<PAGE>   1
                                                                    EXHIBIT 13.1


FIVE YEAR FINANCIAL SUMMARY

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------------------------------------
(000's omitted, except per share data)               1998          1997          1996         1995         1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                <C>           <C>           <C>          <C>          <C>     
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Revenues:
  Pacing, CEDS and Holter                          $  46,171     $  47,227     $ 43,649     $ 41,384     $ 38,661
  Diagnostic imaging service                          19,977        17,610       19,970       20,516       19,150
  Heart Center, practice management and other         41,481        18,578        8,896        1,562          964
                                                   --------------------------------------------------------------
Total revenues                                       107,629        83,415       72,515       63,462       58,775

Operating costs and selling, general and
  administrative expenses                             85,633        63,273       56,412       47,353       44,821
Depreciation and amortization                          8,282         6,306        5,590        5,806        5,880
Non-recurring tender offer expense                        --            --           --        1,050           --
                                                   --------------------------------------------------------------
Operating income                                      13,714        13,836       10,513        9,253        8,074
Interest expense                                       2,990           785          514        2,118        2,463
Other (income)                                          (511)       (3,076)        (591)        (347)        (305)
Minority interest                                      1,273           485          762        1,161        1,099
                                                   --------------------------------------------------------------
Income before income taxes                             9,962        15,642        9,828        6,321        4,817
Provision for income taxes                             3,869         6,257        3,248        1,960        1,004
Income before extraordinary item                       6,093         9,385        6,580        4,361        3,813
Extraordinary item, net of related tax benefit            --           721          449           --           --
                                                   --------------------------------------------------------------
Net income                                         $   6,093     $   8,664     $  6,131     $  4,361     $  3,813
                                                   ==============================================================
Net income per share before extraordinary item:
  Basic                                            $     .69     $    1.11     $    .86     $    .84     $    .74
                                                   ==============================================================
  Diluted                                          $     .66     $    1.04     $    .80     $    .78     $    .69
                                                   ==============================================================
Net income per share:
  Basic                                            $     .69     $    1.02     $    .80     $    .84     $    .74
                                                   ==============================================================
  Diluted                                          $     .66     $     .96     $    .75     $    .78     $    .69
                                                   ==============================================================
Weighted average shares outstanding:
  Basic                                                8,879         8,458        7,623        5,210        5,135
                                                   ==============================================================
  Diluted                                              9,294         9,039        8,194        5,617        5,548
                                                   ==============================================================

CONSOLIDATED BALANCE SHEET DATA:

Total assets                                       $ 122,186     $ 119,421     $ 68,030     $ 46,768     $ 50,245
Long-term debt and capital lease obligations(1)       36,997        36,354        7,576       14,550       20,518
Total stockholders' equity                            66,491        61,899       48,878       21,499       17,160
</TABLE>

(1) Includes current portion of long-term debt and capital lease obligations
plus unamortized debt discount.



                                     PAGE 5
<PAGE>   2

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

The Company generates the majority of its revenues from the provision of
transtelephonic monitoring services for cardiac pacemaker patients ("Pacing"),
cardiac event detection services ("CEDS") and Holter, diagnostic imaging
services and cardiac catheterization procedures.

Following the Company's initial public offering in December 1995, the Company
has entered into a series of transactions which have expanded its heart center
and physician practice management businesses. As a result, revenue is also being
provided from: the Raytel Heart Center at Granada Hills ("RHCGH") beginning on
February 1, 1996; the management of Southeast Texas Cardiology Associates II
P.A. ("SETCA") beginning on September 18, 1996; the management of Comprehensive
Cardiology Consultants, a Medical Group, Inc. ("CCMG") beginning on November 1,
1996; and Cardiovascular Ventures, Inc. ("CVI") beginning on August 15, 1997,
which included the multi-specialty physician practice, Heart and Family Health
Institute ("HFHI") and seven cardiovascular diagnostic facilities.

The Company's investments in two ventures ("Ventures") that operated four of the
consolidated diagnostic imaging centers terminated during fiscal 1997. Revenues
contributed by these ventures were $1,318,000 and $3,924,000, for the years
ended September 30, 1997 and 1996, respectively.

On October 18, 1996, the Company, through a subsidiary, entered into a long-term
management service agreement whereby the Company will manage the non-medical
aspects of the CCMG practice. Total consideration for the transaction was cash
of $427,000, promissory notes of $620,000 and 14,376 shares of the Company's
Common Stock to be delivered at future dates, valued at $91,000 (which
represents a discount from the trading price of the stock at the time of the
transaction due primarily to the delay in the delivery of the shares).

In September 1996, the Company received a favorable administrative decision
related to a billing dispute with a New York Medicare carrier whereby it was
entitled to receive approximately $4.0 million. The time period for the
Healthcare Finance Administration ("HCFA") and the Social Security
Administration to file an appeal expired on February 10, 1997. After accounting
for administrative costs and reimbursements due to Medtronic under the terms of
the acquisition of CardioCare and a separate provision against the value of a
non-operating asset, the Company recognized other income of $2,510,000 pretax in
its second fiscal quarter ending March 31, 1997, with a positive after tax
effect of $1,506,000 or $.17 per share (the "Decision").

Under certain practice management contracts, revenues are recognized pursuant to
long-term arrangements with physician groups under which the Company provides
the physician group with a full range of services, including, but not limited
to, office space, specialized clinical and procedural facilities, medical
equipment, data processing and medical record keeping, billing and collection
procedures and services, non-physician licensed personnel, such as nurses and
technicians, as well as office staff and administrative personnel. In the case
of SETCA and CCMG, the Company's practice management revenues are derived from
the physician groups' revenues, generally as a purchased service, except for
certain physician compensation and employment benefits, which are paid by the
physician group on a priority basis. Under the above management services



                                     PAGE 6
<PAGE>   3

arrangements, the Company's practice management revenues represent approximately
56% of the revenues of the physician groups for the years ended September 30,
1998 and 1997. For HFHI, the Company recognizes 100% of all medical revenue as
the physicians are employees of the Company.

On August 15, 1997, the Company acquired all of the outstanding capital stock of
CVI, of New Orleans, Louisiana. CVI manages, owns and operates cardiovascular
diagnostic facilities in Texas, Louisiana and Florida and owns and manages a
physician practice in Florida. Total original consideration for the transaction
consisted of cash and transaction costs of approximately $16,980,000, and
500,000 shares of Raytel Common Stock. During fiscal 1998, there were additional
transaction costs of approximately $280,000 and an additional 46,668 shares of
the Company's Common Stock has been or will be issued. The contingent promissory
notes in the aggregate principal amount of $820,000 were cancelled in accordance
with the terms of the agreement.

On October 9, 1997, the Company announced it had entered into an agreement with
The Baptist Hospital of Southeast Texas to develop a Raytel Heart Center at the
hospital. Under the agreement, Raytel will manage the heart center, which will
provide a range of cardiovascular services, including diagnostic, therapeutic
and patient wellness programs. Among other duties, Raytel will be responsible
for the day-to-day operations of the heart center, including administrative
support, information systems management and public relations activities. The
Company began operations at Baptist Hospital during the fourth quarter of fiscal
1998.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain data derived
from the Consolidated Statements of Operations as a percentage of total
revenues:

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended September 30,
----------------------------------------------------------------------------------
                                                   1998        1997         1996
----------------------------------------------------------------------------------
<S>                                                <C>         <C>          <C>   
Total revenues                                     100.0%      100.0%       100.0%
Operating costs and selling, general and
  administrative expenses                           79.6        75.9         77.8
Depreciation and amortization                        7.7         7.6          7.7
                                                   -------------------------------
Operating income                                    12.7        16.5         14.5
Interest expense and other (income) expense          2.3        (2.8)         (.1)
Minority interest                                    1.2          .5          1.1
                                                   -------------------------------
Income before income taxes                           9.2        18.8         13.5
Provision for income taxes                           3.6         7.5          4.5
                                                   -------------------------------
Income before extraordinary item                     5.6        11.3          9.0
Extraordinary item                                    --          .9           .6
                                                   -------------------------------
Net income                                           5.6%       10.4%         8.4%
                                                   -------------------------------
</TABLE>

Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997

The operations of CVI are included in the Company's Consolidated Statements of
Operations since August 15, 1997, the effective date of the Company's
acquisition of CVI. Accordingly, such results are included for fiscal 1998, but
are only included for 45 days of fiscal 1997.



                                     PAGE 7
<PAGE>   4

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenues. Pacing, CEDS and Holter revenues decreased by $1,056,000, or 2.2%,
from $47,227,000 in fiscal 1997 to $46,171,000 in fiscal 1998, due primarily to
a combination of competitive pressures and lower reimbursement rates for CEDS.
Diagnostic imaging service revenues increased by $2,367,000, or 13.4%, from
$17,610,000 in fiscal 1997 to $19,977,000 in fiscal 1998 due primarily to
increases in revenues at certain centers due to an increase in volume, partially
offset by decreased revenues due to the termination of two Ventures in fiscal
1997. Heart Center, practice management and other revenues increased by
$22,903,000, or 123.3%, from $18,578,000 in fiscal 1997 to $41,481,000 in fiscal
1998 due primarily to the inclusion of revenues from CVI.

As a result of the foregoing factors, total revenues increased by $24,214,000,
or 29.0%, from $83,415,000 in fiscal 1997 to $107,629,000 in fiscal 1998.

Operating Expenses. Operating costs and selling, general and administrative
expenses increased by 22,360,000, or 35.3%, from $63,273,000 in fiscal 1997 to
$85,633,000 in fiscal 1998, due primarily to the inclusion of costs and expenses
from CVI. Operating costs and selling, general and administrative expenses as a
percentage of total revenues increased from 75.9% in fiscal 1997 to 79.6% in
fiscal 1998 due primarily to the inclusion of revenues and costs and expenses
from CVI. At RHCGH operating expenses were slightly in excess of revenues for
both fiscal years.

Depreciation and Amortization. Depreciation and amortization expense increased
by $1,976,000, or 31.3%, from $6,306,000 in fiscal 1997 to $8,282,000 in fiscal
1998, due primarily to the inclusion of CVI, but remained relatively unchanged
as a percentage of revenues.

Operating Income. As a result of the foregoing factors, operating income
decreased by $122,000, or 0.9%, from $13,836,000 in fiscal 1997 to $13,714,000
in fiscal 1998.

Interest Expense. Interest expense increased by $2,205,000, or 280.9%, from
$785,000 in fiscal 1997 to $2,990,000 in fiscal 1998 due primarily to an
increase in debt due to the CVI acquisition.

Other Expense (Income). Other income decreased by $2,565,000 or 83.4% from
$3,076,000 in fiscal 1997 to $511,000 in fiscal 1998 due primarily to
non-recurring income resulting from the Decision.

Minority Interest. Minority interest increased by $788,000, or 162.5%, from
$485,000 in fiscal 1997 to $1,273,000 in fiscal 1998 due primarily to the
inclusion of CVI.

Income Taxes. The provision for income taxes decreased by $2,388,000, or 38.2%,
from $6,257,000 in fiscal 1997 to $3,869,000 in fiscal 1998 as a result of
decreased taxable income.

Extraordinary Item. An extraordinary charge of $721,000, net of the related tax
benefit, for the cost of restructuring certain indebtedness acquired with the
CVI purchase was recorded during the year ended September 30, 1997.

Net Income. As a result of the foregoing factors, net income decreased by
$2,571,000, or 29.7%, from $8,664,000 in fiscal 1997 to $6,093,000 in fiscal
1998.

Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996

The operations of RHCGH are included in the Company's Consolidated Statements of
Operations since February 1, 1996, the effective date of the agreement.
Accordingly, RHCGH's operations are included for all twelve months in fiscal
1997, but are only included for eight months in fiscal 1996. The operations of
CDS are included in the Company's Consolidated Statements of Operations since
June 11, 1996, the effective date of the Company's acquisition of CDS.
Accordingly, the operations of CDS are included for all twelve months in fiscal
1997, but are only included for approximately four months of fiscal 1996. The
results of operations from the management service agreement with SETCA are
included in the Company's



                                     PAGE 8
<PAGE>   5

Consolidated Statements of Operations since September 18, 1996, the effective
date of the agreement. Accordingly, such results are included for all twelve
months in fiscal 1997, but are only included for twelve days of fiscal 1996. The
results of operations from the management service agreement with CCMG are
included in the Company's Consolidated Statements of Operations since November
1, 1996, the effective date of its agreement. Accordingly, such results are
included for eleven months in fiscal 1997, but are not included in fiscal 1996.
The operations of CVI are included in the Company's Consolidated Statements of
Operations since August 15, 1997, the effective date of the Company's
acquisition of CVI.

Revenues. Pacing, CEDS and Holter revenues increased by $3,578,000, or 8.2%,
from $43,649,000 in fiscal 1996 to $47,227,000 in fiscal 1997, due primarily to
the inclusion of revenues from CDS. Diagnostic imaging service revenues
decreased by $2,360,000 or 11.8%, from $19,970,000 in fiscal 1996 to $17,610,000
in fiscal 1997, due primarily to the termination of one diagnostic imaging joint
venture on December 31, 1996 and another on June 30, 1997. Heart Center,
practice management and other revenues increased by $9,682,000 or 108.8% from
$8,896,000 in fiscal 1996 to $18,578,000 in fiscal 1997 due primarily to the
inclusion of revenues from the physician practice management agreements and from
CVI and RHCGH.

As a result of the foregoing factors, total revenues increased by $10,900,000,
or 15.0%, from $72,515,000, in fiscal 1996 to $83,415,000 in fiscal 1997.

Operating Expenses. Operating costs and selling, general and administrative
expenses increased by $6,861,000, or 12.2%, from $56,412,000 in fiscal 1996 to
$63,273,000 in fiscal 1997 due primarily to the inclusion of costs and expenses
from CVI, RHCGH, CDS and the management of the physician practices. These
increases were partially offset by decreases in costs and expenses at operating
facilities, other than CDS, which provide Pacing, CEDS and Holter services due
to cost containment measures. Operating costs and selling, general and
administrative expenses as a percentage of total revenues declined slightly at
RHCGH, where operating expenses were slightly in excess of revenues for the
years ended September 30, 1997 and 1996.

Depreciation and Amortization. Depreciation and amortization expense increased
by $716,000, or 12.8%, from $5,590,000 in fiscal 1996 to $6,306,000 in fiscal
1997 but declined as a percentage of revenues from 7.7% in fiscal 1996 to 7.6%
in fiscal 1997.

Operating Income. As a result of the foregoing factors, operating income
increased by $3,323,000, or 31.6%, from $10,513,000 in fiscal 1996 to
$13,836,000 in fiscal 1997.

Interest Expense. Interest expense increased by $271,000, or 52.7%, from
$514,000 in fiscal 1996 to $785,000 in fiscal 1997, due primarily to an increase
in debt due to the CVI acquisition and an increase in the principal amount
outstanding under equipment loans and capital leases due to the CVI acquisition.

Other Expense (Income). Other income increased by $2,485,000 from $591,000 for
fiscal 1996 to $3,076,000 for fiscal 1997 due primarily to the Decision.

Income Taxes. The provision for income taxes increased by $3,009,000, or 92.6%,
from $3,248,000 in fiscal 1996 to $6,257,000 in fiscal 1997 as a result of
increased taxable income and a higher effective tax rate in the current period.

Extraordinary Item. An extraordinary charge of $721,000, net of the related tax
benefit, for the cost of restructuring certain indebtedness acquired with the
CVI purchase was recorded during the year ended September 30, 1997. An
extraordinary non-cash charge of $449,000, net of the related tax benefit, for
the write-off of unamortized debt discount and capitalized debt issuance
expense, was recorded during the year ended September 30, 1996.

Net Income. As a result of the foregoing factors, net income increased by
$2,533,000, or 41.3%, from $6,131,000 in fiscal 1996 to $8,664,000 in fiscal
1997.



                                     PAGE 9
<PAGE>   6

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS ENVIRONMENT AND FUTURE RESULTS

The Company's future operating results may be affected by various trends in the
healthcare industry as well as by a variety of other factors, some of which are
beyond the Company's control.

The healthcare industry is undergoing significant change as third-party payors
attempt to control the cost, utilization and delivery of healthcare services.
Substantially all of the Company's revenues are derived 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. Although the Company's total revenues have increased
in each of the last three fiscal years, revenue growth of the Company's Pacing
operations during that period has been negatively impacted by Medicare
reimbursement rate reductions. Additional reimbursement rate reductions
applicable to the Company's Pacing procedures became effective on January 1,
1996 and January 1, 1997. These reductions had a negative effect on the
Company's operating results for fiscal 1996, fiscal 1997 and the first quarter
of fiscal 1998. The Company's Pacing operations have been favorably impacted
since January 1, 1998 due to an increase in Medicare reimbursement rates
effective on that date. However, effective January 1, 1999 the Company expects a
slight decrease in these reimbursement rates. The Company cannot predict with
any certainty whether or when additional reductions or changes in Medicare or
other third-party reimbursement rates or policies will be implemented. There can
be no assurance that future changes, if any, will not adversely affect the
amounts or types of services that may be reimbursed to the Company, or that
future reimbursement of any service offered by the Company will be sufficient to
cover the costs and overhead allocated to such service.

From time to time, Congress considers legislation to reduce Medicare and
Medicaid expenditures. Future legislation of this type could have a material
adverse effect on the Company's business, financial condition and operating
results. Governmental agencies promulgate regulations which mandate changes in
the method of delivering services which could have a material adverse effect on
the Company's business.

A key element of the Company's long-range strategy is the development and
operation of integrated heart centers and the acquisition of healthcare
providers specializing in cardiology related services and the assets of
physician practices and other businesses related to its current operations. The
success of the Company's existing and future heart centers and physician
practices will depend upon several factors, including the Company's ability to:
obtain and operate in compliance with appropriate licenses; control costs and
realize operating efficiencies; educate patients, referring physicians and
third-party payors about the benefits of such heart centers; and provide
cost-effective services that meet or exceed existing standards of care.

An element of the Company's strategy is to expand, in part, through acquisitions
and investments in complementary healthcare businesses. The implementation of
this strategy may place significant strain on the Company's administrative,
operational and financial resources and increased demands on its systems and
controls. There can be no assurances that businesses acquired by the Company,
either recently or in the future, will be integrated successfully and profitably
into the Company's operations, that suitable acquisitions or investment
opportunities will be identified, or that any such transactions can be
consummated.



                                    PAGE 10
<PAGE>   7

Providers of healthcare services are subject to numerous federal, state and
local laws and regulations that govern various aspects of their business. There
can be no assurance that the Company will be able to obtain regulatory approvals
that may be required to expand its services or that new laws or regulations will
not be enacted or adopted that will have a material adverse effect on the
Company's business, financial condition or operating results.

The healthcare businesses in which the Company is engaged are highly
competitive. The Company expects competition to increase as a result of ongoing
consolidations and cost-containment pressures, among other factors.

The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in the Company's operating
results, shortfalls in such operating results from levels forecasted by
securities analysts and other events or factors. In addition, the stock market
has, from time to time, experienced extreme price and volume fluctuations that
have particularly affected the market prices of companies in the healthcare
service industries and that have often been unrelated to the operating
performance of the affected companies. Announcements of changes in reimbursement
policies of third-party payors, legislative or regulatory developments, economic
news and other external factors may have a significant impact on the market
price of healthcare stocks.

LIQUIDITY AND CAPITAL RESOURCES

The Company acquired CDS in June 1996 for cash in the amount of $14,254,000,
SETCA in September 1996 for cash in the amount of $4,010,000, CCMG in November
1996 for cash in the amount of $427,000 and CVI in August 1997 for cash in the
amount of $16,980,000 plus $280,000 paid during fiscal 1998. At September 30,
1998, the Company had working capital of $31,168,000, compared to $24,391,000 at
September 30, 1997. At September 30, 1998, the Company had cash and temporary
cash investments of $7,463,000. At September 30, 1998, $28,225,000 was
outstanding under the Company's line of credit.

The Company batch-bills Medicare insurance carriers for most cardiac testing
services performed during the first few months of each calendar year. This
practice results in a temporary build-up of accounts receivable during the
Company's second and third fiscal quarters and the collection of these
receivables primarily during the subsequent fourth fiscal quarter.

The Company has a revolving line of credit with two banks in the amount of
$45,000,000 to fund working capital needs, future acquisitions, equipment
purchases and other business needs. Amounts outstanding under the line of credit
bear interest based on a defined formula and are subject to certain covenants.
The line of credit expires in August 1999 at which time any outstanding balance
will be converted to a five-year term loan.

The Company's long-term capital requirements will depend on numerous factors,
including the rate at which the Company develops and opens new heart centers or
acquires existing heart centers, physician practices or other businesses, if
any. The Company believes that its cash and cash equivalent balances, together
with amounts available from bank borrowings and cash generated by its operating
activities, will be adequate to meet the Company's anticipated needs for working
capital and capital expenditures through fiscal 1999.



                                    PAGE 11
<PAGE>   8

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YEAR 2000 COMPLIANCE

The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. Many existing computer
programs use only two digits instead of four to identify a year in the date
field. The Company has completed a thorough review of its material computer
applications. We have begun installation of a new billing and collection system
as well as a new accounting system. These new systems are Year 2000 compliant.
The Company had planned on replacing them regardless of the Year 2000 issue.
There are other systems at certain cardiovascular diagnostic facilities recently
acquired by the Company which may not be Year 2000 compliant, however, the
Company anticipates that all such systems will be replaced by its new systems
before the Year 2000. There can be no assurances that any systems at companies
purchased by or affiliated with the Company in the future will be Year 2000
compliant or, if not, will be converted on a timely basis. At the present time,
the Company does not anticipate that the cost for it to become Year 2000
compliant will have a material impact on the Company's financial statements.

The Company has initiated a program to determine whether the computer
applications of its significant vendors will be upgraded in a timely manner. The
Company has also initiated a program to determine whether embedded applications
which control medical and other equipment will be affected. The Company has not
yet completed these reviews. The Company has begun discussions with its payors
to determine the status of their systems. The nature of the Company's business
is such that any failure to these types of applications may have a material
adverse effect on its business.

Because of the many uncertainties associated with Year 2000 compliance issues,
and because the Company's assessment is necessarily based on information from
third-party vendors, payors and suppliers, there can be no assurance that the
Company's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct. At the present time, the Company has
not developed a contingency plan relative to Year 2000 compliance.



                                    PAGE 12
<PAGE>   9

PERCENTAGE OF CONSOLIDATED REVENUES

<TABLE>
<CAPTION>
                                              Fiscal Year Ended September 30,
-----------------------------------------------------------------------------
                                                 1998      1997      1996
-----------------------------------------------------------------------------
<S>                                              <C>       <C>       <C> 
Pacing, CEDS and Holter                           43%       57%       60%
Diagnostic imaging service                        19%       21%       28%
Heart Center, practice management and other       38%       22%       12%
                                                 ------------------------
  Total                                          100%      100%      100%
                                                 ========================
</TABLE>

SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended September 30, 1998
------------------------------------------------------------------------------------------------
(000's omitted, except per share amounts)   December 31,   March 31,     June 30,  September 30,
------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>          <C>          <C>    
Net revenues                                  $25,864       $27,151      $28,131      $26,483
                                              ===============================================
Income before income taxes                    $ 2,210       $ 2,657      $ 2,609      $ 2,486
Provision for income taxes                        884         1,063        1,043          879
                                              -----------------------------------------------
Net income                                    $ 1,326       $ 1,594      $ 1,566      $ 1,607
                                              ===============================================
Net income per share(1):
  Basic                                       $   .15       $   .18      $   .18      $   .18
                                              ===============================================
  Diluted                                     $   .14       $   .17      $   .17      $   .18
                                              ===============================================
</TABLE>


<TABLE>
<CAPTION>
                                                            Fiscal Year Ended September 30, 1997
---------------------------------------------------------------------------------------------------------
                                                      December 31,  March 31,     June 30,  September 30,
---------------------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>          <C>          <C>    
Net revenues                                            $20,652      $20,436      $19,758      $22,569
                                                        ==============================================
Income before income taxes and extraordinary item       $ 3,101      $ 5,817      $ 3,276      $ 3,448
Provision for income taxes                                1,240        2,327        1,311        1,379
                                                        ----------------------------------------------
Income before extraordinary item                          1,861        3,490        1,965        2,069
Extraordinary item, net of related tax benefit               --           --           --          721
                                                        ----------------------------------------------
Net income                                              $ 1,861      $ 3,490      $ 1,965      $ 1,348
                                                        ==============================================
Net income per share before extraordinary item(1):
        Basic                                           $   .22      $   .41      $   .23      $   .24
                                                        ==============================================
        Diluted                                         $   .21      $   .39      $   .22      $   .22
                                                        ==============================================
Net income per share(1):
        Basic                                           $   .22      $   .41      $   .23      $   .16
                                                        ==============================================
        Diluted                                         $   .21      $   .39      $   .22      $   .14
                                                        ==============================================
</TABLE>

(1) Quarterly per share earnings do not necessarily equal the total per share
    earnings reported for the year as a result of the dilutive effect of common
    stock equivalents on the calculation of per share earnings.



                                    PAGE 13
<PAGE>   10

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                   September 30,
---------------------------------------------------------------------------------------------------------
(000's omitted)                                                             1998                   1997
---------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                    <C>     
ASSETS

Current assets:

  Cash and cash equivalents                                               $   7,463              $  7,873
  Receivables, net                                                           35,504                30,345
  Prepaid expenses and other                                                  3,996                 3,970
                                                                          -------------------------------
    Total current assets                                                     46,963                42,188
Property and equipment, less accumulated depreciation
  and amortization                                                           19,681                19,712
Intangible assets, less accumulated amortization                             55,497                57,486
Other assets                                                                     45                    35
                                                                          -------------------------------
    Total assets                                                          $ 122,186              $119,421
                                                                          ===============================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt and capital lease obligations         $   1,962              $  1,893
  Accounts payable                                                            4,649                 5,110
  Accrued compensation and benefits                                           2,920                 3,397
  Accrued other liabilities                                                   6,264                 7,397
                                                                          -------------------------------
    Total current liabilities                                                15,795                17,797

Long-term debt and capital lease obligations, net of current portion         35,035                34,461
Deferred liabilities                                                          1,405                 1,163
Minority interest in consolidated entities                                    3,460                 4,101
                                                                          -------------------------------
    Total liabilities                                                        55,695                57,522
                                                                          -------------------------------

Commitments and contingencies (Notes 9 and 13)

Stockholders' equity:
  Common stock                                                                    9                     9
  Additional paid-in capital                                                 61,790                61,261
  Common stock to be issued                                                   1,124                   943
  Retained earnings                                                           7,190                 1,097
                                                                          -------------------------------
                                                                             70,113                63,310

  Less treasury stock, at cost                                               (3,622)               (1,411)
                                                                          -------------------------------
    Total stockholders' equity                                               66,491                61,899
                                                                          -------------------------------
    Total liabilities and stockholders' equity                            $ 122,186              $119,421
                                                                          ===============================

</TABLE>



 The accompanying notes are an integral part of these consolidated statements.


                                    PAGE 14
<PAGE>   11

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                       September 30,
----------------------------------------------------------------------------------------------------
(000's omitted, except per share amounts)                  1998            1997               1996
----------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>                 <C>    
Revenues:
  Pacing, CEDS and Holter                                $  46,171       $ 47,227            $43,649
  Diagnostic imaging service                                19,977         17,610             19,970
  Heart Center, practice management and other               41,481         18,578              8,896
                                                         -------------------------------------------
    Total revenues                                         107,629         83,415             72,515
                                                         ===========================================

Costs and expenses:
  Operating costs                                           50,143         33,536             27,582
  Selling, general and administrative                       35,490         29,737             28,830
  Depreciation and amortization                              8,282          6,306              5,590
                                                         -------------------------------------------
    Total costs and expenses                                93,915         69,579             62,002
                                                         ===========================================
  Operating income                                          13,714         13,836             10,513
Interest expense                                             2,990            785                514
Other expense (income)                                        (511)        (3,076)              (591)
Minority interest                                            1,273            485                762
                                                         -------------------------------------------
  Income before income taxes and extraordinary item          9,962         15,642              9,828
Provision for income taxes                                   3,869          6,257              3,248
                                                         -------------------------------------------
  Income before extraordinary item                           6,093          9,385              6,580
Extraordinary item, net of related tax benefit                  --            721                449
                                                         -------------------------------------------
  Net income                                             $   6,093       $  8,664            $ 6,131
                                                         ===========================================

Net income per share before extraordinary item:
  Basic                                                  $     .69       $   1.11            $   .86
                                                         ===========================================
  Diluted                                                $     .66       $   1.04            $   .80
                                                         ===========================================
Net income per share:
  Basic                                                  $     .69       $   1.02            $   .80
                                                         ===========================================
  Diluted                                                $     .66       $    .96            $   .75
                                                         ===========================================
Weighted average shares:
  Basic                                                      8,879          8,458              7,623
                                                         ===========================================
  Diluted                                                    9,294          9,039              8,194
                                                         ===========================================
</TABLE>



 The accompanying notes are an integral part of these consolidated statements.


                                    PAGE 15
<PAGE>   12


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                     Preferred Stock       Common Stock     Additional   Common    Retained               Total
                                    --------------------------------------   Paid-in    Stock to   Earnings  Treasury  Stockholders'
(000's omitted, except shares)       Shares    Amount    Shares     Amount   Capital    be Issued  (Deficit)   Stock      Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>          <C>     <C>           <C>    <C>         <C>        <C>       <C>        <C>     
Balance at September 30, 1995       3,741,152   $ 7     1,039,683     $2     $ 31,410    $    --    $(9,920)  $    --    $ 21,499
Net income                                 --    --            --      -           --         --      6,131        --       6,131
Conversion of preferred
  stock to common stock            (3,741,152)   (7)    3,741,152      3            4         --         --        --          --
Issuance of common stock in
  payment of preferred dividends           --    --       472,250      -        3,778         --     (3,778)       --          --
Retirement of fractional shares            --    --          (230)     -           --         --         --        --          --
Payment of warrants                        --    --            --      -         (501)        --         --        --        (501)
Sale of common stock in
  initial public offering                  --    --     2,875,000      3       20,397         --         --        --      20,400
Value of 122,068 shares
  to be issued                             --    --            --      -           --        852         --        --         852
Warrants exercised                         --    --        15,760      -           63         --         --        --          63
Options exercised                          --    --       189,309      -          434         --         --        --         434
                                    ------------------------------------------------------------------------------------------------
Balance at September 30, 1996              --    --     8,332,924      8       55,585        852     (7,567)       --      48,878
Net income                                 --    --            --      -           --         --      8,664        --       8,664
Warrants exercised                         --    --        10,505      -           42         --         --        --          42
Options exercised                          --    --       191,494      -          369         --         --        --         369
Repurchase of shares                       --    --      (134,434)     -           --         --         --    (1,411)     (1,411)
Employee stock purchase                    --    --         5,908      -           63         --         --        --          63
Value of 14,376 shares
  to be issued                             --    --            --      -           --         91         --        --          91
Issuance of common stock
  for purchase of a company                --    --       500,000      1        5,202         --         --        --       5,203
                                    ------------------------------------------------------------------------------------------------

Balance at September 30, 1997              --    --     8,906,397      9       61,261        943      1,097    (1,411)     61,899
Net income                                 --    --            --      -           --         --      6,093        --       6,093
Warrants exercised                         --    --        31,359      -          125         --         --        --         125
Options exercised                          --    --        11,001      -           55         --         --        --          55
Repurchase of shares                       --    --      (322,600)     -           --         --         --    (2,211)     (2,211)
Employee stock purchase                    --    --         6,361      -           44         --         --        --          44
Value of 46,668 shares
  to be issued                             --    --            --      -           --        486         --        --         486
Value of 30,981 shares issued              --    --        30,981      -          305       (305)        --        --          --
                                    ------------------------------------------------------------------------------------------------

Balance at September 30, 1998              --   $--     8,663,499     $9     $ 61,790    $ 1,124    $ 7,190   $(3,622)   $ 66,491
                                    ================================================================================================
</TABLE>



 The accompanying notes are an integral part of these consolidated statements.


                                    PAGE 16
<PAGE>   13

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                         September 30,
--------------------------------------------------------------------------------------------------
(000's omitted)                                               1998           1997           1996
--------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>            <C>     
Cash flows from operating activities:

  Net income                                                 $ 6,093       $  8,664       $  6,131
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                            8,282          6,306          5,590
      Minority interest                                        1,273            485            762
      Other, net                                                 211           (735)           245
      Changes in operating accounts:
        Receivables, net                                      (5,813)        (3,137)           850
        Prepaid expenses and other                               (25)          (987)          (105)
        Accounts payable                                        (429)         1,494            651
        Accrued compensation, benefits and
          other liabilities                                   (1,286)           435            574
                                                             -------------------------------------
        Net cash provided by operating activities              8,306         12,525         14,698
                                                             -------------------------------------
Cash flows from investing activities:
  Capital expenditures                                        (5,092)        (3,828)        (3,022)
  Purchases of net assets and physician practice                  --           (427)       (18,264)
  Purchase of a company                                           --        (16,980)            --
  Additional costs of company previously purchased              (280)            --             --
  Cash acquired in purchase of a company                          --          1,384             --
  Other, net                                                    (396)           487            350
                                                             -------------------------------------
    Net cash used in investing activities                     (5,768)       (19,364)       (20,936)
                                                             -------------------------------------
Cash flows from financing activities:
  Net proceeds from borrowings                                 2,264         23,599          2,376
  Net proceeds from initial public offering                       --             --         20,400
  Repurchase of warrants                                          --             --         (2,101)
  Income distributions to noncontrolling investors            (1,560)          (862)          (738)
  Repurchase of company stock                                 (2,211)        (1,411)            --
  Principal repayments of debt                                (1,665)       (12,822)       (13,442)
  Other, net                                                     224            471            497
                                                             -------------------------------------
    Net cash provided by (used in) financing activities       (2,948)         8,975          6,992
                                                             -------------------------------------
Net increase (decrease) in cash and cash equivalents            (410)         2,136            754
Cash and cash equivalents at beginning of period               7,873          5,737          4,983
                                                             -------------------------------------
Cash and cash equivalents at end of period                   $ 7,463       $  7,873       $  5,737
                                                             =====================================
Supplemental disclosure of cash flow information:
  Interest paid                                              $ 2,925       $    822       $    454
                                                             =====================================
  Income taxes paid                                          $ 3,710       $  6,687       $  3,309
                                                             =====================================
</TABLE>



 The accompanying notes are an integral part of these consolidated statements.


                                    PAGE 17
<PAGE>   14


NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND DESCRIPTION OF THE COMPANY

Since 1990, Raytel Medical Corporation ("Raytel" or the "Company") or its
predecessor companies, have been in the medical service business. The Company
provides a range of services, focusing on the needs of patients with
cardiovascular disease and is the leading provider in the United States of
remote cardiac monitoring and testing services utilizing transtelephonic
technology. Also, the Company is developing integrated heart centers that are
located within existing hospitals and acquiring cardiology-related physician
practices, assets and facilities. Since 1990, the Company has acquired and/or
entered into agreements with various medical service providers. The significant
transactions occurring during the past three fiscal years are described below:

    (a) An agreement, with Granada Hills Community Hospital, became effective
    February 1, 1996 and provided for the creation of the Company's first
    integrated heart center, the Raytel Heart Center at Granada Hills ("RHCGH").
    The Company is responsible for the day-to-day operations of RHCGH, including
    administrative support and other non-medical aspects of the program. On
    September 29, 1998, the Company announced that it had reached a new
    agreement with the hospital which includes revised financial terms.

    (b) Effective June 11, 1996, the Company acquired certain assets and assumed
    certain liabilities of Cardio Data Services, Inc. ("CDS"). CDS provides
    clinical transtelephonic pacemaker monitoring, cardiac event detection and
    Holter monitoring services. The purchase price of the transaction was
    $14,254,000 and of such amount $13,985,000 was allocated to the acquisition
    of intangible assets, the majority of which is being amortized over 25
    years.

    (c) On September 18, 1996, the Company acquired all of the non-medical
    assets of Southeast Texas Cardiology Associates, P.A. ("SETCA") and entered
    into a long-term management service agreement whereby the Company will
    manage the non-medical aspects of the practice. The Company has assumed
    responsibility for providing office space as well as billing and collection
    activities and other management services.

        Total consideration for the transaction was cash and transaction costs
    of $4,010,000, promissory notes of $2,289,000 and 122,068 shares of the
    Company's Common Stock to be delivered at future dates, valued at $852,000.
    The shares of Common Stock were valued at a discount from the then current
    trading price of a share after considering all relevant factors, including,
    but not limited to, normal discounts for marketability due to the time delay
    in delivery of the shares. The recorded amounts for the aggregate number of
    shares of Common Stock to be delivered were discounted 40% from comparable
    cash sales of Common Stock. The scheduled issuance of the shares of Common
    Stock that the Company is committed to deliver are 48,828 in 1999, 36,620 in
    2000 and 36,620 in 2001.

    (d) On October 18, 1996, the Company entered into a long-term management
    service agreement whereby the Company will manage the non-medical aspects of
    Comprehensive Cardiology Consultants, a Medical Group, Inc. ("CCMG"), a
    physician practice.

        Total consideration for the transaction was cash of $427,000, promissory
    notes of $620,000 and 14,376 shares of the Company's Common Stock to be
    delivered at future dates, valued, as described above, at $91,000.

    (e) On August 15, 1997, the Company acquired all of the outstanding capital
    stock of Cardiovascular Ventures, Inc. ("CVI"). CVI manages, owns and
    operates several cardiovascular diagnostic facilities in Texas, Louisiana
    and Florida and owns and manages a physician practice in Florida.

        Total original consideration for the transaction was cash and
    transaction costs of approximately $16,980,000, 500,000 shares of the
    Company's Common Stock and contingent promissory notes in the aggregate
    principal amount of $820,000. During fiscal 1998 there were additional
    transaction costs of approximately $280,000 and an additional 46,668 shares
    of



                                    PAGE 18
<PAGE>   15

    the Company's Common Stock has been or will be issued. Also, the $820,000 of
    contingent promissory notes were cancelled in accordance with the terms of
    the agreement.

Unaudited pro forma consolidated financial information for the years ended
September 30, 1997 and 1996, as though the acquisitions of CVI and CDS had
occurred at the beginning of fiscal 1996, is as shown in the table below (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                               September 30,
---------------------------------------------------------------
                                            1997         1996
---------------------------------------------------------------
<S>                                       <C>           <C>    
Revenues                                  $104,345      $94,720
Net income                                $  9,446      $ 4,940
Net income per share:
        Basic                             $   1.05      $   .61
        Diluted                           $    .99      $   .57
Weighted average shares outstanding:
        Basic                                8,958        8,123
        Diluted                              9,539        8,694
</TABLE>

The Company's acquisitions have been accounted for as purchases in accordance
with generally accepted accounting principles. Accordingly, acquired assets and
assumed liabilities were recorded at their estimated fair values at the
acquisition date. In certain acquisitions, there was an excess of the purchase
price over the fair value of the net tangible assets acquired which was
allocated to identifiable intangible assets and goodwill (See Note 5).

In December 1995, the Company completed the initial public offering of its
Common Stock (the "Offering") which yielded net proceeds, after underwriting
discounts and expenses, of $20,400,000. 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 and $5,000,000 to repay substantially all of a
subordinated note. The remaining proceeds were used for working capital, general
corporate purposes and a portion of the purchase price for CDS.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries.

At September 30, 1998, the Company owned four imaging centers and held interests
in three others through investments in various joint ventures and limited
partnerships (the "Ventures"). All Ventures are consolidated for financial
reporting purposes, as the Company owns more than 50% of those Ventures and/or
controls their assets and operations.

Two Ventures that operated four consolidated imaging centers terminated during
fiscal 1997. Revenues contributed by these Ventures were $1,318,000 and
$3,924,000 for the years ended September 30, 1997 and 1996, respectively.

At September 30, 1998, the Company held interests in seven cardiovascular
diagnostic facilities, through investments in various limited partnerships (the
"Partnerships") and wholly-owned two others. All Partnerships are consolidated
for financial reporting purposes, as the Company owns more than 50% of those
Partnerships and/or controls their assets and operations.

Minority interests in consolidated entities represent the investment of
third-parties in certain consolidated Ventures and Partnerships.

All significant intercompany accounts and transactions are eliminated in
consolidation.



                                    PAGE 19
<PAGE>   16

NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS

(b) Revenue Recognition. Net patient and service revenues are recognized at
established rates when the services are provided. Contractual allowances are
calculated for services provided at less than the established rates as approved
by Medicare or other third-party payors and are recorded as deductions from
revenue. Diagnostic imaging service revenues principally represent net fees of
the consolidated Ventures for services provided to patients net of physician
fees and certain expenses.

In certain practice management contracts, revenues are recognized pursuant to
long-term arrangements with physician groups pursuant to which the Company
provides the physician group with a full range of services, including, but not
limited to, office space, specialized clinical and procedural facilities,
medical equipment, data processing and medical record keeping, billing and
collection procedures and services, non-physician licensed personnel, such as
nurses and technicians, as well as office staff and administrative personnel. In
the case of SETCA and CCMG, the Company's practice management revenues are
derived from the physician groups' revenues, generally as a purchased service,
except for physician compensation and employment benefits, which are paid by the
physician group on a priority basis.

Under the above management services arrangements, the Company's practice
management revenues represent approximately 56% of the revenues of the physician
groups for the years ended September 30, 1998 and 1997. For the physician
practice acquired with the CVI acquisition, the Company recognizes 100% of all
medical revenue as the physicians are employees of the Company.

Other revenues include other revenue and equity earnings of unconsolidated
entities.

(c) Cash Equivalents. For purposes of reporting cash flows, the Company
considers temporary investments with original maturities of three months or less
to be cash equivalents. The temporary investments are stated at cost, which
approximates market.

(d) Property and Equipment. Property and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets which range from three to ten years. Capital leases are
recorded at the present value of the future minimum lease payments. Capital
leases are amortized over the terms of the related lease on a straight-line
basis.

(e) Management Service Agreements. Management service agreements are each
recorded as an intangible asset consisting of the costs of purchasing the rights
to manage the medical group. The agreements contain an initial noncancelable
40-year term. Under these long-term agreements, the medical groups have agreed
to provide medical services on an exclusive basis only through facilities
managed by the Company. The agreements are noncancelable except for performance
defaults. In the event a medical group breaches the agreement, or if the Company
terminates with cause, the medical group is required to purchase all related
assets, including the unamortized portion of any management service agreement
and any other intangible assets, at the then net book value. Management service
agreements are being amortized over twenty years.

(f) Intangible Assets. Intangible assets principally consist of the excess of
cost over the fair value of the net tangible assets acquired. Such intangible
assets represent physician referrals and patient lists, joint
venture/partnership interests, non-compete covenants, capitalized debt issuance
expense and goodwill.

Amortization of capitalized debt issuance expense and goodwill is provided on a
straight-line basis. Amortization of physician referrals and patient lists and
joint venture/partnership interests is provided based upon the ratio of expected
annual revenues to expected total revenues to be generated over the estimated
life of the asset. The amortization periods of the intangibles range from two to
twenty-five years, with physician referrals and patient lists being amortized
over fifteen years and goodwill being amortized over ten to twenty-five years.



                                    PAGE 20
<PAGE>   17

(g) Income Taxes. The Company and its subsidiaries file consolidated federal and
state income tax returns. The Company accounts for income taxes in accordance
with the Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes.

(h) Extraordinary Item. An extraordinary noncash charge of $449,000 ($670,000
less $221,000 of related tax benefit) for the write-off of unamortized debt
discount and the write-off of capitalized debt issuance expense was recorded
during the year ended September 30, 1996. This charge resulted from the early
repayment of indebtedness and the repurchase of certain redeemable warrants from
the net proceeds of the Offering.

An extraordinary charge of $721,000 ($1,202,000 less $481,000 of related tax
benefit), for the cost of restructuring certain indebtedness acquired with the
CVI purchase was recorded during the year ended September 30, 1997.

(i) Use of Estimates.The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the related disclosures. Actual results could differ from those
estimates.

(j) New Accounting Standards. Recently, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information and SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. All statements are effective
for fiscal 1999 and relate only to additional disclosures. Therefore, the
adoption of these accounting standards will have no effect on the Company's
results of operations or financial position. Also SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities was issued in June 1998 (effective
for fiscal 2000). It will have no effect on the Company's results.

(k) Fair Value of Financial Instruments. The carrying amounts of all financial
instruments approximate fair value.

(l) Long-Lived Assets. The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.

NOTE 3. RECEIVABLES

Receivables consist of the following (in thousands):

<TABLE>
<CAPTION>
                                               September 30,
-----------------------------------------------------------------
                                            1998           1997
-----------------------------------------------------------------
<S>                                       <C>            <C>     
Patient and service receivables           $ 41,239       $ 34,114
Less allowance for doubtful accounts        (7,093)        (6,189)
                                          -----------------------
                                            34,146         27,925
Other receivables                            1,358          2,420
                                          -----------------------
  Total                                   $ 35,504       $ 30,345
                                          =======================
</TABLE>






                                    PAGE 21
<PAGE>   18

NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                              September 30,
----------------------------------------------------------------
                                          1998            1997
----------------------------------------------------------------
<S>                                     <C>             <C>     
Equipment, furniture and fixtures       $ 31,263        $ 28,495
Leasehold improvements                     8,928           7,768
                                        ------------------------
                                          40,191          36,263
Less accumulated depreciation            (20,510)        (16,551)
                                        ------------------------
                                        $ 19,681        $ 19,712
                                        ========================
</TABLE>

Depreciation expense was $4,820,000, $3,712,000 and $3,667,000 for the years
ended September 30, 1998, 1997 and 1996, respectively.

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                  September 30,
--------------------------------------------------------------------
                                              1998            1997
--------------------------------------------------------------------
<S>                                         <C>             <C>     
Goodwill                                    $ 48,752        $ 47,986
Physician referrals and patient lists         10,940          10,715
Management service agreements                  7,984           7,984
Other                                          6,245           5,803
                                            --------        --------
                                              73,921          72,488
Less accumulated amortization                (18,424)        (15,002)
                                            ------------------------
                                            $ 55,497        $ 57,486
                                            ========================
</TABLE>

Amortization expense related to intangible assets totaled $3,462,000, $2,594,000
and $1,923,000 for the years ended September 30, 1998, 1997 and 1996,
respectively.

NOTE 6. NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES

Notes payable, long-term debt and capital leases consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                    September 30,
------------------------------------------------------
                                1998            1997
------------------------------------------------------
<S>                           <C>             <C>     
Promissory notes(a)           $  2,609        $  2,609
Line of credit(b)               28,225          25,975
Other(c)                         6,163           7,770
                              ------------------------
                                36,997          36,354
Less current maturities         (1,962)         (1,893)
                              ------------------------
                              $ 35,035        $ 34,461
                              ========================
</TABLE>

(a) In connection with the SETCA and CCMG transactions, the Company issued
    promissory notes bearing interest at rates ranging from 10% to 12% per
    annum. Interest is payable quarterly.

(b) In August 1996, the Company entered into a line of credit for $25,000,000.
    This agreement was amended in September 1997 to expand the line of credit to
    $45,000,000 and was further amended on July 24, 1998 adjusting certain
    covenants. Under terms of the agreement



                                    PAGE 22
<PAGE>   19

    with two banks, this credit facility can be used to fund acquisitions and
    for working capital purposes. The Company can draw amounts under the line of
    credit until August 1, 1999, at which date amounts outstanding will convert
    into a term loan which will amortize on a semi-annual basis for the five
    years thereafter.

    The Company's access to the line of credit is subject to the maintenance of
    certain financial covenants related to the Company's level of indebtedness
    and cash flow. The interest rate is based upon LIBOR plus 150 basis points
    or the bank's prime rate at the option of the Company. At September 30,
    1998, the approximate weighted average interest rate was 7.24%. The line is
    collateralized by substantially all of the assets of the Company and its
    subsidiaries.

(c) Other debt includes a balance due in connection with the RHCGH transaction
    and nonrecourse notes and capital lease obligations with varying maturities
    at interest rates ranging from 8.29% to 12.75% per annum. The majority of
    these notes and leases are collateralized by the equipment purchased.

Notes payable, long-term debt and capital lease obligations maturing within each
of the five years subsequent to September 30, 1998 are as follows: 1999 --
$1,962,000; 2000 -- $6,943,000; 2001 -- $7,743,000; 2002 -- $7,778,000 and 2003
-- $6,386,000.

NOTE 7. PREFERRED STOCK AND COMMON STOCK

Effective upon the closing of the Offering in December 1995, all outstanding
Preferred Stock was converted into Common Stock. Upon the completion of the
Offering, 2,000,000 shares of undesignated Preferred Stock were authorized for
issuance. The Company's Board of Directors has the authority to issue such
Preferred Stock in one or more series and to establish its terms which may be
greater than the rights of the Common Stock. As of September 30, 1998, no such
shares had been issued.

The previously outstanding shares of Preferred Stock were entitled to receive
dividends. Upon the completion of the Offering, all accumulated dividends on the
Preferred Stock were paid with Common Stock in amounts determined by dividing
the total accumulated dividends by the Offering price.

In August 1998, the Board of Directors adopted a Stockholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, each outstanding share of Raytel Common
Stock held of record at the close of business on September 2, 1998, will receive
one right to purchase one one-hundredth of a share of a new series of Preferred
Stock for $30.00 per right when someone acquires 15 percent or more of Raytel's
Common Stock or announces a tender offer which could result in such person
owning 15 percent or more of the Common Stock. The rights expire on August 13,
2008.

There are 20,000,000 shares of Common Stock, $.001 par value, authorized.

NOTE 8. STOCK OPTIONS AND WARRANTS

Warrants

In connection with previous credit facilities, warrants were issued to the banks
to purchase 5% of the fully diluted Common Stock of certain subsidiaries under
certain circumstances. Such warrants were valued at $750,000 and $850,000,
respectively, and were being amortized over the life of the term loan. The
warrants were repurchased using proceeds of the Offering.

Upon completion of the Offering, in accordance with the terms of a 1993
acquisition, the Company issued the seller warrants to purchase 231,200 shares
of Common Stock at an exercise price of $8.40 per share. At September 30, 1998,
all such warrants are outstanding. The warrants will expire five years from the
effective date of the Offering.



                                    PAGE 23
<PAGE>   20

NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTION PLANS

The Company has options outstanding under the 1983 Incentive Stock Option Plan
as Amended (the "1983 Option Plan") and the 1990 Stock Option Plan (the "1990
Option Plan"). Generally, the 1983 Option Plan and the 1990 Option Plan
(together the "Plans") have similar terms. Terms for the option grants under the
Plans, including exercise price, are set by the Board of Directors. The exercise
price for incentive stock options must be at not less than the fair market value
of the underlying stock at the date of grant. The exercise price for
nonqualified options must be at not less than 85% of fair market value. Options
granted under the Plans have a term of five to ten years from the date of grant.
Vesting occurs ratably over a period ranging from two to four years beginning
with the effective date of grant.

Effective upon the closing of the Offering, and the conversion of Preferred
Stock into Common Stock in December 1995, all options outstanding to purchase
Preferred Stock were converted into options to purchase Common Stock.

The Company's Outside Directors Stock Option Plan (the "Directors Plan") was
approved by the stockholders in fiscal 1995. The Directors Plan provides for the
grant of 6,000 nonstatutory stock options to nonemployee directors of the
Company on the date on which the optionee first becomes a director of the
Company. Thereafter, the annual grant could be a maximum of 6,000 shares, as
defined. Total vesting occurs, based on a formula, no sooner than three years
nor longer than five years. The exercise price per share of all options granted
under the Directors Plan shall be equal to the fair market value of a share of
the Company's Common Stock on the date of grant.

In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), was issued. SFAS 123 requires the measurement of the fair value of stock
options or warrants to be included in the statements of operations or disclosed
in the notes to financial statements. The Company has determined that it will
retain its existing method of accounting for stock options and has elected the
pro forma footnote disclosure included in the tables below. Accordingly, SFAS
123 has no effect on the Company's consolidated financial position or results of
operations.

The Company has computed the pro forma disclosures required under SFAS 123 for
options granted in 1998, 1997 and 1996 using the Black-Scholes option pricing
model prescribed by SFAS 123. The weighted average assumptions used are as
follows:

<TABLE>
<CAPTION>
                                               September 30,
----------------------------------------------------------------------------
                                  1998             1997             1996
----------------------------------------------------------------------------
<S>                          <C>              <C>              <C>
Risk free interest rate      5.58% - 5.86%    5.74% - 6.68%    5.60% - 6.60%
Expected dividend yield          None             None             None
Expected lives                 3 years          3 years          3 years
Expected volatility             62.9%            61.6%            61.6%
</TABLE>







                                    PAGE 24
<PAGE>   21

Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates of awards under these plans consistent with
the method of SFAS 123, the Company's net income and net income per common share
would have decreased to the pro forma amounts indicated below (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                       September 30,
------------------------------------------------------------------------------
                                               1998         1997         1996
------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>   
Net income:

  As reported                                 $6,093       $8,664       $6,131
  Pro forma                                    5,086        8,338        5,532

Net income per common share -- basic:
  As reported                                    .69         1.02          .80
  Pro forma                                      .57          .99          .73

Net income per common share -- diluted:
  As reported                                    .66          .96          .75
  Pro forma                                      .55          .92          .68
</TABLE>

Because SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.

A summary of the status of the Company's three stock option plans at September
30, 1998, 1997 and 1996 and changes during the years then ended is presented in
the tables below:

<TABLE>
<CAPTION>
                                                                 September 30,
------------------------------------------------------------------------------------------------------------
                                              1998                    1997                      1996
------------------------------------------------------------------------------------------------------------
                                                   Weighted                Weighted                 Weighted
                                                   Average                 Average                  Average
                                                   Exercise                Exercise                 Exercise
                                       Shares       Price      Shares       Price       Shares       Price
                                      -------------------     --------------------     ---------------------
<S>                                   <C>           <C>       <C>           <C>        <C>           <C>   
Outstanding, beginning of year        1,026,712     $7.24     1,122,050     $ 7.34       705,183     $ 2.48
Granted                                 165,750      6.21       653,150       9.17       626,275      10.91
Exercised                               (11,001)     5.04      (191,494)      1.93      (189,309)      2.30
Expired                                (136,552)     8.99      (556,994)     11.38       (20,099)      5.76
                                      ---------               ---------                ---------
Outstanding, end of year              1,044,909      6.87     1,026,712       7.24     1,122,050       7.34
                                      =========               =========                =========
Exercisable, end of year                584,779      6.17       435,813       4.61       538,713       3.33
                                      =========               =========                =========
Weighted average fair value                          3.73                     5.26                     6.52
   of options granted
</TABLE>


<TABLE>
<CAPTION>
                                                      Options Outstanding       Options Exercisable
                                                    ----------------------    -----------------------
                                                    Weighted
                                                     Average      Weighted      Number       Weighted
                                                    Remaining     Average     Exercisable    Average
  Options Outstanding Summary        Outstanding       Life       Exercise       As of       Exercise
   Range of Exercise Prices           @ 9/30/98     (in years)     Price        9/30/98       Price
  ---------------------------------------------------------------------------------------------------
        <S>                           <C>              <C>         <C>          <C>           <C>  
        $1.42 - $ 5.63                  357,347        $6.03       $3.69        262,847       $3.02
         5.88 -   8.00                   66,000         9.62        6.88            500        8.00
         8.50 -  13.50                  621,562         8.46        8.70        321,432        8.76
                                      ---------                                 -------
         1.42 -  13.50                1,044,909         7.70        6.87        584,779        6.17
                                      =========                                 =======
</TABLE>

At September 30, 1998, there were 470,415 shares available for future option
grants.



                                    PAGE 25
<PAGE>   22

NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. LEASE COMMITMENTS

The Company leases its facilities and office space under various noncancelable
agreements which expire at various dates through 2008. The Company also leases
various equipment under noncancelable leases. All of the above are treated as
operating leases.

At September 30, 1998, the future minimum rental payments for each fiscal year
thereafter under all noncancelable operating leases are as follows (in
thousands):

<TABLE>
<CAPTION>
Fiscal Year Ending
--------------------------------------------------------
       <S>                                        <C>   
       1999                                       $3,308
       2000                                        2,608
       2001                                        2,488
       2002                                        1,340
       2003                                        1,222
       Thereafter                                  3,343
</TABLE>

NOTE 10. INCOME TAXES

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                                     September 30,
-------------------------------------------------------------
                          1998           1997           1996
                         ------         ------         ------
<S>                      <C>            <C>            <C>   
Current:
  Federal                $2,782         $4,233         $1,751
  State                   1,087          2,024          1,497
                         ------------------------------------
    Total                $3,869         $6,257         $3,248
                         ====================================
</TABLE>

At September 30, 1998 and 1997, the Company had $1,780,000 and $2,019,000,
respectively, of deferred tax assets. The Company has recorded a 100% valuation
allowance against these amounts.

The tax effect of the primary temporary differences giving rise to the Company's
deferred tax assets and liabilities at September 30, 1998 and 1997, are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                    Current Asset              Long-Term Asset
                                                     (Liability)                 (Liability)
---------------------------------------------------------------------------------------------------
                                                 1998          1997          1998            1997
---------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>          <C>            <C>    
Depreciation and amortization                   $   779        $  63        $ 1,133        $ 3,203
Reserves for accounts receivable
  and unbilled costs and fees                       941           44             --             --
Net operating loss                                 (105)          --             --             --
Other, net                                         (459)          --           (509)        (1,291)
                                                --------------------------------------------------
                                                  1,156          107            624          1,912
Valuation allowance                             $(1,156)        (107)          (624)        (1,912)
                                                -------        -----        -------         ------ 
Total deferred income taxes                     $    --        $  --        $    --        $    --
                                                ================================================== 
</TABLE>




                                    PAGE 26
<PAGE>   23

Reconciliation of the federal statutory rate to the Company's effective tax rate
is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                September 30,
----------------------------------------------------------------------------------------------------
                                              1998                  1997                  1996
----------------------------------------------------------------------------------------------------
                                      Amount       Rate     Amount       Rate     Amount       Rate
----------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>      <C>          <C>      <C>          <C>  
Federal income tax at the
  statutory rate                      $ 3,387      34.0%    $ 5,318      34.0%    $ 3,342      34.0%
State income taxes, net of
  federal benefit                       1,087      10.9       1,336       8.5         988      10.0
Other                                    (481)     (4.8)       (397)     (2.5)         --        --
Federal tax benefit of the
  utilization of net operating
  loss and credit carryforwards          (124)     (1.2)         --        --      (1,082)    (11.0)
                                      --------------------------------------------------------------
    Total                             $ 3,869      38.9%    $ 6,257      40.0%    $ 3,248      33.0%
                                      ==============================================================
</TABLE>

At September 30, 1998, the Company had $4,436,000 of federal net operating loss
carryforwards acquired in the CVI transaction. Such carryforwards have certain
limitations on use.

NOTE 11. EMPLOYEE BENEFIT PLANS

The Raytel Medical Corporation Pension Plan (the "Pension Plan") is a defined
contribution benefit plan which covers substantially all employees.
Contributions to the Pension Plan are based upon a percentage of an employee's
covered compensation, as defined. Total expense under the Pension Plan amounted
to $596,000, $547,000 and $503,000 for the years ended September 30, 1998, 1997
and 1996, respectively.

The Company maintains a tax-qualified Retirement Savings Plan (the "401(k)
Plan") which covers substantially all employees. Eligible employees may make
salary deferral (before tax) contributions up to a specified maximum. The
Company makes a matching contribution of 25% of the amount deferred. Total
expense under the 401(k) Plan amounted to $191,000, $178,000 and $133,000 for
the years ended September 30, 1998, 1997 and 1996, respectively.

Executive officers and key employees of the Company are eligible to participate
in an executive deferred compensation plan at the discretion of the Board of
Directors. Participants may defer a portion of their compensation, as defined.

NOTE 12. PRINCIPAL CUSTOMERS

All services performed by the Company are performed in the United States. No one
customer accounted for more than 10% of the Company's total net patient and
service revenues. However, certain sources of payment for the services, such as
Medicare, HMOs, commercial insurers and other third party payors, do or could
account for more than 10% of payments received.

NOTE 13. CONTINGENCIES

The Company is from time to time a party to various unrelated claims and
disputes associated with various aspects of its ongoing business operations. In
management's opinion, none of these claims or disputes are expected, either
individually or in the aggregate, to have a material adverse effect on the
Company's financial position or results of operations.

NOTE 14. NET INCOME PER SHARE

All previously outstanding preferred shares and accumulated preferred dividends
were converted to Common Stock for all periods presented for purposes of the
income per share calculation. Also, those shares under commitments to be issued
at specified future dates are considered as outstanding for per share
calculations.


                                    PAGE 27
<PAGE>   24

NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has adopted the provisions of SFAS No. 128, Earnings Per Share for
all periods presented. The adoption of this accounting standard did not have a
material impact on its results of operations.

For the years ended September 30, 1998, 1997 and 1996, basic and diluted
earnings per share are calculated as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                          For the Year Ended September 30,
--------------------------------------------------------------------------
                                           1998        1997        1996
--------------------------------------------------------------------------
<S>                                       <C>         <C>         <C>   
Basic Earnings per Share:

Net income                                $6,093      $8,664      $6,131
                                          ==============================
Weighted average shares outstanding        8,879       8,458       7,623
                                          ==============================
Per share                                 $  .69      $ 1.02      $  .80
                                          ==============================
</TABLE>


<TABLE>
<CAPTION>
                                         For the Year Ended September 30,
-------------------------------------------------------------------------
                                           1998        1997        1996
-------------------------------------------------------------------------
<S>                                       <C>         <C>         <C>   
Diluted Earnings per Share:
Net income                                $6,093      $8,664      $6,131
                                          ==============================
Weighted average shares outstanding        8,879       8,458       7,623
Shares to be issued                          137         135           4
Options                                      250         350         476
Warrants                                      28          96          91
                                          ------------------------------
                                           9,294       9,039       8,194
                                          ==============================
Per share                                 $  .66      $  .96      $  .75
                                          ==============================
</TABLE>

Certain options and warrants to purchase shares of common stock were outstanding
during the years ended September 30, 1998, 1997 and 1996, but were not included
in the computation of diluted earnings per share because their exercise prices
were greater than the average market price of the common shares for the period.
The options and warrants outstanding and their exercise prices are as follows:

<TABLE>
<CAPTION>
                                           For the Year Ended September 30,
------------------------------------------------------------------------------
                                         1998               1997          1996
------------------------------------------------------------------------------
<S>                                  <C>               <C>                 <C>
Options and warrants outstanding        525,722            307,542         --
Range of exercise prices             $5.63 - $13.50    $10.00 - $13.88     --
</TABLE>

NOTE 15. DEFERRED LITIGATION AWARD

In September 1996, the Company received a favorable administrative decision
related to a billing dispute with a New York Medicare carrier whereby it was
entitled to approximately $4.0 million. The time period for the Healthcare
Finance Administration ("HCFA") and the Social Security Administration to file
an appeal expired on February 10, 1997. After accounting for administrative
costs and reimbursements due to Medtronic as a result of the terms of the
acquisition of CardioCare and a separate provision against the value of a
non-operating asset, the Company recognized other income of $2,510,000 pretax in
its second fiscal quarter ending March 31, 1997, with a positive after tax
effect of $1,506,000 or $.17 per share (the "Decision").




                                    PAGE 28
<PAGE>   25



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated balance sheets of Raytel Medical
Corporation and Subsidiaries as of September 30, 1998 and 1997 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Raytel
Medical Corporation and Subsidiaries as of September 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1998 in conformity with
generally accepted accounting principles.


/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Hartford, Connecticut
November 12, 1998