transient cardiac arrhythmias, including atrial and ventricular
abnormalities, such as tachycardia, which causes the heart to beat at an
abnormally rapid and potentially life threatening rate. During its fiscal year
ended September 30, 1999, Raytel tested approximately 37,000 patients for
potential transient arrhythmic events. The Company believes, based on its
industry experience, that it is the largest provider of these services in the
United States.



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        Upon enrollment in its CEDS program, the Company provides the patient
with a cardiac event recorder for a testing period lasting up to 30 days. Upon
experiencing symptoms, the patient activates the event recorder to capture one
or more ECGs which the patient will later transmit to one of the Company's two
CEDS technical operations centers for analysis. Skilled technologists, under the
supervision of cardiac care nurses and cardiologists, make preliminary
evaluations of these transmissions for cardiac irregularities. Unlike similar
services offered by individuals or small clinics, the Company's centers are
staffed 24 hours a day, seven days a week to respond to a patient's needs on a
timely basis. Emergency medical response is initiated for CEDS patients when
necessary. Regardless of the number of calls placed, payors reimburse the
Company on a 30-day program basis for its CEDs service.

        Holter Monitoring Services

        The Company believes, based on its industry experience, that it is the
largest provider of Holter monitoring services in the United States, currently
serving over 51,000 patients annually. The Company processed approximately
70,000 Holter monitoring tapes during fiscal 1999. Holter monitoring tests and
documents an ambulatory patient's cardiac rhythm irregularities while the
patient is fitted with a recording device, with leads attached to the patient's
chest, typically for a single 24-hour period. Should Holter monitoring or other
testing procedures fail to detect an arrhythmia event in a symptomatic patient,
the patient's physician often will refer the patient to an event detection
service such as CEDs.

        Implantable Cardioverter Defibrillators

        On November 8, 1999, Raytel and St. Jude Medical, Inc. announced the
launch of the Housecall(TM) Transtelephonic Monitoring System, the first
commercially available system capable of downloading a complete set of
diagnostic data from an implantable cardioverter defibrillators ("ICD") over the
telephone. ICDs are pacemaker-like devices that can sense ventricular
tachyarrhythmias (life-threatening fast heart rates) and automatically deliver
an electrical shock to restore a normal rhythm. The number of times the ICD was
activated is also monitored. Currently, patients with ICDs must return to the
physician's office on a routine basis in order to have the ICD's battery tested
and for an examination of the ICD system integrity. Raytel will also monitor St.
Jude Medical ICD patients with the Housecall system through Raytel Cardiac
Services, Inc. The Housecall(TM) system will reduce the frequency of physician
office visits by extending the transtelephonic monitoring procedures presently
used for pacemakers to ICDs. The new system will enable trained technicians to
interrogate the device's memory and transmit both stored data as well as
real-time clinical and technical information on the patient's cardiac activity
and ICD status. The test results are interpreted by trained technicians and a
comprehensive report is communicated to the patient's physician for clinical
evaluation. Under the exclusive agreement signed in November 1998 with St. Jude
Medical, Raytel will manufacture the Housecall transmitters and receiving units.

        Training and Quality Assurance

        All of the Company's pacemaker monitoring technologists undergo a formal
six-week training program that includes basic cardiac physiology, the operation
of pacemaker devices, the interaction of pacemaker systems with the heart, and
the administration and interpretation of ECG tests. As technologists become more
experienced, they are trained to monitor increasingly complex pacemaker systems.
Technologists administering the Company's CEDS and Holter services undergo
training in the interpretation of ECG data to detect symptoms of cardiac
arrhythmia.

        The Company maintains a rigorous quality assurance program.
Board-certified cardiologists direct the Company's technologists with special
training in the fields of cardiac pacing and electrophysiology. Each
pacemaker-monitoring test is separately reviewed by a supervising technologist
and a cardiologist. CEDS transmissions and Holter test results are evaluated by
technologists under the supervision of cardiac care nurses and cardiologists. In
order to comply with certain requirements of new federal regulations regarding
independent diagnostic testing facilities (see "Government



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Regulation"), the State of Connecticut has approved Raytel's training program
for college credit toward a bachelor of science degree within the Connecticut
state university system.

RAYTEL CARDIOVASCULAR FACILITIES

        The Company currently operates cardiac catheterization laboratory within
a licensed acute care hospital and operates eight additional freestanding
diagnostic cardiovascular facilities, one of which is associated with a
multi-specialty medical practice in Florida which the Company owns and manages.
Four of the seven cardiovascular diagnostic facilities are located in Texas and
two are located in Louisiana.

        In September 1998, the Company entered into a revised 10-year management
consulting agreement with GHCH in Southern California under which it is managing
an on-site heart center. Effective March 27, 1999, Raytel and Granada Hills
Community Hospital terminated the management consulting agreement as the result
of a request for an advisory opinion from the Regional Office of the Health Care
Finance Agency for Region IX. Raytel and GHCH entered into the 5-year consulting
services agreement which provides for Raytel to perform certain specified
consulting services to the hospital, including quality management and assurance,
technology assessment and management, strategic planning and other services.

        In October 1997, the Company entered into a 10-year agreement with
Baptist Hospital. Pursuant to this agreement, the Company developed and manages
a fully integrated heart center with a cardiac catheterization laboratory.
During 1998, Baptist Hospital merged with the Memorial Hermann Hospital System,
based in Houston, Texas, and as a result of that merger, Memorial Hermann and
the Company agreed to modify the existing management agreement. Effective
February 27, 1999, the original agreement was terminated and effective March 1,
1999, a revised 3-year management services agreement was entered into between
Raytel and Baptist Hospital. The revised agreement provides that Raytel will
perform multiple functions at the Baptist Hospital to be designated the center
of excellence for the management of cardiovascular disease. Raytel's
responsibilities include the management of the center of excellence and the
development of specialty clinics to support the cardiovascular program.

        Cardiovascular Diagnostic Facilities

        The Company operates three hospital-based cardiac catheterization
laboratories and seven free-standing cardiovascular diagnostic facilities (the
"Cardiovascular Diagnostic Facilities"). Cardiac catheterization utilizes
catheters and sophisticated diagnostic instruments to evaluate the functioning
of the heart and the coronary arteries. A narrow, flexible tube, or catheter, is
inserted through a main artery in the leg or arm and guided into the patient's
coronary arteries, where a cardiologist can use the catheter to perform various
tests to diagnose the nature and extent of the patient's coronary artery
disease.

        The Cardiovascular Diagnostic Facilities are located in Texas,
Louisiana, Florida and California. At each Cardiovascular Diagnostic Facility,
the Company provides the facilities, equipment, supplies and support personnel
necessary for the cardiologist to perform interventional cardiac imaging and
peripheral therapeutic procedures. In three of the Cardiovascular Diagnostic
Facilities, the Company also provides nuclear cardiology diagnostic services.
Seven of the Cardiovascular Diagnostic Facilities are owned by limited
partnerships, and the Company, through a separate wholly-owned subsidiary for
each limited partnership, serves as the corporate general partner which acts as
the day-to-day manager of each facility. The Company owns a majority interest in
six of the facilities and owns 100% of the Florida facility. The limited
partnerships have a term of 20 years or more in all but one facility and that
one expires on December 31, 2001.

        Two of the hospital-based Cardiovascular Diagnostic Facilities are
located in Texas. Each is operated under contracts with the respective hospitals
under which Raytel provides equipment, technical



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staff and certain management and administrative services. The hospitals provide
space for the facility within the hospital, all supplies, and credentialing of
physicians. The Company receives a fee from the hospital on a per procedure
basis, and in one instance with a guaranteed minimum monthly payment. One
contract expires in March 2000, and the other contract expires in December 2000.
In addition to diagnostic catheterization procedures, one of these facilities
currently performs pacemaker installations, peripheral vascular angioplasty and
peripheral stent installations. There can be no assurance that the Company will
be successful in negotiating extensions of the terms of the contracts.

        Physicians practicing at the Cardiovascular Diagnostic Facilities are
not obligated to refer patients to or practice at these facilities and in many
cases also practice at nearby hospitals.

        Northern California Heart Center

        In January 1996, the Company initiated the development of a diagnostic
cardiac catheterization facility (the "Northern California Heart Center") in
Fremont, California. In November 1996, the Company completed the construction of
the facility. In September 1997, the regional office of Licensing and
Certification of the California Department of Health Services denied the request
for a license to operate the facility. The Company has filed an administrative
appeal of the decision by the regional office and the status of the appeal is
still pending. In addition, the Company filed a Petition for Writ of Mandate
requesting that the Superior Court of California order the Department of Health
Services to issue the appropriate license. The Superior Court denied the
Company's request for a Writ of Mandate and returned the matter to the
administrative appeals office of the Department of Health Services. In December
1997, the Company filed an appeal of the Department's decision denying the
application for the appropriate license to operate the facility. In July 1998,
the Company and the Department presented the case to an administrative law
judge. Final briefs were submitted during November 1998 and a final decision of
the administrative law judge was received in late March 1999. Nearly eight
months after the administrative hearing, the administrative law judge for the
California Department of Health Services issued its decision denying the
Company's application for licensure of its freestanding cardiac catheterization
laboratory in Fremont. See "Item 3. Legal Proceedings."

        Raytel Heart Center at Granada Hills Community Hospital

        Effective March 27, 1999, Raytel and GHCH terminated the management
consulting agreement which they entered into effective September 1998, as the
result of an advisory opinion from the Regional Office of the Health Care
Finance Agency for Region IX which raised issues regarding the hospital's
eligibility to continue to participate in the Medicare program. Effective with
the termination of the management consulting agreement, the Company entered into
a revised 5-year consulting services agreement with GHCH, pursuant to which
Raytel provides consulting services to the hospital with regard to the
operations of the hospital's integrated heart center. GHCH is a general acute
care hospital located in the San Fernando Valley area of Los Angeles. The
hospital's heart program includes cardiac catheterization procedures, stress
testing, ultrasound and other diagnostic services, cardiovascular and
cardiothoracic surgical procedures and cardiac rehabilitation programs.

        Raytel and GHCH entered into the 5-year Consulting Services Agreement
which provides for Raytel to perform certain specified consulting services to
Granada Hills Community Hospital, including quality management and assurance,
technology assessment and management, strategic planning and other services. All
medical services at the facility are the responsibility of the hospital and its
medical staff.

        Through an affiliated medical group, the Company and GHCH entered into
an exclusive agreement for Raytel to be the exclusive provider of cardiac
surgery services at the hospital and to manage the hospital's cardiovascular
surgery program. The Company has entered into an agreement with a leading
cardiothoracic surgeon to provide the cardiac surgery services at the hospital.
The initial term of the agreement coincides with the term of the consulting
agreement with the hospital to perform consulting services regarding the heart
program. The affiliated medical group is owned by David E.



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Wertheimer, M.D., who purchased all of the shares of capital stock from F. David
Rollo, M.D., who resigned in October 1999 as the Company's Executive Medical
Director. The Company, through a subsidiary, provides management services to the
medical group.

        Raytel Heart Center at The Baptist Hospital of Southeast Texas

        In October 1997, the Company entered into a 10-year agreement with The
Baptist Hospital of Southeast Texas in Beaumont, Texas. Pursuant to this
agreement, the Company developed and manages a fully integrated heart center
with a cardiac catheterization laboratory. During 1998, The Baptist Hospital of
Southeast Texas merged with the Memorial Hermann Hospital System, based in
Houston, Texas, and as a result of that merger, Memorial Hermann and the Company
agreed to modify the existing management agreement. Effective February 27, 1999,
the original agreement was terminated and effective March 1, 1999, a revised
3-year management services agreement was entered into between Raytel and The
Baptist Hospital of Southeast Texas. The revised agreement provides that Raytel
will perform multiple functions at the Baptist Hospital to be designated the
Center of Excellence for the management of cardiovascular disease. Raytel's
responsibilities include the management of the Center of Excellence and the
development of specialty clinics to support the cardiovascular program. The
Baptist Hospital is a general acute care hospital. The hospital's heart program
includes cardiac catheterization procedures, stress testing, ultrasound and
other diagnostic services, cardiovascular and cardiothoracic surgical procedures
and cardiac rehabilitation programs.

RAYTEL PHYSICIAN PRACTICE MANAGEMENT

        The Company continues to manage two cardiology practices, one in
Beaumont, Texas, and the other in Granada Hills, California. Through its
acquisition of CVI in August 1997, the Company acquired a 20-physician
multi-specialty medical group, which focuses on cardiology, located in Port St.
Lucie, Florida.

DIAGNOSTIC IMAGING SERVICES

        The Company provides outpatient diagnostic imaging services through
operating and investment interests in seven freestanding imaging centers (the
"Imaging Centers"). The Company also operates the Raytel Imaging Network, a
specialized preferred provider network currently consisting of 475 independent
imaging centers located from Virginia to New York, including five centers owned
and managed by the Company.

        Diagnostic imaging technology consists of a number of medical diagnostic
modalities, many of which integrate computer hardware and software. These
modalities include magnetic resonance imaging (MRI), computed tomography ("CT"),
nuclear medicine, radiography/fluoroscopy ("R/F"), ultrasound, general x-ray and
mammography. These imaging modalities are generally non-invasive (with the
exception of the injection of contrast material in certain techniques and the
occasional use of sedating agents) and subject the patient either to sound waves
(ultrasound), X-rays (CT, R/F and X-ray mammography) or radio waves and magnetic
fields (MRI) to gather data that aid in medical diagnosis. These diagnostic
technologies enable physicians to view certain internal body anatomy and
pathology and in many instances provide early diagnostic capability and aid in
effective treatment planning without the need for more costly exploratory
surgery.

        The principal diagnostic imaging modality in use at the Imaging Centers
is MRI. MRI is used to provide high resolution images of the soft tissue of the
body. In the field of cardiology, MRI is used for the assessment of congenital
and anatomical cardiac defects. Other MRI techniques, such as MR angiography,
are also used in the assessment of peripheral vascular and other cardiovascular
diseases. The Imaging Centers also provide a wide range of imaging services for
the diagnosis of neurological disorders of the head, neck and spine, as well as
imaging of the musculoskeletal system and a variety of internal organs,
including the liver and prostate, and the female pelvis.



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        Raytel Imaging Centers

        The Imaging Centers are located in four states. All of the Imaging
Centers offer MRI services, and four offer other imaging modalities. The Company
owns four of the Imaging Centers and holds its interests in the other three
through investments in limited partnerships (the "Ventures"), to which the
Company provides management services, including data processing, billing and
collection, accounting, marketing services and operational supervision. The
Ventures have terms that expire between 2008 and 2025.

        Raytel Imaging Network

        The trends toward cost containment and managed care have resulted in
changes in the patterns of patient referrals to diagnostic imaging facilities,
adversely affecting the profitability of independent imaging centers and
encouraging the formation of networks of independent centers. Many independent
operators of diagnostic imaging facilities lack the management and marketing
expertise and systems, as well as the experience in dealing with large managed
care organizations, that are necessary to effectively establish and operate such
networks. The Company's experience in dealing with a wide variety of managed
care organizations and its established, centralized marketing, scheduling,
billing and accounting systems provide the Company with the capability to
establish and operate networks of independent diagnostic imaging centers. In
addition, the Company's purchasing power allows it to provide participating
centers with supplies, such as contrast agents, film and other medical and
technical supplies, and with equipment maintenance and other services at
considerable cost savings.

        The Raytel Imaging Network (the "Network") is a dedicated network of
diagnostic imaging facilities established to provide services to patients
participating in healthcare benefit programs offered by municipal and state
employers, corporations that self-insure, third-party insurance carriers, union
health and welfare plans and managed care providers. Independent imaging centers
enter into fixed fee contractual relationships with the Network to provide
imaging services to patients referred by payors which have contracted with the
Network for services at a negotiated fee. The Network handles scheduling for
patients whose healthcare benefit programs participate in the Network and
guarantees these participating entities a fixed fee for all radiology procedures
performed in Network centers. The Network also offers centralized billing
services for those procedures, promptly reports the results of the studies to
the patient's referring physician and the outcomes of the studies to the
administrators responsible for the management of the patient's healthcare
program.

        The Network is a preferred provider organization with participating
imaging centers in the states of New Jersey, Pennsylvania, Delaware, Maryland,
New York and Virginia. The Network currently provides diagnostic imaging
services under referral arrangements with approximately 90 organizations
administering healthcare programs covering more than 600,000 individual
participants.

SALES AND MARKETING

        The Company's marketing activities are directed at managed care
organizations, cardiologists and referring physicians. The Company maintains a
central managed care sales group that negotiates and manages contracts with
managed care organizations. The Company's marketing organization also supervises
the marketing of its TTM-based services to physicians nationwide and supports
the efforts of local centers to market their services to referring physicians in
the communities they serve.

        Raytel Cardiac Monitoring and Testing Services

        The Company markets its cardiac monitoring and testing services
nationwide by using regional sales managers coordinating the activities of
approximately 400 sales representatives who are employees of the pacemaker
equipment manufacturers. The sales organization is supported by the Company's



                                       10
<PAGE>   11

customer service and telemarketing personnel. Raytel works closely with all
major pacemaker manufacturers and has agreements with certain manufacturers for
the distribution of the Company's services through the direct sales forces of
the manufacturers. The Company's sales force works closely with the
approximately 12,000 physicians currently prescribing the Company's pacemaker
monitoring services.

        The Company differentiates its cardiac monitoring and testing services
from most of its competitors by providing its services 24 hours a day, seven
days a week. In addition, the Company offers technologists who specialize in
monitoring specific pacemaker models (the more complex the unit, the more
expertise a technologist is required to have), extensive quality control
procedures, computerized reports for complex pacemakers, detailed reporting
procedures for abnormal findings and an extensive database on pacemaker
performance.

        Diagnostic Imaging Services

        The Company markets services of the Imaging Centers it manages through a
team approach tailored to the needs of each Imaging Center. The Company's
central sales organization coordinates the Imaging Center's marketing activities
with the Imaging Center's radiologists. The principal selling effort is directed
toward the local base of referring physicians. In support of the selling effort,
the Company provides marketing materials, including newsletters and brochures
and holds routine educational sessions for physicians. The Company also assists
the Imaging Center in addressing needs of managed care organizations by
negotiating contracts with these organizations and working closely with
insurance plan administrators, HMO personnel, workers' compensation coordinators
and hospital administrators.

        Raytel Heart Centers and Cardiovascular Diagnostic Facilities

        The Company markets the services of its Cardiovascular Diagnostic
Facilities using the basic approach employed with the Imaging Centers. Each
facility undertakes marketing activities specifically structured for its local
or regional market. The manager of each facility initiates and maintains contact
with local referring physicians. The Company's central sales organization
supports the local selling effort with marketing materials and assistance in the
development of clinical outreach programs designed to make the capabilities of
the center available to underserved segments of the community. The center
manager coordinates local physician contacts with the Company's cardiac
monitoring and testing sales force to cross-sell the Company's transtelephonic
pacemaker monitoring, Holter monitoring and cardiac event detection services.
The Company's central sales group negotiates contacts with managed care
organizations. This group also assists the center manager in addressing the
needs of such organizations.

        Raytel Physician Practice Management Services

        The Company markets services of the physician practices it manages
through a team approach tailored to the needs of each physician practice, in the
same fashion used to market the services of the Imaging Centers and its heart
centers and Cardiovascular Diagnostic Facilities.

BILLING AND COLLECTION

        The Company's cardiac monitoring and testing operations generate a high
volume of relatively low-cost services delivered to patients living throughout
the United States. The Company derives substantially all of its transtelephonic
pacemaker monitoring, cardiac event detection services, and Holter monitoring
revenues from Medicare and other third-party payors and, in most cases, renders
bills to at least two payors for each procedure. In the year ended September 30,
1999 the Company generated more than one million bills to Medicare and other
third-party payors related to these businesses. Accordingly, the Company's
success in these businesses is substantially dependent upon the efficiency of
its billing and collection systems.



                                       11
<PAGE>   12

        All of the billing and collection functions for the Company's cardiac
testing operations are centralized at the Company's facilities in Connecticut.
The Company has specialized data management systems that it uses to obtain and
record primary and secondary insurance data at the time of patient enrollment
and to maintain and update that information. The Company's billing and
collection staff is specially trained in third-party coverage and reimbursement
procedures. The Company communicates continuously with carriers administering
Medicare and has established procedures that allow it to submit most primary
Medicare claims electronically, on a batch-billing basis. In addition, the
Company maintains a database on the billing procedures and requirements of more
than 1,500 insurance carriers, which enables it to efficiently process claims to
primary, secondary and tertiary private insurers. Computerized billing and
collection reports allow the Company's personnel to continually monitor open
accounts.

        Due to the complexity of the billing and collection process, the
Company, like many other healthcare service providers, experiences normal
payment cycles that are considerably longer than those customary in many other
industries. The Company typically experiences billing cycles of 60 to 240 days
from the billing date, depending on the type and number of third-party payors,
although billing cycles can be even longer in certain situations. Based upon its
experience, the Company believes that its specialized data processing system and
its extensive background in processing high volume, third-party claims serve to
minimize collection cycles and the incidence of rejected claims due to
incomplete or inaccurate information.

        The Company bills and collects for the Imaging Centers, physician
practices, heart centers and other cardiac facilities that it manages.

THIRD-PARTY REIMBURSEMENT

        The Company derives substantially all of its revenues from Medicare,
HMOs and commercial insurers and other third-party payors. Both government and
private payment sources have instituted cost containment measures designed to
limit payments made to healthcare providers, by reducing reimbursement rates,
limiting services covered, increasing utilization review of services,
negotiating prospective or discounted contract pricing, adopting capitation
strategies and seeking competitive bids. There can be no assurance that such
measures will not adversely affect the amounts or types of services that may be
reimbursable to the Company in the future, or that the future reimbursement for
any service offered by the Company will be sufficient to cover the costs and
overhead allocated to such service by the Company, either of which could have a
material adverse effect on the Company's operating results. The Company cannot
predict with any certainty whether or when additional changes in Medicare,
Medicaid or other third-party reimbursement rates or policies will be
implemented. However, such future changes could have a material adverse effect
on the Company's business, financial condition or operating results.

        Reimbursement rates vary depending on the type of third-party payors.
Changes in the composition of third-party payors from higher reimbursement rate
payors to lower reimbursement rate payors could have an adverse effect on the
Company's operating results. In addition, the Company anticipates that it may
increasingly offer its services to third party payors on a capitated or other
risk-sharing basis. To the extent that patients or enrollees covered by a
risk-sharing contract require more frequent or extensive services than is
anticipated by the Company, the revenue derived from such contract may be
insufficient to cover the costs of the services provided. Insufficient revenue
under capitated or other risk-sharing contracts could have a material adverse
effect on the Company's business, financial condition or operating results.

GOVERNMENT REGULATION

        The healthcare industry is highly regulated, and there can be no
assurance that the regulatory environment in which the Company operates will not
change significantly and adversely in the future. In



                                       12
<PAGE>   13

general, the scrutiny of methods and levels of payment of healthcare providers
and companies is increasing.

        On August 5, 1997, President Clinton signed the Balanced Budget Act of
1997 ("BBA") into law. Two of the areas affected most profoundly by this law are
(1) fraud and abuse, and (2) the effort of the federal government to use its
purchasing power to expand health care options for Medicare beneficiaries while
using pressure from increased competition to control costs. The fraud and abuse
provisions build on many of the provisions that were enacted by the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). In addition to
the specific changes, the fraud and abuse provisions of the BBA signify an
apparent shift to the Office of the Inspector General of the Department of
Health and Human Services (the "OIG") of not only enforcement power, but
policy-making authority as well. In addition, the BBA broadened the authority
for the HCFA to enter into contracts for providing managed care to Medicare
beneficiaries by expanding the type of managed care options available to
Medicare beneficiaries.

        On October 31, 1997, the Secretary of the Department of Health and Human
Services ("HHS") published final regulations implementing a number of changes
proposed in June 1997. One of the changes replaced the independent physiological
laboratory ("IPL") with the creation of the independent diagnostic testing
facility (the "IDTF"). An IDTF is a diagnostic facility, distinct from a
physician's office or hospital, which does not directly use test results to
treat patients. The facility exists to perform diagnostic testing procedures.
The Company's cardiac monitoring and testing services currently operate as an
IPL. The original implementation date was postponed until March 1999, and the
Company is in the process of replacing all of its designations as an IPL with
the new designation as an IDTF, as required by the new regulations.

        The Company believes that healthcare legislation, regulations and
interpretations will continue to change and, as a result, routinely monitors
developments in healthcare law. The Company expects to modify its agreements and
operations from time to time as the business and regulatory environment changes.
While the Company believes it will be able to structure all of its agreements
and operations in accordance with applicable law, the lack of definitive
interpretations of many statutory and regulatory provisions means that there can
be no assurance that the Company's arrangements are in compliance with such
provisions or will not be successfully challenged.

        Government Reimbursement Programs

        The federal government maintains the Medicare health insurance program
for the aged. Individual states have programs for medical assistance to the
indigent known generally as Medicaid, which are partially financed by the
federal government. Federal Medicaid funds are currently conditioned on state
compliance with federal requirements. A significant portion of the Company's
revenues is received under Medicare and other government programs. Both the
Medicare and Medicaid programs are subject to statutory and regulatory changes,
retroactive and prospective rate adjustments, administrative rulings,
interpretations of policy, intermediary determinations, and government funding
restrictions, all of which may materially increase or decrease the rate of
program payments to healthcare facilities and other healthcare suppliers and
practitioners.

        The Company's existing cardiac monitoring and testing services derive a
substantial portion of its revenue from the Medicare program. The Company's
heart centers, diagnostic imaging, and Cardiovascular Diagnostic Facilities also
derive a substantial portion of their revenue from payments made under the
Medicare program, and the Company anticipates that future facilities and
services will also derive significant revenues from these sources. In order to
participate in this program, a newly-developed facility must be certified after
officials administering the Medicare program in the state where the facility is
located, or their designees, have conducted a survey of the facility, a process
that cannot commence until the facility opens and begins providing services to
patients. Once a facility is certified, it will be reimbursed by Medicare for
services performed from the date on which a satisfactory



                                       13
<PAGE>   14

survey is conducted in connection with the certification of the facility or such
later date as an acceptable plan is submitted to correct any deficiencies noted
in the survey. The Company expects that delays in the certification process may
occur and may increase with the funding limitations being imposed on certifying
authorities. Combined with the billing and collection cycle for Medicare
reimbursement that all healthcare facilities experience, these delays could
result in a three to six month working capital deficiency during the start-up
phase for newly developed cardiac centers. These working capital deficiencies
will have to be funded by the Company through working capital advances to the
facilities using funds provided by operating or financing activities.

        The Stark Law and Medicare Fraud and Abuse Laws

        The Company is subject to a variety of laws and regulations governing
the referral of patients to facilities with whom the referring physician has a
financial relationship.

        Subject to certain exceptions, physicians who have a financial
relationship with an entity providing healthcare services are prohibited by
federal law (the "Stark Law") from referring or admitting patients to that
entity for the provision of certain designated services reimbursable under
Medicare or Medicaid, as well as certain other federally assisted state
healthcare programs. The entity providing healthcare services is also prohibited
from presenting, or causing to be presented, a claim or bill for the designated
services furnished pursuant to a prohibited referral. Possible sanctions for
violations of the Stark Law include civil monetary penalties, exclusion from the
Medicare and Medicaid programs and forfeiture of amounts collected in violation
of such prohibition. The Stark Law prohibits a physician who owns stock of a
company from referring patients to the medical facilities in which such company
has an ownership interest unless such Company's stockholders' equity exceeds
$75.0 million.

        On January 9, 1998, the Health Care Financing Administration ("HCFA")
published proposed rules implementing the Stark Law. The regulations have been
published in proposed form and HCFA has solicited comments on the proposed
regulations. The proposed regulations do not have the force of law, but they do
provide information regarding the views of enforcement agencies, such as the
OIG.

        The Stark Law was originally enacted in December 1989, and prohibited a
physician (or an immediate family member of a physician), with a financial
relationship with a clinical laboratory from making a referral to the clinical
laboratory for the furnishing of clinical laboratory services for which payment
otherwise would be made by the Medicare program. In 1993, the Stark Law was
amended to expand the referral prohibition to apply to certain "designated
health services." The 1993 amendments are commonly referred to as "Stark II."
Two years later, in 1995, HCFA issued regulations, but these applied only to the
original 1989 Stark Law. The recently promulgated regulations apply to the Stark
II Law.

        Generally, the Stark Law prohibits physicians from referring Medicare
patients to facilities for "designated health services" if the physician (or
immediate family member of the physician) has a financial arrangement with the
entity, unless the arrangement fits within an exception. The definition of
designated health services specifically includes radiology services, including
MRI, CT, ultrasound and nuclear medicine. However, the regulations specifically
exclude "invasive" radiology, which includes cardiac catheterization, PTCA and
similar imaging modalities used to guide a needle, probe or catheter accurately.
Thus, the Stark Law does not prohibit physician ownership of an entity or
facility which provides "invasive" radiology, such as cardiac catheterization
services provided at the Cardiovascular Diagnostic Facilities.

        In addition to the limitations of the Stark Law, a number of states have
laws which apply to referrals made for services reimbursed by all payors, and
not simply Medicare or Medicaid. Some of these laws may extend to the services
furnished by medical facilities in which the Company has an



                                       14
<PAGE>   15

ownership interest and, absent the availability of an exception under such laws,
could prohibit physicians with ownership interests in the Company from referring
any patients to such facilities.

        The Company is also subject to the illegal remuneration provisions of
the federal Social Security Act and similar state laws ("Fraud and Abuse Laws")
which collectively impose civil and criminal sanctions on persons who solicit,
offer, receive or pay any remuneration, directly or indirectly, for referring a
patient for treatment that is paid for in whole or in part by Medicare, Medicaid
or similar state or private programs. The courts and the OIG have stated that
the Fraud and Abuse Laws are violated where even one purpose, as opposed to a
primary or sole purpose, of the arrangement is to induce referrals. Violations
of the Fraud and Abuse Laws are punishable by criminal or civil penalties, which
may include exclusion or suspension of the provider from future participation in
the Medicare, Medicaid and similar state and federal programs, as well as
substantial fines. The federal government has published exemptions, or "safe
harbors," for business transactions that will be deemed not to violate the
federal Fraud and Abuse Laws. Although satisfaction of the requirements of these
safe harbors provides protection from criminal prosecution or penalties under
the federal anti-kickback legislation, failure to meet the safe harbors does not
necessarily mean a transaction violates the statutory prohibitions. Due to the
breadth of the statutory provisions of the Fraud and Abuse Laws and the absence
of definitive regulations or court decisions addressing the type of arrangements
by which the Company and its affiliated entities conduct and will conduct their
business, from time to time certain of their practices may be subject to
challenge under these laws. In October 1995, Congress passed a bill that would
extend the prohibitions of the Fraud and Abuse Laws to all third-party payors,
governmental and private. In the HIPAA and BBA, Congress expanded the government
fraud and abuse controls in a number of ways and added a provision for obtaining
advisory opinions from the OIG regarding physician self-referral compliance with
the Stark Law.

        The Company has attempted to structure its business relations to comply
with the Stark Legislation, the Fraud and Abuse Laws and all other applicable
healthcare laws and regulations. However, there can be no assurance that such
laws will be interpreted in a manner consistent with the Company's practices. In
addition, state legislatures and other governmental entities are considering
additional measures restricting or regulating referrals, and there can be no
assurance that new laws or regulations will not be enacted which will require
restructuring of the Company's operations or otherwise have a material adverse
effect on the Company's business, financial condition or operating results.

        Certificates of Need and Other Licensing Requirements

        Certain states in which the Company operates or may operate in the
future prohibit the establishment, expansion or modification of certain
healthcare facilities and the services provided at such facilities, including
heart centers, catheterization laboratories and diagnostic imaging centers,
without first obtaining a certificate of need ("CON") or comparable license from
the appropriate state regulatory agency. In addition to any CON or comparable
licensing requirements that may apply, heart centers, catheterization
laboratories and diagnostic imaging centers developed or operated by the Company
may also be required to comply with other licensing requirements, which vary
from state to state. Obtaining CON approval or comparable licensing is typically
an expensive and lengthy process and may involve adversarial proceedings
initiated by competing facilities or taxpayer groups. The existence of these
laws or future legislation changing these laws may make it more difficult or
prohibitive for the Company to develop heart centers, catheterization
laboratories or other diagnostic facilities, maintain existing facilities or
expand the services provided at such facilities or its other diagnostic imaging
facilities.

        Under current California regulations, the performance of cardiac
catheterization procedures is generally restricted to licensed general acute
care hospitals. In 1996, the Company applied for a license for its freestanding
cardiac catheterization laboratory in Fremont, California under a pilot program.
Although this pilot program was repealed in 1993, the Company believes that it
meets all of the requirements for the granting of a license, because the entity
holding the permit for such a facility was in active status as of December 31,
1993. In September 1997, the regional office of the California



                                       15
<PAGE>   16

Department of Health Services notified the Company by letter dated September 8,
1997 that its application for the license was denied. In December 1997, the
Company filed an appeal of the Department's decision and filed a Petition for
Writ of Mandate requesting that the Superior Court of California order the
Department of Health Services to issue the appropriate license. The Superior
Court denied the Company's request for a Writ of Mandate and returned the matter
to the administrative appeals office of the Department of Health Services. In
July 1998, the Company and the Department presented the case to an
administrative law judge. Final briefs were submitted in November 1998 and a
final decision of the administrative law judge was received in late March 1999.
Nearly eight months after the administrative hearing, the administrative law
judge for the California Department of Health Services issued its decision
denying the Company's application for licensure of its freestanding cardiac
catheterization laboratory in Fremont.

        The Company from time to time is required to upgrade or modify its
facilities in order to maintain its licenses. In many states, a facility, such
as a free-standing heart center, must be completed before a license will be
issued allowing the facility to operate, and even once the facility is built
there can be no assurances that a license or certification for operations will
be issued by the appropriate government agency.

        Restrictions on Corporate Practice of Medicine

        The laws of certain states in which the Company operates or may operate
in the future prohibit non-physician entities from practicing medicine,
exercising control over physicians or engaging in certain practices such as
fee-splitting with physicians. Although the Company has structured its
affiliations with physician groups so that the physicians maintain exclusive
authority regarding the delivery of medical care, there can be no assurance that
these laws will be interpreted in a manner consistent with the Company's
practices or that other laws or regulations will not be enacted in the future
that could have a material adverse effect on the Company's business. If a
corporate practice of medicine law is interpreted in a manner that is
inconsistent with the Company's practices, the Company would be required to
restructure or terminate its relationship with the applicable physician group to
bring its activities into compliance with such law. The termination of, or
failure of the Company to successfully restructure, any such relationship could
result in fines or a loss of revenue that could have a material adverse effect
on the Company's business, financial condition or operating results.

MEDICAL MALPRACTICE INSURANCE

        In general, the Company does not, itself, engage in the practice of
medicine and requires physicians performing medical services at its facilities
to maintain medical malpractice insurance. In the case of HIPSL, a wholly owned
subsidiary, the Company employs approximately 20 physicians, who are performing
medical services as members of a multi-specialty medical group. The other
licensed professionals in this practice, such as registered nurses, nurse
practitioners and technicians, perform their professional duties under the
direct supervision of the physicians. With the exception of the physician
employees of HIPSL, the Company's employees do not practice medicine. However,
certain of its employees are or will be involved in the delivery of healthcare
services to the public under the supervision of physicians. To protect the
Company from medical malpractice claims, including claims associated with its
employees' activities, the Company, or the Ventures for which the Company serves
as general partner, maintains professional liability and general liability
insurance on a "claims made" basis in amounts deemed appropriate by management
based upon the nature and risks of the Company's business. Such policies provide
malpractice coverage in the amount of $1 million per occurrence with an
aggregate limit of $3 million. Insurance coverage under such policies is
contingent upon a policy being in effect when a claim is made, regardless of
when the events which caused the claim occurred. The cost and availability of
such coverage has varied widely in recent years. While the Company believes its
insurance policies are adequate in amount and coverage for its current
operations, there can be no assurance that the coverage maintained by the
Company is sufficient to cover all future claims. In



                                       16
<PAGE>   17

addition, there can be no assurance that the Company will be able to obtain such
insurance on commercially reasonable terms in the future.

COMPETITION

        The healthcare service businesses in which the Company is currently
engaged are highly competitive. The restructuring of the healthcare system is
leading to rapid consolidation of the existing highly fragmented healthcare
delivery system into larger and more organized groups and networks of healthcare
providers. The Company expects competition to increase as a result of this
consolidation and ongoing cost containment pressures among other factors. In
executing its business strategy, the Company competes with management services
organizations, for-profit and nonprofit hospitals, HMOs and other competitors
that are seeking to form strategic alliances with physicians or provide
management services to physicians or to diagnostic and therapeutic facilities
owned by such physicians. In operating its heart centers, the Company encounters
competition from physician groups, general acute care hospitals and freestanding
and hospital-based cardiac care facilities located in the same markets.

        The Company's cardiac monitoring and testing programs compete with a
number of smaller, regional commercial entities as well as hospitals, clinics
and physicians who generally provide these services as an adjunct to their
primary practice. Principal competitive factors are the availability and quality
of service. The Company believes that it competes favorably with most of its
smaller competitors based on its 24-hour a day, seven-day a week service,
specialized technical staff and sophisticated billing and collection system.
Certain of its competitors, including local physicians and hospitals, may have
certain competitive advantages over the Company based upon their direct
relationships with patients.

        Cardiac catheterization and other cardiac diagnostic and therapeutic
procedures, as well as diagnostic imaging procedures, are performed in
hospitals, private physicians' offices, clinics operated by group practices of
physicians and independent catheterization facilities. Although the Company and
its affiliates operate in locations throughout the United States, competition
focuses on physician referrals at the local market level. Principal competitors
in each of the Company's markets are hospital and physician affiliated
facilities, some of which may have greater financial and other resources than
the Company, more experience and greater name recognition than the local
managers and physicians associated with the Company's Imaging Centers,
Cardiovascular Diagnostic Facilities and Catheterization Laboratories, or better
ties to the local medical community. Successful competition for referrals is a
result of many factors, including quality and timeliness of test results, type
and quality of equipment, facility location, convenience of scheduling and,
increasingly, relationships with managed care programs. Other independent
companies (including some which have substantially greater financial and
operating resources than the Company) are in the business of establishing
facilities similar to the facilities in which the Company has or may obtain
interests and providing management services to such facilities.

EMPLOYEES

        As of November 30, 1999, the Company employed approximately 765 full
time equivalent employees. None of the Company's employees are covered by
collective bargaining contracts.

ITEM 2. PROPERTIES

        The principal operations of the Company and its subsidiaries are
conducted at facilities located in Windsor, Connecticut; New York, New York;
Haddonfield, New Jersey; San Mateo, California; and Port St. Lucie, Florida. The
Windsor facility, consisting of approximately 36,679 square feet, is occupied
under a lease expiring in July 2004. The New York facility, consisting of
approximately 23,300 square feet, is occupied under a lease expiring in
September 2001. The Haddonfield facility, consisting of approximately 11,000
square feet, is occupied under a lease expiring in June 2000. The San Mateo
facility, consisting of approximately 2,400 square feet, is occupied under a
lease expiring in May 2003. The Port St. Lucie facility, consisting of
approximately 25,400 square feet, is occupied under a lease



                                       17
<PAGE>   18

expiring in December 2002. In addition, through seven of its consolidated
Imaging Centers, the Company leases a total of approximately 31,000 square feet
in facilities located in New York, New Jersey, California and Pennsylvania.
Through its acquisition of CVI in August 1997, the Company acquired eight
Cardiovascular Diagnostic Facilities in Texas, Louisiana, Maryland and Florida.
The joint ventures that operate the Cardiovascular Diagnostic Facilities lease a
total of approximately 89,000 square feet in these facilities. The Company
generally considers its properties to be in good condition and suitable for the
Company's anticipated needs.

ITEM 3. LEGAL PROCEEDINGS

        In September 1997, the California Department of Health Services denied
the Company's application for a license to operate a freestanding diagnostic
catheterization facility in Fremont, California. The Company filed an
administrative appeal requesting that the Department of Health Services
reconsider the denial of the application by the regional office of Licensing and
Certification. In addition, in November 1997, the Company filed a Petition for
Writ of Mandate requesting that the Superior Court of the State of California
for the County of Sacramento order the Department of Health Services to issue
the appropriate license, or in the alternative, to find that the Department of
Health Services lacks jurisdiction to regulate the operation of the diagnostic
catheterization facility. The Court denied the Company's Petition for a Writ of
Mandate and remanded the case the administrative law office of the Department of
Health Services. In July 1998, the Company and the Department presented their
case to an administrative law judge. Final briefs were filed in November 1998
and a final decision of the administrative law judge was received in late March
1999. Nearly eight months after the administrative hearing, the administrative
law judge for the California Department of Health Services issued its decision
denying the Company's application for licensure of its freestanding cardiac
catheterization laboratory in Fremont.

        In November 1999, the Company filed a demand for arbitration against
Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG") with
JAMS/Endispute, Inc. The Company provides management services to CCMG pursuant
to a long-term management services agreement entered into between the parties
in November 1996. The demand for arbitration asserts that Raytel is entitled to
rescission, restitution and/or damages as a result of CCMG's material breaches
of the management services agreement. Therefore, the Company does not expect
that an adverse opinion in the arbitration will have a material adverse effect
on the financial condition of the Company.

        Raytel and its subsidiaries are parties to other litigation and claims
arising out of its ongoing business operations. The Company believes that none
of these matters, either individually or in the aggregate, are likely to have a
material adverse effect on the Company's business, financial condition or
operating results.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.



                                       18
<PAGE>   19

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The information required by this item is incorporated by reference to
information set forth under the heading "Stock Data Nasdaq Symbol: RTEL" on page
30 of the Company's 1999 Annual Report to Stockholders.

ITEM 6. SELECTED FINANCIAL DATA

        The information required by this item is incorporated by reference to
the information set forth under the heading "Five Year Financial Summary" on
page 5 of the Company's 1999 Annual Report to Stockholders.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

        The information required by this item is incorporated by reference to
information set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 6 to 12 of the Company's
1999 Annual Report to Stockholders.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

        The Company does not hold any marketable equity securities, foreign
currencies, or derivative financial instruments in its investment portfolio. At
the end of the fiscal year 1999, the Company did not hold any investments that
are subject to interest rate risk, except for approximately $1,693,000 in
investment grade commercial paper with maturities of less than 150 days. These
securities, like all fixed income instruments, are subject to interest rate risk
and will fall in value if market interest rates increase. However, because
commercial paper has such short maturities, the Company has the ability to hold
its fixed income investments until maturity. Therefore, the Company would not
expect to recognize an adverse impact in income or cash flows if there were an
increase or decrease in interest rates. The Company has not issued any debt
securities other than promissory notes with fixed interest rates in connection
with certain acquisitions, and therefore does not have any interest rate risk
with respect to this type of financing activity.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by this item is incorporated by reference to
the financial statements and supplementary data on pages 13 to 29 of the
Company's 1999 Annual Report to Stockholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

        Not Applicable.



                                       19
<PAGE>   20

                                    PART III

        Certain information required by Part III is omitted from this report in
that the Company intends to file its definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this report, and certain information therein is
incorporated herein by reference.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Proposal No. 1 -
Election of Directors - Executive Officers and Directors."

        The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance."


ITEM 11. EXECUTIVE COMPENSATION

        The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Executive
Compensation and Other Matters."


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management."


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Certain
Transactions."



                                       20
<PAGE>   21

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)     1. FINANCIAL STATEMENTS:

        Report of Independent Public Accountants

        Consolidated Statements of Operations for the Years Ended September 30,
        1999, 1998 and 1997

        Consolidated Balance Sheets as of September 30, 1999 and 1998

        Consolidated Statements of Changes in Stockholders' Equity for the Years
        Ended September 30, 1999, 1998 and 1997

        Consolidated Statements of Cash Flows for the Years Ended September 30,
        1999, 1998 and 1997

        Notes to Consolidated Financial Statements

        Supplementary Data: Quarterly Financial Data (unaudited)


        2. FINANCIAL STATEMENT SCHEDULES:

        Report of Independent Public Accountants

        Schedule II - Valuation and Qualifying Accounts


        3. EXHIBITS:

        The exhibits which are filed with this Form 10-K, or incorporated herein
        by reference, are set forth in the Exhibit Index, which immediately
        precedes the exhibits to this Report.


(b)     REPORTS ON FORM 8-K DURING THE QUARTER ENDED SEPTEMBER 30, 1999

        The Company filed no report on Form 8-K during the quarter ended
September 30, 1999.



                                       21
<PAGE>   22

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                    RAYTEL MEDICAL CORPORATION



Dated:  December 28, 1999           By:   /s/ RICHARD F. BADER
                                       ---------------------------------------
                                          Richard F. Bader
                                          Chairman and Chief Executive Officer


        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
on the dates indicated.

<TABLE>
<CAPTION>
       SIGNATURE                                     TITLE                             DATE
<S>                              <C>                                              <C>
 /s/ RICHARD F. BADER            Chairman of the Board and Chief Executive        December 28, 1999
------------------------         Officer (Principal Executive Officer)
  (Richard F. Bader)

/s/ JOHN F. LAWLER, JR.          Senior Vice President and Chief Financial        December 28, 1999
------------------------         Officer  (Principal Financial and Accounting
 (John F. Lawler, Jr.)           Officer)

   /s/ ALLAN ZINBERG             President, Chief Operating Officer and           December 28, 1999
------------------------         Director
    (Allan Zinberg)

/s/ DAVID E. WERTHEIMER          Senior Vice President and Director               December 28, 1999
------------------------
 (David E. Wertheimer)

   /s/ MARY M. LAMPE             Director                                         December 28, 1999
------------------------
    (Mary M. Lampe)
                                 Director                                         December 28, 1999
------------------------
   (Gene I. Miller)

 /s/ THOMAS J. FOGARTY           Director                                         December 28, 1999
------------------------
  (Thomas J. Fogarty)
</TABLE>



                                       22
<PAGE>   23

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE



To the Board of Directors and Stockholders of
Raytel Medical Corporation:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Raytel Medical Corporation and Subsidiaries
included in this Form 10-K, and have issued our report thereon dated November
12, 1999. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission rules and is not part of
the basic financial statements. The information reflected on the schedule has
been subjected to the auditing procedures applied in the audits of the basic
financial data, and in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.


                               /s/ Arthur Andersen LLP
                               -------------------------
                               Arthur Andersen LLP

Hartford, Connecticut
November 12, 1999



                                       23
<PAGE>   24

                                                                     Schedule II


                   RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES

              For the years ended September 30,1999, 1998 and 1997

                        VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                    Balance at      Charged to
                                    Beginning        Cost and                                                Balance at
                                    of Year          Expenses           Other (1)         Deductions         End of Year
<S>                                <C>              <C>                <C>                <C>                <C>
DESCRIPTION
September 30, 1999                 $ 7,093,000       $ 6,467,000                          $(7,896,000)       $ 5,664,000
      Allowance for doubtful
      accounts

September 30, 1998
      Allowance for doubtful       $ 6,189,000       $ 5,767,000                          $(4,863,000)       $ 7,093,000
      accounts

September 30, 1997
      Allowance for doubtful       $ 5,855,000       $ 5,387,000       $ 1,946,000        $(6,999,000)       $ 6,189,000
      Accounts
</TABLE>


        (1) The majority represents a reserve acquired in connection with the
        purchase of CVI on August 15, 1997.



                                       24
<PAGE>   25

                                INDEX TO EXHIBITS


EXHIBIT                         EXHIBIT TITLE
NUMBER

3.1(1)       Restated Certificate of Incorporation of the Registrant.

3.2(2)       Bylaws of the Registrant, as amended.

4.1(3)       Rights Agreement dated as of August 14, 1998 between the Registrant
             and BankBoston N.A., as Rights Agent

*10.1(4)     1983 Incentive Stock Option Plan, as amended.

*10.2(4)     1990 Stock Option Plan, as amended.

*10.3(4)     1995 Outside Directors Stock Option Plan.

*10.7(4)     Form of Indemnity Agreement for officers and directors.

*10.8(4)     Employment Agreement dated September 28, 1995 between the
             Registrant and Richard F. Bader.

*10.9(4)     Employment Agreement dated September 28, 1995 between the
             Registrant and Allan Zinberg.

10.22(4)     Lease Agreement dated March 6, 1992 between the Registrant and
             Peninsula Office Park, as amended.

10.24(4)     Agreement of Lease Dated July 22, 1983 between the Registrant and
             C.E. Towers Co., as amended, with Lease Assignment and Assumption
             Agreement Dated February 26, 1993 between the Registrant and
             Medtronic, Inc. and Consent of C.E. Towers Co. dated February 12,
             1993.

10.28(4)     Joint Venture Agreement dated March 3, 1998 between Medical Imaging
             Partners, L.P. and California Medical Imaging Services, Inc., as
             amended, and related agreements.

10.30(4)     MRI Diagnostic Partners I, L.P. 1986 Limited Partnership Agreement
             dated December 31, 1986, and related agreement and MRI Building
             Partners, L.P. 1986 Agreement of Limited Partnership dated December
             31, 1986.

+10.38(5)    Master Transaction Agreement, dated as of August 21, 1996, but
             effective as of September 18, 1996, between and among Raytel
             Medical Corporation, Raytel Texas Physician Services, Inc., Raytel
             Southeast Management, L.P., Southeast Texas Cardiology Associates,
             P.A., Southeast Texas Cardiology Associates II, P.A., Rodolfo P.
             Sotolongo, M.D., Wayne S. Margolis, M.D., Michael L. Smith, M.D.,
             and Miguel Castellanos, M.D.

+10.40(6)    Management Services Agreement, dated and effective as of September
             18, 1996, between Cardiology Management Partnership, a Texas
             general partnership, and Southeast Texas Cardiology Associates II,
             P.A., as assigned to Raytel Southeast Management, L.P.

*10.41(7)    Employee Stock Purchase Plan dated May 8, 1996

10.42(7)     Amended and Restated Credit Agreement and form of Promissory Note
             dated August 14, 1996 among the Registrant, Bank of Boston
             Connecticut and Banque Paribas, and Bank of Boston Connecticut, as
             agent.

10.43(7)     Promissory Note in the amount of $15,000,000 between the Registrant
             and Bank of Boston Connecticut dated September 2, 1996.

10.44(7)     Promissory Note in the amount of $10,000,000 between the Registrant
             and Banque Paribas dated September 2, 1996.

10.45(8)     First Amendment to Amended and Restated Credit Agreement dated June
             4, 1997 among the Registrant, Bank of Boston Connecticut and Banque
             Paribas, and Bank of Boston Connecticut, as agent.

10.46(8)     Second Amendment to Amended and Restated Credit Agreement, dated
             September 26, 1997 among the Registrant, Bank of Boston Connecticut
             and Banque Paribas, and Bank of Boston Connecticut, as agent.

10.47(8)     Promissory Note in the amount of $27,000,000 between the Registrant
             and Bank of Boston Connecticut dated September 26, 1997.



                                       25
<PAGE>   26

10.48(8)     Promissory Note in the amount of $18,000,000 between the Registrant
             and Banque Paribas dated September 26, 1997.

10.50(8)     Noncompetition Agreement, dated as of August 15, 1997, by and
             between David E. Wertheimer and Raytel Medical Corporation

*10.51(8)    Employment Agreement, dated as of January 1, 1996, by and between
             David E. Wertheimer, M.D., and Heart Institute of Port St. Lucie,
             Inc., an indirect wholly-owned subsidiary of Registrant as a result
             of the CVI acquisition.

*10.52(9)    Employment Agreement dated as of March 1, 1998, by and between
             Swapan Sen and Raytel Medical Corporation.

*10.53(9)    Employment Agreement dated as of March 1, 1998, by and between F.
             David Rollo, M.D., Ph.D., and Raytel Medical Corporation.

*10.54(9)   Employment Agreement dated as of March 1, 1998, by and between
             Michael O. Kokesh and Raytel Medical Corporation.

10.55(10)    Third Amendment to Amended and Restated Credit Agreement, dated
             July 24, 1998 among the Registrant, Bank of Boston Connecticut and
             Banque Paribas, and BankBoston, as agent.

10.56(10)    Succession Agreement, dated July 1, 1998, by and among David E.
             Wertheimer, M.D., Advanced Magnetic Resonance Imaging, P.C., Raytel
             Medical Corporation and Raytel Imaging Holdings, Inc. as General
             Partner for Forest Hills Imaging Venture.

10.57(10)    Succession Agreement, dated February 3, 1997, by and among F. David
             Rollo, M.D., Raytel Medical Group, Inc., P.C., Raytel Medical
             Corporation and Raytel California Physician Services, Inc.

10.58        Fourth Amendment to Amended and Restated Credit Agreement, dated
             July 24, 1998 among the Registrant, Bank of Boston Connecticut and
             Banque Paribas, and BankBoston, as agent.

10.59        Commercial Office Lease dated July 19, 1999 between Registrant and
             USGC Joint Venture.

*10.60       Key Management Retention Agreement dated as of September 1, 1999,
             by and between Swapan Sen and Raytel Medical Corporation.

*10.61       Key Management Retention Agreement dated as of September 1, 1999,
             by and between David E. Wertheimer, M.D. and Raytel Medical
             Corporation.

*10.62       Key Management Retention Agreement dated as of September 1, 1999,
             by and between John F. Lawler, Jr. and Raytel Medical Corporation.

13.1         Portions of Annual Report to Stockholders incorporated by reference
             in this Report on Form 10-K.

21.1         List of subsidiaries of the Registrant.

23.1         Consent of Arthur Andersen LLP.

27           Financial Data Schedule

*       Constitutes a management contract or compensatory plan required to be
        filed pursuant to Item 14(c) of Form 10-K.

+       Confidential treatment has been granted as to a portion of this Exhibit.


(1)     Incorporated by reference to identically numbered exhibit to the
        Registrant's Form 10-Q Report for the quarter ended December 31, 1995.

(2)     Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K
        Report filed on October 23, 1998 (the "October 1998 Form 8-K").

(3)     Incorporated by reference to Exhibit 1 to the October 1998 Form 8-K.

(4)     Incorporated by reference to the identically numbered exhibit to the
        Registrant's Registration Statement on Form S-1, No. 33-97860, which
        became effective on November 30, 1995 (the "1995 Registration
        Statement").


                                       26
<PAGE>   27

(5)     Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K
        Report filed on October 3, 1996 (the "October 1996 Form 8-K").

(6)     Incorporated by reference to Exhibit 2.3 to the October 1996 Form 8-K.

(7)     Incorporated by reference to identically numbered exhibits to the
        Registrant's Form 10-K Report for the year ended September 30, 1996.

(8)     Incorporated by reference to identically numbered exhibits to the
        Registrant's Form 10-K Report for the year ended September 30, 1997.

(9)     Incorporated by reference to Exhibit 2.1 to the March 1998 Form 10-Q.

(10)    Incorporated by reference to identically numbered exhibits to the
        Registrant's Form 10-K Report for the year ended September 30, 1998.



                                       27