<PAGE>   1
                                  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, 1996.
         (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)

                                 (415) 349-0800
              (Registrant's telephone number, including area code)

           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. / /

The aggregate market value of the registrant's Common Stock held by
non-affiliates as of November 29, 1996 was $72,473,174 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 29, 1996 was 8,332,924.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         DOCUMENT                                   WHERE INCORPORATED
Annual Report for fiscal year ended
       September 30, 1996                                PART II

Proxy  Statement for the Annual Meeting
       to be held on March 6, 1997                       PART III

<PAGE>   2
                                     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 identifying 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. The Company's goal
is to become a leading CVD healthcare management company by developing a network
of integrated heart centers that will coordinate or provide a full range of
diagnostic, therapeutic and follow up services, augmented by Raytel's cardiac
monitoring and testing services. Raytel intends to develop its heart centers in
affiliation with cardiology physician groups and hospitals delivering high
quality patient care. Raytel believes its planned heart centers will address the
cost containment pressures currently shaping the healthcare industry. The
Company has executed an agreement with Stanford Health Services to develop a
diagnostic cardiac catheterization facility. The Company has also entered into
an agreement with Granada Hills Community Hospital in Southern California under
which the Company is managing an existing, on-site heart center and is
negotiating to upgrade the hospital-based cardiac catheterization facility at
the hospital. The Company expanded its physician practice management business in
1996 through its acquisitions of cardiology practices in Beaumont, Texas, and
Granada Hills, California. The Company is negotiating to develop a fully
integrated heart center with a general acute care hospital in Southeast Texas.
In June 1996, Raytel acquired the assets and assumed certain liabilities of
Cardio Data Services, Inc., ("CDS"), a provider of pacemaker monitoring, cardiac
detection and Holter monitoring services.

         Raytel was incorporated in California in October 1981 under the name
Raytel 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 (415) 349-0800.

RECENT CORPORATE DEVELOPMENTS

Initial Public Offering

         In December 1995, the Company completed the initial public offering of
its Common Stock which yielded net proceeds of $20,400,000 after underwriting
discounts and expenses. The Company used approximately $6,000,000 of the
proceeds of the offering to pay the remaining balance of a term loan from two
banks, approximately $2,101,000 to repurchase certain outstanding redeemable
warrants 


                                       2
<PAGE>   3
and $5,000,000 to repay substantially all of the outstanding balance of a
subordinated note of the Company. The remaining proceeds were used for working
capital, general corporate purposes and to fund a portion of the purchase price
for an acquisition in June 1996.

Acquisition of Certain Assets from Cardio Data Services, Inc.

         In June 1996, the Company acquired certain assets and assumed certain
liabilities of Cardio Data Services, Inc. ("CDS"). Total consideration for the
acquisition was $14,000,000, consisting entirely of cash from the Company's
available cash and short-term investments and a line of credit with its banks.
Through this acquisition the Company expanded its cardiac monitoring and testing
services, and added Holter monitoring services, a new line of business.

Acquisition of Nonmedical Assets of Southeast Texas Cardiology Associates, P.A.

         In October 1996, the Company acquired certain nonmedical assets and
assumed certain liabilities of Southeast Texas Cardiology Associates, P.A., a
cardiology practice in Beaumont, Texas, and entered into a long-term
management agreement to manage the medical practice after the acquisition.

Acquistion of Nonmedical Assets of Comprehensive Cardiology Medical Group, Inc.

         In November 1996, the Company acquired certain nonmedical assets and
assumed certain liabilities of Comprehensive Cardiology Medical Group, Inc., a
cardiology practice in Granada Hills, California, and entered into a long-term
agreement to manage the medical practice after the acquisition.


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, including
atherosclerosis, electrophysiological defects, valvular dysfunction, congestive
heart failure, hypertension and congenital defects. The American Heart
Association (the "AHA") estimates that approximately 59 million people in the
United States suffer from one or more forms of CVD and approximately 1.5 million
Americans will suffer a heart attack during 1995. According to AHA estimates,
the medical costs associated with the treatment of CVD in 1996 will be
approximately $129 billion, or approximately 12% of total healthcare
expenditures in the United States. Due to the aging of the United States
population, the Company believes that the need for medical services to diagnose
and treat CVD will increase significantly in the future.


BUSINESS STRATEGY

         Raytel's objective is to be a leader in the coordination and provision
of CVD services across the continuum of cardiac care through a network of heart
centers, augmented by Raytel's remote cardiac monitoring and testing services.
The Company is pursuing this objective through the following strategies:

         Focus on Establishment of Heart Centers. Raytel is focusing its primary
efforts on the establishment of heart centers designed to coordinate or provide
quality, integrated CVD services on a cost-effective basis. The Company believes
that these heart centers will offer substantial benefits over the traditional
fragmented healthcare delivery system to all of the constituencies involved in
CVD care. Patients will benefit from the convenience of dealing with a single
entity administering their CVD management needs and providing many services at a
single location. Referring physicians will benefit from simplified referral
patterns and more consistent patient treatment. Cardiologists and other
professionals affiliated with the centers will benefit from local access to a
wider range of complementary specialists and diagnostic equipment as well as
management, marketing and administrative resources. 


                                       3
<PAGE>   4
The Company believes that its heart centers will be able to offer more
integrated services at a lower cost than traditional providers, thus addressing
the cost containment objectives of managed care plans and other third-party
payors. All of these constituencies will benefit from improved accountability.

         Leverage Expertise and Existing Businesses. Raytel has significant
experience in providing diagnostic and monitoring services to CVD patients and
in acquiring and operating geographically dispersed healthcare service
businesses. The Company believes that the expertise it has acquired through the
management and operation of its existing businesses, including its extensive
experience in marketing, billing and collection, as well as its existing
relationships with cardiologists, hospitals and third-party payors, will be of
substantial benefit to the Company in the establishment and operation of its
heart centers. Raytel intends to integrate the services provided at its heart
centers by making its current and future cardiac monitoring and testing services
available to heart center patients.

         Develop Affiliations with Providers. Raytel plans to develop its heart
centers on a regional basis, 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. As part of its strategy to create a flexible format for its heart
centers, the Company will seek to establish relationships with cardiovascular
and thoracic surgeons and other specialists who perform invasive therapeutic
procedures not offered at the heart center in order to create consistent
referral patterns and assure the seamless delivery of quality service throughout
the continuum of cardiac care.

         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
multistate or regional basis. Raytel actively markets its existing healthcare
services to managed care plans and provides value added services, such as
utilization review and outcome studies, to such organizations. The Company
intends to utilize its experience in working with managed care plans to market
the services of its heart centers to such organizations. The Company believes
that the ability to offer payors a system of integrated and coordinated cardiac
care on a cost-effective basis will constitute a competitive advantage in
obtaining contracts with such payors.

         Develop Standardized Protocols and Information Systems. The Company
believes that the development and ongoing refinement of guidelines and protocols
for the diagnosis, treatment and management of CVD, reflecting currently
accepted practices, is important for improving the consistency of patient care
and reducing overall costs of treatment. Raytel intends to establish a medical
advisory board, comprised of cardiologists and other specialists and
sub-specialists, to work with the Company and its physician and hospital
affiliates, to define guidelines for diagnosis, treatment and management of
various CVD disease states. The Company also intends to expand its existing
information systems to collect and analyze clinical and financial data at its
heart centers to promote more efficient practice patterns and better enable the
Company to negotiate managed care contracts.

         Expand the Company's Telemedical Business. The Company believes that
the establishment of heart centers will enhance its ability to market its
cardiac monitoring and testing services. Raytel also intends to utilize its
technology and expertise as well as its operating and administrative systems to
address additional transtelephonic applications in the treatment and management
of cardiac patients and thereby widen the range of cardiac services offered both
nationally and through its heart centers.

         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 


                                       4
<PAGE>   5
opportunities that arise as a result of the trends toward consolidation of
healthcare service providers. Raytel intends to explore opportunities to
establish heart centers and expand its other cardiac businesses through
additional strategic acquisitions, including the acquisition of the assets of
physician practices. 

RAYTEL HEART CENTERS

         The principal element in Raytel's strategy is the development and
operation of heart centers that will coordinate or provide integrated CVD
services to patients, including management of the patient's diagnostic,
therapeutic and follow up needs. The Company anticipates that each heart center
will include a catheterization laboratory, specialized diagnostic equipment,
examination and consultation rooms an operating room and patient beds and
monitoring equipment. Personnel at the heart center will perform diagnostic
services, coordinate therapeutic care with affiliated physicians and/or
hospitals, conduct post-therapeutic follow up programs and enroll patients in
cardiac monitoring and testing programs. The Company currently operates two
catheterization laboratories, has completed the construction of a diagnostic
catheterization laboratory in Fremont, California, in collaboration with
Stanford Health Services and is in negotiations for the development of a fourth
facility in Beaumont, Texas. The Company has also entered into a 10-year
agreement with Granada Hills Community Hospital in Southern California under
which it is managing an existing, on-site heart center and is negotiating to
upgrade the hospital-based cardiac catheterization facility. The Company 
expanded its physician practice management business in 1996 through its
acquisitions of cardiology practices in Beaumont, Texas, and Granada Hills,
California. The Company is negotiating to develop a fully integrated heart
center with a general acute care hospital in Southeast Texas, which would
include a cardiac catheterization laboratory among other possible facilities and
equipment. In addition, Raytel is evaluating opportunities for the development
and acquisition of additional heart centers.

The Raytel Heart Center Approach

         The Company plans to organize an integrated delivery system for
cardiovascular services in each region in which it develops a heart center.
Raytel heart centers will be designed and developed on a region-by-region basis
to maximize the available resources and address the specific needs of each
community served. The structure of the heart centers will be flexible to permit
the Company to proactively respond to the restructuring of the healthcare system
as it occurs. The Company intends to develop its heart centers in conjunction
with academic medical centers, established hospitals and cardiology specialists.
In certain cases, the Company may develop heart centers by acquiring the assets
of cardiology practices and negotiating long-term agreements to provide
management services to such practices. The heart centers will be located on
hospital premises or in free-standing facilities in close proximity to the
hospitals or physicians with whom the heart centers are affiliated. The heart
centers will be designed to enable affiliated cardiologists and cardiovascular
surgeons to perform a comprehensive range of diagnostic procedures on site.
Therapeutic procedures will generally be performed by physicians either at the
affiliated hospital or the heart center. Post-therapeutic monitoring and follow
up programs will be offered through the Company's cardiac monitoring services
and through on-site programs to be developed by the Company in conjunction with
its physician and hospital affiliates.

         The Company believes that the heart centers and the related integrated
delivery systems will be well positioned in their local markets to capture
patients enrolled in HMOs and other managed care programs, as well as patient
referrals from local primary care physicians and the heart centers' affiliated
hospitals.



                                       5
<PAGE>   6
Southmore and Mesquite Catheterization Laboratories

         In September 1994, the Company acquired two catheterization
laboratories, located at Southmore Hospital in Pasadena, Texas, a suburb of
Houston, and Mesquite Hospital in Mesquite, Texas, a suburb of Dallas (the
"Catheterization Laboratories"). These facilities are each operated under
contracts with the respective hospitals under which Raytel provides equipment,
technical 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, with a guaranteed minimum monthly payment. Physicians
practicing at the Catheterization Laboratories are not obligated to refer
patients to or practice at these facilities and in many cases also practice at
other hospitals. The contract with Southmore Hospital expires in March 1998, and
the contract with Mesquite Hospital expires in January 1999. In addition to
diagnostic catheterization procedures, the Southmore facility 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 Southmore or Mesquite contracts.

         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.

Northern California Heart Center

         In January 1996, the Company entered into an agreement with Stanford
Health Services ("SHS") to develop a diagnostic cardiac catheterization
facility (the "Northern California Heart Center") in Fremont, California. In
November 1996, the Company completed the construction of the facility and is in
the final process of completing the requirements for a license from the
California Department of Health Services. The Company expects the facility to
be fully licensed and operational during the second quarter of the 1997 fiscal
year. However, there can be no assurance that the company will be able to
obtain such licensure or any additional licenses that may be required to expand
the services offered at the facility.

         Under the agreement with SHS, the Company will provide the facilities
and equipment for the facility and will be responsible for the facility's
administration, including maintenance and repairs, administrative support
services, personnel administration and billing and collection. The agreement
provides that SHS will be responsible for providing all medical services at the
facility, including providing the medical director, physicians, protocols,
credentialing and quality assurance. The parties have subsequently agreed that
the Company, through an affiliated medical group, will collaborate with SHS in
providing certain of these services. The Company will bill and collect for the
technical component of services rendered at the facility, and SHS, the
affiliated medical group or physicians with staff privileges at the facility
will bill and collect for their professional component of such services. The
Company will also receive a fee from SHS for the Company's marketing services
and pay a fee to SHS for the services of the medical director.

         The initial term of the agreement is one year, subject to successive,
automatic one-year extensions unless terminated by either party. The agreement
is subject to earlier termination under certain circumstances, including, among
others, the failure to obtain licensure by the State of California prior to
June 30, 1996 and without cause at any time upon 60 days notice during the
initial term and upon 90 days notice during any extension. Should the agreement
be terminated, the Company will endeavor to operate the facility in
collaboration with other medical service providers.

Raytel Heart Center at Granada Hills Community Hospital

         The Company has entered into an agreement with Granada Hills Community
Hospital, in the San Fernando Valley north of Los Angeles, pursuant to which
Raytel manages an integrated heart center located on the premises of the
hospital. Granada Hills Community Hospital is a general, acute care hospital.
The hospital's heart program includes cardiac catheterization procedures,
stress testing, ultrasound and other


                                       6
<PAGE>   7
diagnostic services, cardiovascular and cardiothoracic surgical procedures and
cardiac rehabilitation programs.

         There are two phases to Raytel's agreement with the hospital. Under
Phase I, known as the interim agreement, the Company manages the hospital's
heart center, leases space from the hospital, provides capital equipment and has
provided improvements to consolidate the hospital's program in a contiguous
physical location. The Company is responsible for supervising and coordinating
all day-to-day operations of the heart center, including administrative support
and on-site management. The Company is also primarily responsible for marketing
and public relations activities and assists the hospital in the negotiation and
administration of contracts with managed care organizations and other
third-party payors and in its compliance with Medicare coverage and
accreditation requirements and governmental licensing and certification matters.
All medical service at the facility are the responsibility of the hospital and
its medical staff.

         The Company and the hospital intend to implement Phase II of the
agreement in the second quarter of the 1997 fiscal year. Under Phase II, the
duties and responsibilities will remain the same as under Phase I. The principal
difference between Phase I and Phase II is the method of calculating the
procedure costs for which Raytel reimburses the hospital. Once Phase II has been
implemented, the initial term of the definitive agreement will be 10 years and
the Company will have an option to extend the term for an additional five years.
The agreement will be subject to termination under certain circumstances,
including the failure by either party to maintain any material license, Joint
Commission on Accreditation of Healthcare Organizations accreditation or
Medicare certification for the hospital and will also be terminable by the
hospital in the event that fewer than a specified number of procedures are
performed at the center during any successive two-year period. During the term
of the agreement, the parties have each agreed to refrain from competitive
activities.

         The Company and the hospital are also in the process of negotiating an
agreement for Raytel to manage the hospital's cardiovascular surgery program,
although there can be no assurance that this agreement will be consummated.


RAYTEL CARDIAC MONITORING SERVICES

         The Company is the largest provider of cardiac monitoring and testing
services in the United States utilizing Holter monitoring and transtelephonic
pacemaker monitoring ("TTM") technology. 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.
Since its acquisition of assets from CDS in June 1996, the Company has also
offered Holter monitoring services.

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 70,000 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


                                       7
<PAGE>   8
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
pacemaker device, sensing and pacing leads and a battery.

         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 12 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, 1996, Raytel tested over 30,000 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.

         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 center 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. During 1994, approximately 56% of patient calls to the center were
received outside of normal business hours, and 


                                       8
<PAGE>   9
approximately 21% of the patients who underwent CEDS testing placed one or more
calls to the center that resulted in immediate contact with the referring
physician, based upon preselected clinical criteria. 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

         Since the acquisition of assets from CDS in June 1996, the Company has
offered 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 60,000 patients annually. Holter
monitoring service 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.

Cardiac Rehabilitation and Follow Up Programs

         The Company's cardiac rehabilitation and follow up program was
discontinued during 1996. The successful commercialization of the cardiac
rehabilitation and follow-up program was dependent upon reimbursement
authorization under Medicare and by other third-party payors. Although the
Company's program services were approved for reimbursement by several private
insurers, such services are not reimbursable under current Medicare guidelines.
Because the Company does not believe that Medicare reimbursement for both
services will be authorized in the near future, the Company has determined to
discontinue offering the service until the availability of Medicare
reimbursement is more certain.

Training and Quality Assurance

         As of November 30, 1996, the Company employed approximately 153 full
time equivalent technologists in all of its cardiac monitoring and testing
operations. 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. The
Company's technologists are directed by board-certified cardiologists 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.

DIAGNOSTIC IMAGING SERVICES

         The Company provides outpatient diagnostic imaging services through
operating and investment interests in 12 free-standing imaging centers and two
mobile MRI units (the "Imaging Centers"). The Company also operates the Raytel
Imaging Network, a specialized preferred provider network currently consisting
of 241 independent imaging centers located from Maryland to New York, including
four centers 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 MRI, computed tomography ("CT"), nuclear medicine,
radiography/fluoroscopy ("R/F"), ultrasound, general X-ray and 


                                       9
<PAGE>   10
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 tranquilizing agents) and subject the patient either to sound
waves (ultrasound), X-rays (CT, R/F and X-ray mammography) or radio waves (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.

Raytel Imaging Centers

         The Imaging Centers are located in six states, with clusters in the
northeast and California. All of the Imaging Centers offer MRI services, and six
offer other imaging modalities. The Company owns four of the Imaging Centers 
and holds its interests in the other eight through investments in various joint 
ventures and limited partnerships (the "Ventures"). Historically, the Company 
provided imaging equipment and/or financing for most of the Ventures. In 
exchange for providing such equipment and/or financing, the Company receives a 
fixed priority payment as defined in each Venture agreement. To the extent 
that each Venture has distributable cash after such priority payments, the 
Company will also receive a cash distribution to the extent of its 
proportionate Venture interest which ranges from 37.5% to 90%. In Imaging 
Centers where the equipment is not owned by the Company, the Company receives 
only its proportionate Venture interest in the distributable cash of the 
entity. The Company provides management services to seven of the Imaging 
Centers (including the four owned by the Company). Such services include 
marketing, data processing, billing and collection, accounting and supervision.
Day-to-day management of the other five Imaging Centers is the responsibility
of either the Company's Venture partners or independent managers who receive a
fee based upon the Imaging Center's revenues.

        The Ventures were established for fixed terms. Ventures that operate
four consolidated and two unconsolidated Imaging Centers are scheduled to
terminate on or before July 31, 1997. Unless these terminating Ventures are
extended or restructured by the Company and its Venture partners, these
Ventures will discontinue operations. See Item 3, "Legal Proceedings," for a
description of the dispute between the Company and one of its Venture partners
relating to the expiration of the term of one of the Imaging Centers. Ventures
that operate the remaining Imaging Centers have terms that expire between 1999
and 2026.

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 


                                       10
<PAGE>   11
independent diagnostic imaging centers. In addition, the Company's purchasing
power allows it to provide participating centers with supplies, such as drugs
and film, 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, Maryland, and New 
York. The Network currently provides diagnostic imaging services under 
referral arrangements with approximately 90 organizations administering 
healthcare programs covering more than 400,000 individual participants. 

SALES AND MARKETING

         The Company's marketing activities are directed at managed care
organizations 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 through a sales force made up of 17 full-time regional field 
managers who direct a network of over 350 part-time salespersons and 
independent sales representatives, and supported by the Company's customer
service and telemarketing personnel. The Company's sales force works closely 
with the approximately 15,000 physicians currently prescribing the Company's 
pacemaker monitoring services. The Company works closely with all major 
pacemaker manufacturers and has agreements with certain manufacturers for the 
distribution of the Company's services through their direct sales forces. In 
addition, the Company has arrangements with the major pacemaker manufacturers 
to place its prescription form in the document packages included with their 
pacemakers.

         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.

                                       11
<PAGE>   12
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 selling 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

         The Company markets the services of its heart centers using the basic
approach employed with the Imaging Centers. As is the practice at the Granada
Hills Heart Center, each heart center will undertake marketing activities
specifically structured for its local or regional market. The manager of each
heart center will initiate and maintain contact with local referring physicians.
The Company's central sales organization will support 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 will coordinate 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 will negotiate contacts with managed care organizations. This group will
also assist the center manager in addressing the needs of such organizations.

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, Holter monitoring and cardiac event detection services
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,
1996, 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.

         All of the billing and collection functions for the Company's
cardiology operations are centralized at the Company's facilities in Connecticut
and New Jersey. As of November 30, 1996, the Company employed approximately 64
billing and collection personnel. 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 


                                       12
<PAGE>   13
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 it manages and
expects to manage these functions centrally for certain of its heart centers.

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

                                       13
<PAGE>   14
         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 anticipates that its heart centers and catheterization
laboratories will derive a substantial portion of their revenue from payments
made under the Medicare program. 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 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 


                                       14
<PAGE>   15
six month working capital deficiency during the start-up phase for all newly
developed heart 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.

Stark Legislation and 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 Legislation") 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 Legislation include civil monetary penalties, exclusion
from the Medicare and Medicaid programs and forfeiture of amounts collected in
violation of such prohibition. The Stark Legislation 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.

         In addition to the limitations of the Stark Legislation, 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
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 Office of the Inspector
General of HHS 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.

         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.
The Company holds interests in 8 diagnostic imaging centers through investments
in the Ventures. Day-to-day management of five of these Venture centers is
controlled by the Company's Venture partners or by independent managers, and the
Company is unable to exercise significant control over the operation of these
centers.  While the Company believes that these centers operate in material


                                       15
<PAGE>   16
compliance with all applicable laws, the Company may not be responsible for
ensuring compliance with these laws by other centers under its joint venture and
partnership agreements. However, failure of the entity operating or managing
such centers to ensure compliance may adversely affect the Company's business,
financial condition or operating results. In 1994, a joint venture in which a
Company subsidiary was a non-managing general partner was subject to litigation
brought on behalf of the federal government by a private plaintiff relating to
alleged non-compliance with the Fraud and Abuse laws. Such litigation was
settled with no material adverse consequences to the Company. There can be no
assurance that additional challenges under such laws or regulations or new laws
or regulations will not require the Company or its affiliated entities to change
their practices or will not have a material adverse effect on the Company's
business, financial condition or operating results. 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 may make it more difficult for the Company to develop heart centers,
catheterization laboratories or other diagnostic 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. The Company has applied for a license for its free-standing
cardiac catheterization laboratory in Fremont, California under a pilot program.
Although the 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. However, there can be no assurance that a license will be granted on
acceptable terms, if at all. If the Company cannot obtain such license, it is
uncertain under current California regulations whether the Company could
otherwise separately obtain a license to operate a free-standing catheterization
laboratory.

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.


                                       16
<PAGE>   17

MEDICAL MALPRACTICE INSURANCE

         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. Although the Company's employees do not practice
medicine, 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 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. 


                                       17
<PAGE>   18
In operating its heart centers, the Company encounters competition from
physician groups, general acute care hospitals and free-standing 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 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.

         Diagnostic imaging is performed in hospitals, private physicians'
offices, clinics operated by group practices of physicians and independent
imaging centers. Although the Company and its affiliates operate in New York,
New Jersey, Massachusetts, Pennsylvania, and California, competition focuses on
physician referrals at the local market level. Principal competitors in each of
the Company's markets are hospital and physician affiliated imaging centers,
some of which may have greater financial and other resources than the Company,
more experience and greater name recognition than the local managers and
radiologists associated with the Company's Imaging Centers, 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. The Company believes that it competes
favorably with other providers of diagnostic imaging services based on the
quality of its service, its emphasis on sophisticated equipment, and the
professionalism of its staff, among other factors. 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, including at least one
publicly-held Company of which the Company is aware whose primary business
consists of the development and operation of cardiac care centers.

EMPLOYEES

         As of November 30, 1996, the Company employed approximately 554 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 and San Mateo, California. The Windsor facility,
consisting of approximately 33,000 square feet, is occupied under a lease
expiring in July 1999. The New York facility, consisting of approximately 23,300
square feet, is occupied under a lease expiring in September 1996. The
Haddonfield facility, consisting of approximately 13,000 square feet, is
occupied under a lease expiring in June 1997. The San Mateo facility, consisting
of approximately 2,400 square feet, is occupied under a lease expiring in June
1998. 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. 


                                       18
<PAGE>   19
The Company generally considers its properties to be in good condition and 
suitable for the Company's anticipated needs.


ITEM 3.  LEGAL PROCEEDINGS

         The Company and certain of its subsidiaries are involved in litigation
with Medical Diagnostics, Inc. ("MDI"), the joint venture partner in Mass.
Mobile Imaging Venture ("MMIV"), one of the Ventures in which the Company,
through a subsidiary, holds an interest. The dispute arose out of MDI's proposal
to co-develop a new MRI center with a hospital utilizing assets of MMIV. In the
course of the dispute, other differences have arisen between the Company and MDI
concerning provisions of the joint venture agreement, the ability of MDI to
adequately manage MMIV and other matters concerning the operations of the
Imaging Centers owned by MMIV. In September 1992, MDI filed an action against
the Company, certain of its subsidiaries and certain other defendants in the
Superior Court of the Commonwealth of Massachusetts, County of Middlesex. The
suit alleges that the Company and the other defendants violated fiduciary and
contractual obligations to MDI and MMIV by refusing to approve the development
of the new center and by generally failing to cooperate in good faith with MDI
in the business affairs of MMIV and seeks declaratory relief, the dissolution of
MMIV, unspecified damages and injunctive relief. In addition to denying MDI's
allegations, the Company has asserted counterclaims, alleging that MDI and an
affiliate of MDI have breached their fiduciary and contractual obligations to
the Company and MMIV and have sought to benefit their own business interests at
the expense of the Company and MMIV. The counterclaim seeks the removal of MDI
as the manager of MMIV and equity participation, or damages in lieu of equity
participation, in the new center for the duration of the operating agreement
with the hospital. The Company believes that the complaint filed against it is
without merit and is vigorously defending the complaint and prosecuting its
counterclaims relating to the new center and the management of MMIV.

         In September 1996, the Company won an administrative decision related
to a billing dispute with a New York Medicare carrier. The Company billed the
carrier at a reimbursement rate which was in effect at the time the Company
acquired the CardioCare division from Medtronic, Inc. in 1993. The reimbursement
rate was confirmed by the carrier after the acquisition. Following an audit of
the carrier by the Healthcare Finance Administration ("HFCA"), the Company was
ordered to return approximately $4 million to Medicare, a decision the Company
appealed. The Company was notified on September 23, 1996, that an 
administrative law judge found that the Company was without fault and is 
entitled to the reimbursement of approximately $4 million in question.

         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.


                                       19
<PAGE>   20
                                     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 37 of the Company's 1996 Annual Report to Shareholders.


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 17 of the Company's 1996 Annual Report to Shareholders.


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 18 to 22 of the
Company's 1996 Annual Report to Shareholders.


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 23 to 36 of the 
Company's 1996 Annual Report to Shareholders.


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

         Not Applicable.


                                       20
<PAGE>   21
                                    PART III


         Certain information required by Part III is omitted from the 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."

         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
Executive Compensation and Other Matters."


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."


                                       21
<PAGE>   22
                                     PART IV


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

(A)      1. FINANCIAL STATEMENTS:

         Independent Auditors Report
         Consolidated Statements of Income for the Years Ended September 30,
         1996, 1995 and 1994
         Consolidated Balance Sheets as of September 30, 1995 and 1996
         Consolidated Statements of Shareholders' Equity for the Years Ended 
         September 30, 1996, 1995 and 1994
         Consolidated Statements of Cash Flows for the Years Ended September 30,
         1996, 1995 and 1994
         Notes to Consolidated Financial Statements
         Supplementary Data: Quarterly Financial Data (unaudited)


         2. FINANCIAL STATEMENT SCHEDULES

         Schedule II - Valuation and Qualifying Accounts
         Independent Auditor's Report


         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, 1996

         None.


                                       22
<PAGE>   23
                                   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 30, 1996           By: /s/ RICHARD F. BADER
                                       ------------------------------
                                            Richard F. Bader
                                            Chairman and Chief Executive Officer
                                 

                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael Kokesh and E. Payson Smith, Jr.,
or either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this Report
on Form 10-K and to file the same, with all exhibits thereto and other documents
in connection therewith with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might and could do in person, hereby ratify and confirming all that said
attorneys-in-fact and agents, or either of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

         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 Officer                December 26, 1996
  --------------------                (Principal Executive Officer)
   (Richard F. Bader)                 

   /s/ ALLAN ZINBERG*                 President, Chief Operating Officer and Director                  December 26, 1996
   ------------------
     (Allan Zinberg)

/s/ E. PAYSON SMITH, JR.              Senior Vice President and Chief Financial Officer                December 26, 1996
------------------------              (Principal Financial and Accounting Officer)
 (E. Payson Smith, Jr.)               

/s/ THOMAS J. FOGARTY                 Director                                                         December 26, 1996
---------------------
   (Thomas J. Fogarty)

  /s/ ALBERT J. HENRY*                Director                                                         December 26, 1996
  --------------------
    (Albert J. Henry)

                                      Director                                                         December __, 1996
     ---------------
    (Gene I. Miller)

    /s/ DAVID ROLLO*                  Director                                                         December 26, 1996
    ----------------
      (David Rollo)

/s/ TIMOTHY J. WOLLAEGER*             Director                                                         December 26, 1996
-------------------------
 (Timothy J. Wollaeger)
</TABLE>


                                       23
<PAGE>   24
              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 balance sheets of Raytel Medical Corporation and
Subsidiaries as of September 30, 1996 and September 30, 1995 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1996
included in this Form 10-K, and have issued our report thereon dated November 8,
1996. 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 8, 1996


                                       24
<PAGE>   25
                                                                Schedule II

                  RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES

             For the years ended September 30, 1996, 1995 and 1994

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                              Balance at        Charged to
                                              Beginning of      Cost and                           Balance at
                                              Year              Expenses         Deductions        End of Year
                                              ----------------------------------------------------------------
<S>                                           <C>               <C>              <C>               <C>
DESCRIPTION

September 30, 1996
        Allowance for doubtful accounts       $7,709,000        $5,352,000       $(7,206,000)      $5,855,000

September 30, 1995
        Allowance for doubtful accounts       $8,220,000        $5,187,000       $(5,698,000)      $7,709,000

September 30, 1994
        Allowance for doubtful accounts       $9,395,000        $4,643,000       $(5,818,000)      $8,220,000
</TABLE>


                                       25
<PAGE>   26
                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT                            EXHIBIT TITLE                                      
NUMBER                             -------------                                             
-------                                                                                      

<S>           <C>                                                                            
++2.1(1)      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.

++2.2(1)      Agreement for the Purchase and Sale of Assets, 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., and Michael L. Smith, M.D.

 ++2.3(1)     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.


  3.1(2)      Restated Certificate of Incorporation of the Registrant, as             
              proposed to be amended.                                                 

  3.2(3)      Bylaws of the Registrant, as amended.                                   

  4.1(4)      Registration Rights Agreement dated October 31, 1985 among the          
              Registrant and certain of its stockholders.

 *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.                               

 *10.5(4)     Executive Deferred Compensation 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.                                           

 *10.10(4)    Employment Agreement dated September 28, 1995 between the               
              Registrant and E. Payson Smith, Jr.                                     

  10.11(4)    Asset Purchase Agreement dated February 26, 1993 between the            
              Registrant and Medtronic, Inc.                                          

  10.12(4)    Warrant dated February 26, 1993 issued to Medtronic, Inc. and           
              related Put Agreement dated February 26, 1993 between the
              Registrant and Medtronic, Inc., with form of Registration
              Rights Agreement.

  10.13(4)    Subordinated Promissory Note dated February 26, 1993 issued to          
              Medtronic, Inc.                                                         

  10.14(4)    Services Agreement dated February 26, 1993 between the                  
              Registrant and Medtronic, Inc.                                                
</TABLE>


                                       26
<PAGE>   27
<TABLE>
<S>           <C>                                                                          
     10.21(4)    Warrant issued to Thomas J. Fogarty, M.D. August 30, 1990.                    

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

     10.23(4)    Lease dated August 27, 1993 between the Registrant and USGC                   
                 Joint Venture.                                                                

     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.

     10.25(4)    Letter of Intent dated May 31, 1995 between the Registrant and                
                 Stanford Health Services and related letter dated June 12,
                 1995 from Bruce A. Reitz, M.D.

    +10.26(4)    American Diagnostics and Management, Inc. Diagnostic                          
                 Catheterization Services Agreement dated September 2, 1992
                 between American Diagnostics And Management, Inc. ("ADAM") and
                 Southmore Medical Center, as assumed from ADAM by Registrant.

    +10.27(4)    American Diagnostics And Management, Inc. Diagnostic                          
                 Catheterization Services Agreement dated June 10, 1993
                 between ADAM and Southmore Medical Center, as assumed from
                 ADAM by Registrant.

     10.28(4)    Joint Venture Agreement dated March 3, 1988 between Medical                   
                 Imaging Partners, L.P. and California Medical Imaging
                 Services, Inc., as amended, and related agreements.

     10.29(4)    Joint Venture Agreement dated November 25, 1987 between                       
                 Medical Imaging Partners, L.P. and Mastercare Diagnostic
                 Limited Partners, as amended, and related agreements.

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

     10.31(4)    Amended and Restated Joint Venture Agreement dated August 6,                  
                 1990 between Medical Imaging Partners, L.P. and Medical
                 Diagnostics, Inc., and related agreements.

     10.32(4)    Letter Agreement dated October 2, 1995 between the Registrant                 
                 and Bank of Boston Connecticut.                                               

     10.33(4)    Letter of Intent dated October 26, 1995 between the Registrant                
                 and Granada Hills Community Hospital.

    +10.34(5)    Cardiac Catheterization Facility and Administrative Services 
                 Agreement dated January 10, 1996 between the Company and 
                 Stanford Health Services.

    +10.35(6)    Letter Agreement dated January 9, 1996 between the Company and
                 International Philanthropic Hospital Foundation, doing business
                 as Granada Hills Community Hospital.

    +10.36(7)    Cardiac Catheterization Facility and Administrative Services 
                 Agreement dated January 10, 1996 between the Company and 
                 Stanford Health Services.

    +10.37(8)    Letter Agreement dated January 9, 1996 between the Company and
                 International Philanthropic Hospital Foundation, doing business
                 as Granada Hills Community Hospital.

   ++10.38       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. Reference is made to
                 Exhibit 2.1.

   ++10.39       Agreement for the Purchase and Sale of Assets, 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., and Michael L. Smith, M.D., Reference is made
                 to Exhibit 2.2.

   ++10.40       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. Reference is made to Exhibit 2.3.

    *10.41       Employee Stock Purchase Plan dated May 8, 1996

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

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

     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.

</TABLE>


                                       27
<PAGE>   28
<TABLE>
<S>           <C>                                                                           <C>
     24.1     Power of Attorney.  Reference is made to page 23 of this Report on Form 10-K.  

     27       Financial Data Schedule.

</TABLE>
---------- 
*       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. 
++      Confidential treatment has been requested as to a portion of this
        Exhibit. 
(1)     Incorporated by reference to identically numbered exhibit to the
        Registrant's Form 8-K Reports filed on October 3, 1996.
(2)     Incorporated by reference to identically numbered exhibits to the
        Registrant's Form 10-Q Report for the quarter ended December 31, 1995
        (the "December 1995 Form 10-Q").
(3)     Incorporated by reference to Exhibit 3.3 to the Registrant's
        Registration Statement on Form S-1, No. 33-97860, which became effective
        on November 30, 1995 (the "1995 Registration Statement").
(4)     Incorporated by reference to identically numbered exhibit to the 1995 
        Registration Statement.
(5)     Incorporated by reference to Exhibit 10.1 to the December 1995 Form
        10-Q. 
(6)     Incorporated by reference to Exhibit 10.2 to the December 1995 Form
        10-Q. 
(7)     Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
        Report for the quarter ended June 30, 1996 (the "June 1996 Form 10-Q").
(8)     Incorporated by reference to Exhibit 10.2 to the June 1996 Form 10-Q.

                                       28