<PAGE>   1
                                                                    EXHIBIT 13.1



www.raytel.com

                              MEDICAL INFORMATION
                            PATIENT CARE MANAGEMENT


                           RAYTEL MEDICAL CORPORATION
                               1999 ANNUAL REPORT



<PAGE>   2
COMPANY PROFILE

RAYTEL MEDICAL CORPORATION is the leading provider of services
and efficient dissemination of technical information to
physicians and patients with cardiovascular disease. These
services include remote cardiac monitoring and testing services
utilizing transtelephonic technology and various Internet
initiatives, as well as cardiovascular centers of excellence and
ambulatory diagnostic imaging centers, nationwide. Raytel's
imaging operations include MRI, CT and other radiological exams
provided in convenient, state-of-the-art facilities. Our imaging
operations also include a network with over 550 multi-modality
diagnostic imaging facilities located throughout the East Coast.
The network provides services to over 600,000 beneficiaries
participating in occupational injury and management programs and
group health plans. The Internet initiatives, which are
available to over 12,000 physicians who routinely use Raytel's
monitoring services, include test results, patient records,
medical books, physician office supplies and information on
pharmaceuticals, implantable devices and other medical
technology. The information Raytel supplies includes a
combination of patient data, test results, and diagnostic
quality imaging including ECGs and cardiac angiograms. Raytel
has a database of more than 500 different pacemaker models,
which it relies upon in the preparation of this information.

TOTAL REVENUES

[BAR CHART]


OPERATING INCOME

[BAR CHART]


NET INCOME

[BAR CHART]


STOCKHOLDERS' EQUITY

[BAR CHART]


<PAGE>   3
TO THE RAYTEL STOCKHOLDERS:

As we move into a new millennium, we can reflect on 1999 as a year of transition
for Raytel Medical Corporation. Several external factors, including changes in
governmental policy and Y2K concerns, had an impact on our operations this year.
Reimbursement from Medicare was reduced by approximately 5% at the beginning of
the year. Government regulations that redefined questionable relationships
prompted our Company to rewrite contracts with hospitals and change
relationships with doctors. Y2K issues became important to resolve, particularly
in light of the Company's commitment to automation. Also this year, Raytel's
President/Chief Operating Officer made the decision to retire, an internal
change that has resulted in transition within Raytel, as well. Taking into
account these events, the management of the Company continued its dedication to
enhancing shareholder value by retaining U.S. Bancorp Piper Jaffray as its
financial advisor to assist the Company in considering a range of strategic
alternatives for maximizing shareholder value.

Competitive pressures within the cardiac monitoring environment have also
contributed some deterioration in the average procedure selling price -- across
all product lines. In response, Raytel has taken positive actions over the last
year, which have resulted in an improvement in our market share. In keeping with
our commitment to automation going into the new millennium, we have fully
automated our Cardiac Event Detection (CED) operating system and have expanded
our Web-based Patient Management Database (PMD) system to enable our physicians
to store and retrieve medical records over the secured Internet site
(WWW.PMD.RAYTEL.COM). We expect to introduce the second generation Pacemaker
monitoring system during Raytel's second quarter. The number of patients
receiving our cardiac monitoring services has steadily increased from earlier
this year and in comparison to the same quarter last year. Although 1999 has
been a transitional year with many factors impacting our operations, the cardiac
monitoring operations continue to yield strong cash flows.

While Raytel's pacemaker monitoring business has been increasing in volume, due
to Medicare price reductions last year, we experienced a decrease in average
selling price. Revenues, therefore, have been relatively flat on a
quarter-to-quarter basis despite pacemaker patient volume being higher than we
have experienced in the last 12 months. With the recent announcement of Medicare
rates for the year 2000 in the Federal Register, we anticipate posting an
increase in revenue for pacemaker monitoring and cardiac event detection
operations next calendar year. Depending upon the region, reimbursement for
pacemakers in the year 2000 will either remain the same as last year or increase
slightly, while cardiac event detection reimbursement will be increased.

High expenditures associated with our automated second-generation pacemaker
monitoring system continued throughout this past year. We expect to have our
present pacemaker system replaced with the new system in the early part of
calendar year 2000. We also expect to reduce our MIS expenditures in FY 2000 by
at least $1 million with the completion of these projects.

Although cardiac event detection continued to experience increased patient
volume during the year, it also continued to experience decreases in price. The
effect this will have on the market is not easy to predict, however, we believe
that it will present a major opportunity for Raytel over the next six months. We
anticipate stabilization of the average selling price next year partially due to
the increase in reimbursement from Medicare. Despite some market uncertainty, we
expect to see improvement in cash flow and profits due to increased
reimbursement, and the deployment of our new automated monitoring system. This
new system should be stable and completely implemented by the end of the year.

Our diagnostic imaging centers have been solid performers through 1999 and I am
pleased to say that trend is continuing. This can be attributed to our
commitment to upgrading and maintaining state-of-the-art diagnostic equipment at
our facilities and the addition of new modalities at some locations. Two Raytel
centers in the Philadelphia area performed exceptionally well this past fiscal
year due to increased volumes from the MRI units that had been installed at both
locations. Despite an increase in new competition surrounding our Queens, NY,
facility, the Center has successfully returned to its previous substantial
volume levels. This year, Raytel acquired the nuclear imaging services that had
previously been leased to a third party at the Queens facility, which has
further enhanced the Center's revenue. We are also pleased to announce that in
the first quarter of year 2000, Raytel will be opening a new MRI facility in
Pennsylvania and a satellite facility offering x-ray and ultrasound services in
New Jersey, further expanding our network of diagnostic imaging facilities
nationwide.

Raytel's imaging network also continues to perform and had another banner year,
increasing both profits and revenue. From a concept developed in a strategic
planning meeting seven years ago, the network has developed a solid reputation
for quality and dependability that has not been equaled by its competitors. New
partnerships being developed will further enhance the value of this initiative.

The continued application of our conservative accounting policies resulted in
increased contractual allowances at our Port St. Lucie, FL, practice reducing
what would have been an otherwise sterling performance, however, Raytel's heart
center and physician management sector reported a good year. Our physician
practice management operations in Port St. Lucie, FL, and Beaumont, TX, reported
slight increases in revenues over the prior year's quarter. A contributing
factor to this increase in revenues for the quarter was the installation of a
complete imaging center, including MRI, at the Port St. Lucie, FL, location. We
continued to focus on operational improvements at all our facility locations. As
a result, we have streamlined


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<PAGE>   4
our Florida facility by reducing administrative costs and improving operating
efficiencies. Our physician practice management operations in Beaumont, TX, and
Granada Hills, CA, contributed operating profits for the year, however, cash
contribution was minimal due to the investment in new physicians.

We continued to see contributions to operations from our revised agreement with
Baptist Hospital, Beaumont, TX. During the last quarter of 1999, the congestive
heart failure clinic began operations and the lipid management clinic
experienced a continued increase in volume. While the revised agreement at
Granada Hills, CA, materially reduced our revenue for the year, the contract is
successfully producing profits and continued cash flow.

In preparation for Y2K and in an effort to improve the efficiency of our billing
and collection department, we purchased a billing system from an outside vendor
to replace the Raytel developed system. After a year, the conversion of all the
files in the existing system to the new system still is not complete.
Consequently, we have been forced to upgrade the existing system. Although the
expenditure was significantly greater than expected, I am happy to report the
conversion was successful and Raytel has the time to properly convert the
remainder of the files to the new system. When completed, all tests will be
taken by computer and the testing and billing systems will be able to
communicate effectively reducing labor and improving the efficiency of the
billing department and decreasing the length of time necessary to collect
outstanding receivables.

Other significant developments during the year included the introduction of
three new initiatives. FIRST, Raytel and St. Jude Medical jointly launched the
Housecall(TM) Transtelephonic Monitoring System, the first commercially
available system capable of downloading a complete set of diagnostic data from
an implantable cardioverterdefibrillator (ICD) via the telephone. Under an
exclusive agreement with St. Jude Medical, Raytel will manufacture the
Housecall(TM) transmitters and receiving units. This monitoring system for
Pacesetter ICD devices was recently approved by the FDA and was jointly
announced at the American Heart Association this past November. Development of
the Housecall(TM) System for remote telephonic ICD monitoring is a technological
expansion of our business and marks Raytel's entry into the ICD monitoring
market. SECOND, we have started clinical tests involving transtelephonic
monitoring of heart valve patients in a joint venture with Sulzer Carbomedics,
the world's leader in mechanical heart valves. Raytel will provide the
surveillance and reporting of home test results for the Sulzer Carbomedics
INRange(TM) Monitored Heart Valve. Applying Raytel's proven ability to remotely
monitor heart patients to the anticoagulated patient is an exciting development
in the use of patient surveillance technology to improve clinical outcomes.
Collaborating on the INRange(TM) Monitored Heart Valve System is a logical
extension of our current lines of business. THIRD, we introduced the
second-generation of our Internet-based clinical test reporting system
(WWW.PMD.RAYTEL.COM), which offers over 12,000 physicians who routinely use
Raytel's monitoring services access to free e-mail, medical books at discounted
prices, and other medical supplies and equipment for their practices. The
service was officially launched by Raytel at the American Heart Association this
past November. Raytel's enhanced Internet-based system is the first in a series
of Web-based clinical and practice management tools that Raytel will be
offering to physicians.

As I noted at the beginning of this letter, Allan Zinberg, President and Chief
Operating Officer of Raytel will retire at the end of the calendar year. Allan
has provided invaluable management and leadership to the Company over the last
25 years, leading the Company before Raytel acquired it in 1990. I am confident
that our strong executive team will manage this transition smoothly. We will
continue to have the advantage of Allan's knowledge and experience on the Board
of Directors after his retirement. I want to express the Company's gratitude for
the efforts he has expended during this time. We wish him well.

As a result of Allan's decision to retire, I have temporarily assumed his
responsibilities. The primary objective for this fiscal year is to work with
investment bankers hired by the Company to improve shareholder value. My first
operational priority is to improve our automation programs so that our
expectations of the system are met and we realize the efficiency improvements
that we project. My second priority is to improve telephonic monitoring sales
through aggressive marketing activities and our continued commitment to the
highest level of service to our physicians and their patients.

FY 1999 was certainly a year of transition for Raytel. As we enter into a new
millennium, I am looking forward to enjoying the fruits of some of the
investments we have made and the new initiatives we are implementing to further
enhance Raytel's revenues. We welcome you to follow our progress by visiting us
on our web site at WWW.RAYTEL.COM.

Finally, I wish to extend my deepest thanks and appreciation to the Raytel
employees, referring physicians, and the patients and the hospitals who use our
service and who have contributed to our success this past year.

Sincerely,


/s/ RICHARD F. BADER

Richard F. Bader
Chairman and Chief Executive Officer


                                                         WWW.RAYTEL.COM * PAGE 3


<PAGE>   5
FINANCIAL TABLE OF CONTENTS

<TABLE>
<S>                                                                                                  <C>
Five Year Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5

Management's Discussion and Analysis of Financial Condition and Results of Operations . . . .         6

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        13

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .        14

Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . . . .       15

Consolidated Statements of Cash Flows  . . . . . . . . . . . . . . . . . . . . . . . . . . . .       16

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .       17

Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . .       29

Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      30

Corporate Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      Inside Back Cover
</TABLE>


<PAGE>   6
FIVE YEAR FINANCIAL SUMMARY


<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended September 30,
-------------------------------------------------------------------------------------------------------------------------
(000's omitted, except per share data)                 1999           1998           1997           1996           1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>            <C>            <C>            <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Revenues:
   Cardiac information services                     $  44,731      $  46,171      $  47,227      $  43,649      $  41,384
   Diagnostic imaging service                          20,143         19,977         17,610         19,970         20,516
   Heart facilities and other                          36,520         41,481         18,578          8,896          1,562
                                                    ---------------------------------------------------------------------
Total revenues                                        101,394        107,629         83,415         72,515         63,462
Operating costs and selling, general and
 administrative expenses                               81,538         85,633         63,273         56,412         47,353
Depreciation and amortization                           8,475          8,282          6,306          5,590          5,806
Non-recurring tender offer expense                         --             --             --             --          1,050
                                                    ---------------------------------------------------------------------
Operating income                                       11,381         13,714         13,836         10,513          9,253
Interest expense                                        2,619          2,990            785            514          2,118
Other (income)                                         (1,011)          (511)        (3,076)          (591)          (347)
Minority interest                                       1,000          1,273            485            762          1,161
                                                    ---------------------------------------------------------------------
Income before income taxes                              8,773          9,962         15,642          9,828          6,321
Provision for income taxes                              3,419          3,869          6,257          3,248          1,960
                                                    ---------------------------------------------------------------------
Income before extraordinary item                        5,354          6,093          9,385          6,580          4,361
Extraordinary item, net of related tax benefit             --             --            721            449             --
                                                    ---------------------------------------------------------------------
Net income                                          $   5,354      $   6,093      $   8,664      $   6,131      $   4,361
                                                    ---------------------------------------------------------------------
Net income per share before extraordinary item:

   Basic                                            $     .61      $     .69      $    1.11      $     .86      $     .84
                                                    ---------------------------------------------------------------------
   Diluted                                          $     .59      $     .66      $    1.04      $     .80      $     .78
                                                    ---------------------------------------------------------------------
Net income per share:

   Basic                                            $     .61      $     .69      $    1.02      $     .80      $     .84
                                                    ---------------------------------------------------------------------
   Diluted                                          $     .59      $     .66      $     .96      $     .75      $     .78
                                                    ---------------------------------------------------------------------
Weighted average shares outstanding:

   Basic                                                8,711          8,879          8,458          7,623          5,210
                                                    ---------------------------------------------------------------------
   Diluted                                              9,040          9,294          9,039          8,194          5,617
                                                    ---------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET DATA:

Total assets                                        $ 117,783      $ 122,186      $ 119,421      $  68,030      $  46,768
Long-term debt and capital lease obligations(1)        29,370         36,997         36,354          7,576         14,550
Total stockholders' equity                             72,029         66,491         61,899         48,878         21,499
</TABLE>


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


                                                         WWW.RAYTEL.COM * PAGE 5


<PAGE>   7
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 cardiac information
services which includes telephonic monitoring services for cardiac pacemaker
patients ("Pacing"), cardiac event detection services ("CEDS") and Holter,
diagnostic imaging services and from heart facilities.

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 medical clinic, 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 expired during fiscal 1997. Revenue
contributed by these ventures was $1,318,000 for the year ended September 30,
1997.

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
arrangements, the Company's practice management revenues represent


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<PAGE>   8
approximately 71%, 56% and 56% of the revenues of the physician groups for the
years ended September 30, 1999, 1998 and 1997, respectively. 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 clinic 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 ("Baptist") to develop a Raytel
Cardiovascular Center at the hospital. Under the agreement, Raytel was to manage
the cardiovascular center, which would provide the entire continuum of
cardiovascular services, including diagnostic, therapeutic and patient
management programs. Among other duties, Raytel was to be responsible for the
day-to-day operations of the heart center, including administrative support,
information systems management, marketing and public relations activities. The
Company began operations at Baptist during its fourth quarter of fiscal 1998.
Due to the recent merger between Baptist and the Memorial Hermann Hospital
System, a modified agreement became effective March 1, 1999. Therefore, during
the first five months of fiscal 1999, the Company only recognized revenue to the
extent of expenses. Effective March 1, 1999, the Company is recognizing revenue
based on the modified agreement which calls for the Company to manage portions
of the cardiovascular surgery and cardiology programs at Baptist and to develop
and manage specialty clinics to support the cardiovascular program.

Effective March 27, 1999, the Company entered into a revised agreement with
RHCGH. The new agreement will result in significantly lower revenues and
expenses than revenues and expenses recognized under the previous agreements.
However, under the new agreement, the Company expects to generate operating
income. Under the old agreements, operating expenses were in excess of revenues.

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,
-----------------------------------------------------------------------------------------------------
                                                                         1999        1998        1997
-----------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>         <C>
Total revenues                                                          100.0%      100.0%      100.0%
Operating costs and selling, general and administrative expenses         80.4        79.6        75.9
Depreciation and amortization                                             8.4         7.7         7.6
                                                                        -----------------------------
Operating income                                                         11.2        12.7        16.5
Interest expense and other (income) expense                               1.6         2.3        (2.8)
Minority interest                                                          .9         1.2          .5
                                                                        -----------------------------
Income before income taxes                                                8.7         9.2        18.8
Provision for income taxes                                                3.4         3.6         7.5
                                                                        -----------------------------
Income before extraordinary item                                          5.3         5.6        11.3
Extraordinary item                                                         --          --          .9
                                                                        -----------------------------
Net income                                                                5.3%        5.6%       10.4%
                                                                        -----------------------------
</TABLE>


                                                        WWW.RAYTEL.COM * PAGE 7


<PAGE>   9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1998

REVENUES. Cardiac information services revenues decreased by $1,440,000, or
3.1%, from $46,171,000 in fiscal 1998 to $44,731,000 in fiscal 1999, due
primarily to slight decreases in Pacing and CEDS revenue. Diagnostic imaging
service revenues increased by $166,000 or .8%, from $19,977,000 in fiscal 1998
to $20,143,000 in fiscal 1999. Heart facilities and other revenues decreased by
$4,961,000 or 12.0% from $41,481,000 in fiscal 1998 to $36,520,000 in fiscal
1999 due primarily to lower revenues at RHCGH due to the amended agreement.

As a result of the foregoing factors, total revenues decreased by $6,235,000, or
5.8%, from $107,629,000, in fiscal 1998 to $101,394,000 in fiscal 1999.

OPERATING EXPENSES. Operating costs and selling, general and administrative
expenses decreased by $4,095,000, or 4.8%, from $85,633,000 in fiscal 1998 to
$81,538,000 in fiscal 1999 due primarily to lower expenses at RHCGH due to the
amended agreement, partially offset by increases in costs and expenses in
diagnostic imaging services and, to a lesser degree, by increases in cardiac
information services. Operating costs and selling, general and administrative
expenses as a percentage of total revenues increased slightly from 79.6% in
fiscal 1998 to 80.4% in fiscal 1999. At RHCGH, operating expenses were slightly
in excess of revenues for both fiscal 1999 and 1998.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
by $193,000, or 2.3%, from $8,282,000 in fiscal 1998 to $8,475,000 in fiscal
1999 and increased as a percentage of revenues from 7.7% in fiscal 1998 to 8.4%
in fiscal 1999.

OPERATING INCOME. As a result of the foregoing factors, operating income
decreased by $2,333,000, or 17.0%, from $13,714,000 in fiscal 1998 to
$11,381,000 in fiscal 1999.

INTEREST EXPENSE. Interest expense decreased by $371,000, or 12.4%, from
$2,990,000 in fiscal 1998 to $2,619,000 in fiscal 1999 due primarily to lower
interest rates and to a decrease in the average debt outstanding.

OTHER EXPENSE (INCOME). Other income increased by $500,000 from $511,000 for
fiscal 1998 to $1,011,000 for fiscal 1999 due primarily to a series of
insignificant items.

MINORITY INTEREST. Minority interest decreased by $273,000 from $1,273,000 in
fiscal 1998 to $1,000,000 in fiscal 1999 due primarily to decreased income in a
certain cardiovascular diagnostic facility.

INCOME TAXES. The provision for income taxes decreased by $450,000, or 11.6%,
from $3,869,000 in fiscal 1998 to $3,419,000 in fiscal 1999 as a result of
decreased taxable income.

NET INCOME. As a result of the foregoing factors, net income decreased by
$739,000, or 12.1%, from $6,093,000 in fiscal 1998 to $5,354,000 in fiscal 1999.

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.

REVENUES. Cardiac information services 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 Facilities 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.


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<PAGE>   10
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.

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. Revenue from the Company's Pacing operations during
certain periods of the last three fiscal years has been negatively impacted by
Medicare reimbursement rate reductions. Reimbursement rate reductions applicable
to the Company's Pacing procedures became effective on January 1, 1997. These
reductions had a negative effect on the Company's operating results for the last
three quarters of fiscal 1997 and for the first quarter of fiscal 1998. The
Company's Pacing operations have been favorably impacted for the period January
1, 1998 to December 31, 1998 due to an increase in Medicare reimbursement rates
effective on January 1, 1998. However, a slight decrease in these rates became
effective on January 1, 1999, thereby having a negative effect


                                                        WWW.RAYTEL.COM * PAGE 9


<PAGE>   11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

on Pacing revenue for the last three quarters of fiscal 1999. 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 was 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 heart centers and physician practices depends
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.

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,
1999, the Company had working capital of $28,599,000, compared to $31,168,000 at
September 30, 1998. At September 30, 1999, the


PAGE 10 * WWW.RAYTEL.COM


<PAGE>   12
Company had cash and temporary cash investments of $6,110,000. At September 30,
1999, $19,047,000 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 2001 at which time any outstanding balance
will be due and payable.

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 2000.

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. The Company has begun installation of a new billing and collection
system and a new accounting system has been installed. These new systems are
Year 2000 compliant. The Company had planned on replacing them regardless of the
Year 2000 issue. There are other systems being used by the Company which may not
be Year 2000 compliant, however, the Company anticipates that all such systems
will be either replaced or made Year 2000 compliant 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 any additional 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. Many of the Company's payors are
related to the Federal government. The Federal government and its agents have
made conflicting public statements regarding their ability to be Year 2000
compliant. The Company has no control over their ability to be compliant. 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.


                                                       WWW.PAYTEL.COM * PAGE 11


<PAGE>   13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to market risk from interest rate fluctuations because it
uses variable rate debt to finance working capital requirements. The Company
does not believe that there is any material market risk exposure with respect to
other financial instruments that would require further disclosure under this
item.

PERCENTAGE OF CONSOLIDATED REVENUES


<TABLE>
<CAPTION>
                                  Fiscal Year Ended September 30,
----------------------------------------------------------------
                                    1999        1998        1997
----------------------------------------------------------------
<S>                               <C>           <C>         <C>
Cardiac information services         44%         43%         57%
Diagnostic imaging service           20%         19%         21%
Heart facilities and other           36%         38%         22%
                                    ----------------------------
   Total                            100%        100%        100%
                                    ----------------------------
</TABLE>


SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended September 30, 1999
----------------------------------------------------------------------------------------------------------------------
(000's omitted,
 except per share amounts)           December 31,            March 31,               June 30,            September 30,
----------------------------------------------------------------------------------------------------------------------
<S>                                <C>                    <C>                    <C>                    <C>
Net revenues                       $       25,805         $       27,056         $       24,581         $       23,952
                                   -----------------------------------------------------------------------------------
Income before income taxes         $        2,213         $        2,202         $        2,190         $        2,168
Provision for income taxes                    863                    859                    854                    843
                                   -----------------------------------------------------------------------------------
Net income                         $        1,350         $        1,343         $        1,336         $        1,325
                                   -----------------------------------------------------------------------------------
Net income per share(1):

   Basic                           $          .16         $          .15         $          .15         $          .15
                                   -----------------------------------------------------------------------------------
   Diluted                         $          .15         $          .15         $          .15         $          .15
                                   -----------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                          Fiscal Year Ended September 30, 1998
----------------------------------------------------------------------------------------------------------------------
                                     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>


(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 12 * WWW.RAYTEL.COM


<PAGE>   14
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                                   September 30,
---------------------------------------------------------------------------------------------------------
(000's omitted)                                                                 1999              1998
---------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>
ASSETS
Current assets:

   Cash and cash equivalents                                                 $   6,110          $   7,463
   Receivables, net                                                             34,858             35,504
   Prepaid expenses and other                                                    3,143              3,996
                                                                             ----------------------------
     Total current assets                                                       44,111             46,963
Property and equipment, less accumulated depreciation
 and amortization                                                               22,239             19,681
Intangible assets, less accumulated amortization                                51,388             55,497
Other assets                                                                        45                 45
                                                                             ----------------------------
     Total assets                                                            $ 117,783          $ 122,186
                                                                             ----------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

   Current portion of long-term debt and capital lease obligations           $   2,124          $   1,962
   Accounts payable                                                              3,793              4,649
   Accrued compensation and benefits                                             3,391              2,920
   Accrued other liabilities                                                     6,204              6,264
                                                                             ----------------------------
     Total current liabilities                                                  15,512             15,795
Long-term debt and capital lease obligations, net of current portion            27,246             35,035
Deferred liabilities                                                               129              1,405
Minority interest in consolidated entities                                       2,867              3,460
                                                                             ----------------------------
     Total liabilities                                                          45,754             55,695
                                                                             ----------------------------
Commitments and contingencies (Notes 9 and 13)
Stockholders' equity:

   Common stock                                                                      9                  9
   Additional paid-in capital                                                   62,053             61,790
   Common stock to be issued                                                     1,045              1,124
   Retained earnings                                                            12,544              7,190
                                                                             ----------------------------
                                                                                75,651             70,113

   Less treasury stock, at cost                                                 (3,622)            (3,622)
                                                                             ----------------------------
     Total stockholders' equity                                                 72,029             66,491
                                                                             ----------------------------
     Total liabilities and stockholders' equity                              $ 117,783          $ 122,186
                                                                             ----------------------------
</TABLE>


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


                                                        WWW.RAYTEL.COM * PAGE 13


<PAGE>   15
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                              September 30,
------------------------------------------------------------------------------------------------------------
(000's omitted, except per share amounts)                      1999               1998                1997
------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>                <C>
Revenues:

   Cardiac information services                              $  44,731          $  46,171          $  47,227
   Diagnostic imaging service                                   20,143             19,977             17,610
   Heart facilities and other                                   36,520             41,481             18,578
                                                             -----------------------------------------------
     Total revenues                                            101,394            107,629             83,415
                                                             -----------------------------------------------

Costs and expenses:

   Operating costs                                              45,091             50,143             33,536
   Selling, general and administrative                          36,447             35,490             29,737
   Depreciation and amortization                                 8,475              8,282              6,306
                                                             -----------------------------------------------
     Total costs and expenses                                   90,013             93,915             69,579
                                                             -----------------------------------------------
   Operating income                                             11,381             13,714             13,836
Interest expense                                                 2,619              2,990                785
Other expense (income)                                          (1,011)              (511)            (3,076)
Minority interest                                                1,000              1,273                485
                                                             -----------------------------------------------
   Income before income taxes and extraordinary item             8,773              9,962             15,642
Provision for income taxes                                       3,419              3,869              6,257
                                                             -----------------------------------------------
   Income before extraordinary item                              5,354              6,093              9,385
   Extraordinary item, net of related tax benefit                   --                 --                721
                                                             -----------------------------------------------
Net income                                                   $   5,354          $   6,093          $   8,664
                                                             -----------------------------------------------

Net income per share before extraordinary item:

   Basic                                                     $     .61          $     .69          $    1.11
                                                             -----------------------------------------------
   Diluted                                                   $     .59          $     .66          $    1.04
                                                             -----------------------------------------------

Net income per share:

   Basic                                                     $     .61          $     .69          $    1.02
                                                             -----------------------------------------------
   Diluted                                                   $     .59          $     .66          $     .96
                                                             -----------------------------------------------

Weighted average shares:

   Basic                                                         8,711              8,879              8,458
                                                             -----------------------------------------------
   Diluted                                                       9,040              9,294              9,039
                                                             -----------------------------------------------
</TABLE>


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


PAGE 14 * WWW.RAYTEL.COM


<PAGE>   16
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                Common Stock           Additional       Common
                                        --------------------------       Paid-in        Stock to
(000's omitted, except shares)             Shares          Amount        Capital       be Issued
----------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>            <C>            <C>
Balance at September 30, 1996            8,332,924      $        8     $   55,585     $      852

Net income                                      --              --             --             --

Warrants exercised                          10,505              --             42             --

Options exercised                          191,494              --            369             --

Repurchase of shares                      (134,434)             --             --             --

Employee stock purchase                      5,908              --             63             --

Value of 14,376 shares to be issued             --              --             --             91

Issuance of common stock
 for purchase of a company                 500,000               1          5,202             --
                                       -------------------------------------------------------------
Balance at September 30, 1997            8,906,397               9         61,261            943

Net income                                      --              --             --             --

Warrants exercised                          31,359              --            125             --

Options exercised                           11,001              --             55             --

Repurchase of shares                      (322,600)             --             --             --

Employee stock purchase                      6,361              --             44             --
Value of 46,668 shares to be issued             --              --             --            486

Value of 30,981 shares issued               30,981              --            305           (305)
                                       -------------------------------------------------------------

Balance at September 30, 1998            8,663,499               9         61,790          1,124

Net income                                      --              --             --             --

Options exercised                           59,206              --            120             --

Stock compensation grant                     7,348              --             37             --

Employee stock purchase                      6,973              --             27             --

Issuance of shares to be issued              8,104              --             79            (79)
                                       -------------------------------------------------------------
Balance at September 30, 1999            8,745,130      $        9     $   62,053     $    1,045
                                       -------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                       Retained                         Total
                                       Earnings        Treasury      Stockholders'
(000's omitted, except shares)         (Deficit)         Stock          Equity
----------------------------------------------------------------------------------
<S>                                   <C>             <C>             <C>
Balance at September 30, 1996         $   (7,567)     $       --      $   48,878

Net income                                 8,664              --           8,664

Warrants exercised                            --              --              42

Options exercised                             --              --             369

Repurchase of shares                          --          (1,411)         (1,411)

Employee stock purchase                       --              --              63

Value of 14,376 shares to be issued           --              --              91

Issuance of common stock
 for purchase of a company                    --              --           5,203
                                     -------------------------------------------
Balance at September 30, 1997              1,097          (1,411)         61,899

Net income                                 6,093              --           6,093

Warrants exercised                            --              --             125

Options exercised                             --              --              55

Repurchase of shares                          --          (2,211)         (2,211)

Employee stock purchase                       --              --              44
Value of 46,668 shares to be issued           --              --             486

Value of 30,981 shares issued                 --              --              --
                                     -------------------------------------------

Balance at September 30, 1998              7,190          (3,622)         66,491

Net income                                 5,354              --           5,354

Options exercised                             --              --             120

Stock compensation grant                      --              --              37

Employee stock purchase                       --              --              27

Issuance of shares to be issued               --              --              --
                                     -------------------------------------------
Balance at September 30, 1999         $   12,544      $   (3,622)     $   72,029
                                     -------------------------------------------
</TABLE>


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


                                                       WWW.RAYTEL.COM * PAGE 15


<PAGE>   17
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                           September 30,
----------------------------------------------------------------------------------------------------
(000's omitted)                                                   1999          1998          1997
----------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>           <C>
Cash flows from operating activities:

   Net income                                                   $  5,354      $  6,093      $  8,664
   Adjustments to reconcile net income to net cash
    provided by operating activities:

     Depreciation and amortization                                 8,475         8,282         6,306
     Minority interest                                             1,000         1,273           485
     Payout of deferred compensation                              (1,245)           --            --
     Other, net                                                       78           211          (735)
     Changes in operating accounts:

        Receivables, net                                             646        (5,813)       (3,137)
        Prepaid expenses and other                                   853           (25)         (987)
        Accounts payable                                            (856)         (429)        1,494
        Accrued compensation, benefits and
         other liabilities                                           411        (1,286)          435
                                                                ------------------------------------
        Net cash provided by operating activities                 14,716         8,306        12,525
                                                                ------------------------------------
Cash flows from investing activities:

   Capital expenditures                                           (7,773)       (5,092)       (3,828)
   Purchases of net assets and physician practice                     --            --          (427)
   Purchase of a company                                              --            --       (16,980)
   Additional costs of company previously purchased                   --          (280)           --
   Cash acquired in purchase of a company                             --            --         1,384
   Other, net                                                        (36)         (396)          487
                                                                ------------------------------------
        Net cash used in investing activities                     (7,809)       (5,768)      (19,364)
                                                                ------------------------------------
Cash flows from financing activities:
   Proceeds from (paydown of) line of credit                      (9,178)        2,264        23,599
   Income distributions to noncontrolling investors               (1,594)       (1,560)         (862)
   Repurchase of company stock                                        --        (2,211)       (1,411)
   Proceeds from (principal repayments of) debt, net               2,325        (1,665)      (12,822)
   Other, net                                                        187           224           471
                                                                ------------------------------------
        Net cash provided by (used in) financing activities       (8,260)       (2,948)        8,975
                                                                ------------------------------------
Net increase (decrease) in cash and cash equivalents              (1,353)         (410)        2,136
Cash and cash equivalents at beginning of period                   7,463         7,873         5,737
                                                                ------------------------------------
Cash and cash equivalents at end of period                      $  6,110      $  7,463      $  7,873
                                                                ------------------------------------
Supplemental disclosure of cash flow information:

   Interest paid                                                $  2,680      $  2,925      $    822
                                                                ------------------------------------
   Income taxes paid                                            $  2,309      $  3,710      $  6,687
                                                                ------------------------------------
</TABLE>


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


PAGE 16 * WWW.RAYTEL.COM


<PAGE>   18
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, testing and information services utilizing telephonic
and Internet communication technology. Also, the Company has developed
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
        included revised financial terms. Effective March 27, 1999, the then
        current agreement was replaced with a revised agreement. The revised
        agreement will result in significantly lower revenues and expenses than
        revenues and expenses recognized under the previous agreements. However,
        under the revised agreement, the Company expects to generate operating
        income. Under the old agreements, operating expenses were in excess of
        revenues.

        (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 85,448 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 clinic in Florida.


                                                       WWW.RAYTEL.COM * PAGE 17


<PAGE>   19
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

                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 additional 46,668 shares
        of 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 year ended
September 30, 1997, 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
----------------------------------------------------
<S>                                    <C>
Revenues                                 $104,345
Net income                               $  9,446

Net income per share:

   Basic                                 $   1.05
   Diluted                               $    .99
Weighted average shares outstanding:
   Basic                                    8,958
   Diluted                                  9,539
</TABLE>


        (f) On October 9, 1997, the Company announced it had entered into an
        agreement with The Baptist Hospital of Southeast Texas ("Baptist") to
        develop a Raytel Cardiovascular Center at the hospital. Under the
        agreement, Raytel was to manage the cardiovascular center, which will
        provide the entire continuum of cardiovascular services, including
        diagnostic, therapeutic and patient management programs. Among other
        duties, Raytel was to be responsible for the day-to-day operations of
        the heart center, including administrative support, information systems
        management, marketing and public relations activities. The Company began
        operations at Baptist during its fourth quarter of fiscal 1998. Due to
        the recent merger between Baptist and the Memorial Hermann Hospital
        System, a modified agreement became effective March 1, 1999. Therefore,
        during the first five months of fiscal 1999, the Company only recognized
        revenue to the extent of expenses. Effective March 1, 1999, the Company
        is recognizing revenue based on the modified agreement which calls for
        the Company to manage portions of the cardiovascular surgery and
        cardiology programs at Baptist and to develop and manage specialty
        clinics to support the cardiovascular program.

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).

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, 1999, the Company owned five imaging centers and held
interests in two 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.


PAGE 18 * WWW.RAYTEL.COM


<PAGE>   20
        Two Ventures that operated four consolidated imaging centers expired
during fiscal 1997. Revenues contributed by these Ventures was $1,318,000 for
the year ended September 30, 1997.

        At September 30, 1999, the Company held interests in seven
cardiovascular diagnostic facilities, through investments in various limited
partnerships (the "Partnerships") and wholly-owned one other. 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.

(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 71%, 56% and 56% of the revenues of
the physician groups for the years ended September 30, 1999, 1998 and 1997,
respectively. For the clinic 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.


                                                       WWW.RAYTEL.COM * PAGE 19


<PAGE>   21
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

(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.

(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 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 had 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,
---------------------------------------------------------------
                                           1999          1998
---------------------------------------------------------------
<S>                                      <C>           <C>
Patient and service receivables          $ 38,978      $ 41,239
Less allowance for doubtful accounts       (5,664)       (7,093)
                                         ----------------------
                                           33,314        34,146

Other receivables                           1,544         1,358
                                         ----------------------
   Total                                 $ 34,858      $ 35,504
                                         ----------------------
</TABLE>


PAGE 20 * WWW.RAYTEL.COM


<PAGE>   22
NOTE 4. PROPERTY AND EQUIPMENT

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


<TABLE>
<CAPTION>
                                            September 30,
------------------------------------------------------------
                                        1999           1998
------------------------------------------------------------
<S>                                   <C>           <C>
Equipment, furniture and fixtures     $ 38,011      $ 31,263
Leasehold improvements                   9,653         8,928
                                      ----------------------
                                        47,664        40,191

Less accumulated depreciation          (25,425)      (20,510)
                                      ----------------------
                                      $ 22,239      $ 19,681
                                      ----------------------
</TABLE>


Depreciation expense was $5,213,000, $4,820,000 and $3,712,000 for the years
ended September 30, 1999, 1998 and 1997, respectively.

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):


<TABLE>
<CAPTION>
                                               September 30,
----------------------------------------------------------------
                                            1999          1998
----------------------------------------------------------------
<S>                                       <C>           <C>
Goodwill                                  $ 48,611      $ 48,752
Physician referrals and patient lists       10,997        10,940
Management service agreements                7,984         7,984
Other                                        5,236         6,245
                                          ----------------------
                                            72,828        73,921

Less accumulated amortization              (21,440)      (18,424)
                                          ----------------------
                                          $ 51,388      $ 55,497
                                          ----------------------
</TABLE>


Amortization expense related to intangible assets totaled $3,262,000, $3,462,000
and $2,594,000 for the years ended September 30, 1999, 1998 and 1997,
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,
                            ----------------------
                              1999          1998
                            ----------------------
<S>                         <C>           <C>
Promissory notes(a)         $  2,609      $  2,609
Line of credit (b)            19,047        28,225
Other(c)                       7,714         6,163
                            ----------------------
                              29,370        36,997

Less current maturities       (2,124)       (1,962)
                            ----------------------
                            $ 27,246      $ 35,035
                            ----------------------
</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 and again on July 30, 1999 changing the
        terms and adjusting certain covenants. Under terms of the agreement 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, 2001, at which date amounts outstanding will
        become due and payable.


WWW.RAYTEL.COM * PAGE 21


<PAGE>   23
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

        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
        175 to 225 basis points depending on the maintenance of a certain
        defined ratio, or the bank's prime rate plus 0 to 50 basis points, at
        the option of the Company. At September 30, 1999, the approximate
        weighted average interest rate was 7.58%. The line is collateralized by
        substantially all of the assets of the Company and its subsidiaries.

(c)     Other debt includes nonrecourse notes and capital lease obligations with
        varying maturities at interest rates ranging from 7.33% to 12.16% 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, 1999 are as follows: 2000 --
$2,124,000; 2001 -- $21,694,000; 2002 -- $2,731,000; 2003 -- $1,392,000, and
2004 -- $1,049,000.

NOTE 7. PREFERRED STOCK AND COMMON STOCK

Effective upon the closing of the Company's initial public offering (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, 1999, 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, received 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

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, 1999,
all such warrants are outstanding. The warrants will expire five years from the
effective date of the Offering.

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.


PAGE 22 * WWW.RAYTEL.COM


<PAGE>   24
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
No. 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 1999, 1998 and 1997 using the Black-Scholes option pricing
model prescribed by SFAS 123. The weighted average assumptions used are as
follows:


<TABLE>
<CAPTION>
                                               September 30,
-------------------------------------------------------------------------------
                                1999               1998               1997
-------------------------------------------------------------------------------
<S>                         <C>                <C>                <C>
Risk free interest rate     4.10% - 5.03%      5.58% - 5.86%      5.74% - 6.68%
Expected dividend yield         None               None               None
Expected lives                 3 years            3 years            3 years
Expected volatility             67.9%              62.9%              61.6%
</TABLE>


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,
---------------------------------------------------------------------------------
                                               1999          1998          1997
---------------------------------------------------------------------------------
<S>                                         <C>           <C>           <C>
Net income:

   As reported                              $5,354        $6,093        $8,664
   Pro forma                                 5,188         5,086         8,338
Net income per common share -- basic:

   As reported                                 .61           .69          1.02
   Pro forma                                   .60           .57           .99
Net income per common share -- diluted:

   As reported                                 .59           .66           .96
   Pro forma                                   .57           .55           .92
</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.


                                                       WWW.RAYTEL.COM * PAGE 23


<PAGE>   25
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the Company's three stock option plans at September
30, 1999, 1998 and 1997 and changes during the years then ended is presented in
the tables below:


<TABLE>
<CAPTION>
                                                                         September 30,
---------------------------------------------------------------------------------------------------------------------------
                                              1999                           1998                           1997
---------------------------------------------------------------------------------------------------------------------------
                                                    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      1,057,409      $6.82           1,026,712      $7.24           1,122,050      $ 7.34
Granted                               668,450       3.69             165,750       6.21             653,150        9.17
Exercised                             (59,206)      2.02             (11,001)      5.04            (191,494)       1.93
Expired                              (695,616)      8.16            (124,052)      9.66            (556,994)      11.38
                                    ---------                      ---------                      ---------
Outstanding, end of year              971,037       4.00           1,057,409       6.82           1,026,712        7.24
                                    ---------                      ---------                      ---------
Exercisable, end of year              446,198       3.94             597,279       6.09             435,813        4.61
                                    ---------                      ---------                      ---------
Weighted average fair value
 of options granted                                 2.21                           3.73                            5.26
</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      @ 9/30/99        (in years)     Price            9/30/99        Price
----------------------------------------------------------------------------------------------------------
<S>                             <C>               <C>         <C>               <C>           <C>
$1.42 - $ 2.30                    143,772            3.26     $2.09               143,772     $   2.09
 3.625 -  3.625                   592,150            9.04      3.63               178,616         3.63
 4.563 - 13.50                    235,115            7.57      6.09               123,810         6.54
                                  -------                                         -------
 1.42 -  13.50                    971,037                                         446,198
                                  -------                                         -------
</TABLE>


At September 30, 1999, there were 497,432 shares available for future option
grants.

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, 1999, 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>
   2000                                     $3,319
   2001                                      3,186
   2002                                      2,112
   2003                                      1,958
   2004                                      1,791
   Thereafter                                2,858
</TABLE>


PAGE 24 * WWW.RAYTEL.COM


<PAGE>   26
NOTE 10. INCOME TAXES

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


<TABLE>
<CAPTION>
                         September 30,
-------------------------------------------------
                  1999         1998         1997
-------------------------------------------------
<S>              <C>          <C>          <C>
Current:
   Federal       $2,366       $2,782       $4,233
   State          1,053        1,087        2,024
                 --------------------------------
     Total       $3,419       $3,869       $6,257
                 --------------------------------
</TABLE>


At September 30, 1999 and 1998, the Company had $1,377,000 and $1,710,000,
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, 1999 and 1998, are as
follows (in thousands):


<TABLE>
<CAPTION>
                                            Current Asset                Long-Term Asset
                                             (Liability)                   (Liability)
-------------------------------------------------------------------------------------------
                                         1999           1998           1999           1998
-------------------------------------------------------------------------------------------
<S>                                    <C>            <C>            <C>            <C>
Depreciation and amortization          $  (456)       $   758        $ 1,794        $ 1,494
Reserves for accounts receivable          (203)           451             --             --
Other, net                                 325           (376)           (83)          (617)
                                       ----------------------------------------------------
                                          (334)           833          1,711            877
Valuation allowance                        334           (833)        (1,711)          (877)
                                       ----------------------------------------------------
Total deferred income taxes            $    --        $    --        $    --        $    --
                                       ----------------------------------------------------
</TABLE>


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


<TABLE>
<CAPTION>
                                                                         September 30,
-------------------------------------------------------------------------------------------------------------------------
                                                  1999                        1998                          1997
-------------------------------------------------------------------------------------------------------------------------
                                     Amount            Rate         Amount            Rate         Amount            Rate
                                     ------------------------------------------------------------------------------------
<S>                                  <C>               <C>          <C>               <C>          <C>               <C>
Federal income tax at the
 statutory rate                      $ 2,983           34.0%        $ 3,387           34.0%        $ 5,318           34.0%
State income taxes, net of
 federal benefit                         695            7.9           1,087           10.9           1,336            8.5
Other                                    421            4.8            (481)          (4.8)           (397)          (2.5)
Federal tax benefit of the
 utilization of net operating
 loss and credit carryforwards          (680)          (7.7)           (124)          (1.2)             --             --
                                     ------------------------------------------------------------------------------------
   Total                             $ 3,419           39.0%        $ 3,869           38.9%        $ 6,257           40.0%
                                     ------------------------------------------------------------------------------------
</TABLE>


At September 30, 1999, the Company had $2,436,000 of federal net operating loss
carryforwards acquired in the CVI transaction. Such carryforwards have certain
limitations on use.


                                                       WWW.RAYTEL.COM * PAGE 25


<PAGE>   27
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

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 $599,000, $596,000 and $547,000 for the years ended September 30, 1999, 1998
and 1997, 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 $183,000, $191,000, and $178,000 for
the years ended September 30, 1999, 1998 and 1997, 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.

For the years ended September 30, 1999, 1998 and 1997, basic and diluted
earnings per share are calculated as follows (in thousands, except per share
amounts):


<TABLE>
<CAPTION>
                                          For the Year Ended September 30,
--------------------------------------------------------------------------
                                            1999         1998         1997
--------------------------------------------------------------------------
<S>                                       <C>          <C>          <C>
BASIC EARNINGS PER SHARE:
Net income                                $5,354       $6,093       $8,664
                                          --------------------------------
Weighted average shares outstanding        8,711        8,879        8,458
                                          --------------------------------
Per share                                 $  .61       $  .69       $ 1.02
                                          --------------------------------
</TABLE>


PAGE 26 * WWW.RAYTEL.COM


<PAGE>   28

<TABLE>
<CAPTION>
                                           For the Year Ended September 30,
--------------------------------------------------------------------------
                                           1999         1998         1997
--------------------------------------------------------------------------
<S>                                       <C>          <C>          <C>
DILUTED EARNINGS PER SHARE:

Net income                                $5,354       $6,093       $8,664
                                          --------------------------------
Weighted average shares outstanding        8,711        8,879        8,458
Shares to be issued                          147          137          135
Options                                      182          250          350
Warrants                                      --           28           96
                                          --------------------------------
                                           9,040        9,294        9,039
                                          --------------------------------
Per share                                 $  .59       $  .66       $  .96
                                          --------------------------------
</TABLE>


Certain options and warrants to purchase shares of common stock were outstanding
during the years ended September 30, 1999, 1998 and 1997, 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,
------------------------------------------------------------------------------------------------
                                           1999                 1998                 1997
------------------------------------------------------------------------------------------------
<S>                                    <C>                  <C>                  <C>
Options and warrants outstanding          626,759              525,722              307,542
Range of exercise prices               $3.63 - $13.50       $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").

NOTE 16. SEGMENT INFORMATION

The Company's reportable segments are strategic business units that offer
different services. The Company has three reportable segments: Cardiac
Information Services ("Information"), Diagnostic Imaging Services ("Imaging")
and Heart Facilities and Other ("Facilities"). The Information segment provides
remote cardiac monitoring and testing services utilizing telephonic and Internet
communication technology. The Imaging segment operates a network of imaging
centers throughout the United States. The Facilities segment provides
diagnostic, therapeutic and patient management services primarily associated
with cardiovascular disease.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies except that the Company does not
allocate all interest expense, taxes or corporate overhead to the individual
segments. The Company evaluates performance based on profit or loss from
operations before income taxes and unallocated amounts. The totals per the
schedules below will not and should not agree to the consolidated totals.


                                                       WWW.RAYTEL.COM * PAGE 27


<PAGE>   29
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

The difference is due to corporate overhead and other unallocated amounts which
are reflected in the reconciliation to consolidated earnings before income taxes
(in thousands):


<TABLE>
<CAPTION>
                                                 Information        Imaging        Facilities         Total
-------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>             <C>              <C>
FOR THE YEAR ENDED SEPTEMBER 30 1999:

   Net revenue                                    $  44,731        $  20,143        $  36,520       $ 101,394
   Total operating expenses                          33,859           14,719           28,857          77,435
                                                  -----------------------------------------------------------
   Segment contribution                              10,872            5,424            7,663          23,959

   Depreciation & amortization                        2,889            1,910            3,436           8,235
   Interest expense                                      --              149              663             812
   Minority interest/other expense (income)            (231)            (346)             656              79
                                                  -----------------------------------------------------------
   Segment profit                                 $   8,214        $   3,711        $   2,908       $  14,833
                                                  -----------------------------------------------------------
   Segment assets                                 $  37,416        $  16,819        $  58,820       $ 113,055
                                                  -----------------------------------------------------------
   Capital expenditures                           $   2,611        $   4,585        $     540       $   7,736
                                                  -----------------------------------------------------------

For the year ended September 30, 1998:

   Net revenue                                    $  46,171        $  19,977        $  41,481       $ 107,629
   Total operating expenses                          32,598           13,718           34,350          80,666
                                                  -----------------------------------------------------------
   Segment contribution                              13,573            6,259            7,131          26,963

   Depreciation & amortization                        2,890            1,843            3,505           8,238
   Interest expense                                      --               34              813             847
   Minority interest/other expense (income)            (139)              82              931             874
                                                  -----------------------------------------------------------
   Segment profit                                 $  10,822        $   4,300        $   1,882       $  17,004
                                                  -----------------------------------------------------------
   Segment assets                                 $  37,794        $  14,813        $  63,487       $ 116,094
                                                  -----------------------------------------------------------
   Capital expenditures                           $   1,962        $   1,483        $     893       $   4,338
                                                  -----------------------------------------------------------

For the year ended September 30, 1997:

   Net revenue                                    $  47,227        $  17,610        $  18,578       $  83,415
   Total operating expenses                          32,187           12,325           15,151          59,663
                                                  -----------------------------------------------------------
   Segment contribution                              15,040            5,285            3,427          23,752

   Depreciation & amortization                        3,194            1,843            1,138           6,175
   Interest expense                                      --               88              500             588
   Minority interest/other expense (income)          (2,704)             240               87          (2,377)
                                                  -----------------------------------------------------------
   Segment profit                                 $  14,550        $   3,114        $   1,702       $  19,366
                                                  -----------------------------------------------------------
   Segment assets                                 $  36,926        $  14,669        $  62,575       $ 114,170
                                                  -----------------------------------------------------------
   Capital expenditures                           $     923        $   1,066        $   1,600       $   3,589
                                                  -----------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                                       September 30,
--------------------------------------------------------------------------------------------------
                                                            1999            1998            1997
--------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>             <C>
Segment profit                                            $ 14,833        $ 17,004        $ 19,366
Unallocated amounts:
   Corporate general and administrative                      4,103           4,967           3,610
   Corporate depreciation and amortization                     240              44             131
   Corporate interest expense                                1,807           2,143             197
   Corporate other expense (income)                            (90)           (112)           (214)
                                                          ----------------------------------------
Earnings before income taxes and extraordinary item       $  8,773        $  9,962        $ 15,642
                                                          ----------------------------------------
</TABLE>


PAGE 28 * WWW.RAYTEL.COM


<PAGE>   30
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, 1999 and 1998 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, 1999.
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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three year period ended September 30, 1999 in conformity with
generally accepted accounting principles.


/s/ ARTHUR ANDERSEN LLP


ARTHUR ANDERSEN LLP

Hartford, Connecticut
November 12, 1999


                                                       WWW.RAYTEL.COM * PAGE 29


<PAGE>   31
CORPORATE INFORMATION

CORPORATE OFFICES
Raytel Medical Corporation
2755 Campus Drive, Suite 200
San Mateo, California 94403
Tel: (650) 349-0800
Fax: (650) 349-8850
http://www.raytel.com

ANNUAL MEETING OF STOCKHOLDERS Raytel

Medical Corporation's Annual Meeting of Stockholders will be held on Thursday,
March 2, 2000 beginning at 10:30 a.m. EST at LeMeridien, the Timberlay B Room,
250 Franklin Street, Boston, Massachusetts. All stockholders are invited to
attend.

INVESTOR RELATIONS

A copy of the Company's Annual Report 10-K, as filed with the Securities and
Exchange Commission, may be obtained by writing to Investor Relations at the
Company's Corporate Offices.

STOCK LISTING

The Common Stock of Raytel Medical Corporation trades on the NASDAQ National
Market under the symbol RTEL.

TRANSFER AGENT

BankBoston
c/o EquiServe, LP

PO Box 8040
Boston, MA 02266-8040

LEGAL COUNSEL

Gray Cary Ware & Freidenrich, Professional Corporation
Palo Alto, California

INDEPENDENT AUDITORS

Arthur Andersen LLP
Hartford, Connecticut

STOCK DATA NASDAQ SYMBOL:RTEL

The number of stockholders of record at September 30, 1999, was 446.

The Company's Common Stock is traded over-the-counter and is quoted on the
Nasdaq National Market. The Company completed the initial public offering of its
common stock in December 1995. The following table shows the high and low sales
price as reported by Nasdaq for the fiscal quarters during the fiscal years
ended September 30, 1999 and 1998.


<TABLE>
<CAPTION>
                            Fiscal Year Ended September 30,
--------------------------------------------------------------------
                            1999                       1998
--------------------------------------------------------------------
                     High          Low           High          Low
--------------------------------------------------------------------
<S>                <C>          <C>           <C>           <C>
First quarter      $ 6 3/4      $ 3 5/8       $ 14 3/4      $ 10 1/2
Second quarter       5 3/16       4 1/16        13 1/16        7 3/8
Third quarter        6 9/16       3 11/16        7 15/16       5
Fourth quarter       4 3/4        2 1/8          6 1/4         4 1/2
</TABLE>


The Company has not paid cash dividends during the fiscal years ended September
30, 1999 and 1998.

PAGE 30 * WWW.RAYTEL.COM
<PAGE>   32

CORPORATE DIRECTORY

BOARD OF DIRECTORS AND OFFICERS

Richard F. Bader
Chairman of the Board of Directors
and Chief Executive Officer

Allan Zinberg
President, Raytel Medical Corporation,
emeritus, and Director

David E. Wertheimer, M.D.
Senior Vice President and Director

Swapan Sen
Senior Vice President, General Manager,
Medical Facility Operations

Michael O. Kokesh
Vice President, General Counsel and Secretary

John F. Lawler, Jr.
Vice President, Chief Financial Officer and
Corporate Controller

Thomas J. Fogarty, M.D.
Professor of Surgery at
Stanford University Medical School
General Partner, Three Arch Ventures, L.P.

Mary M. Lampe
Chief Operating Officer,
Cardiovascular Research Foundation

Gene I. Miller
General Partner, Peregrine Venture Funds



<PAGE>   33
[RAYTEL MEDICAL CORPORATION LOGO] RAYTEL MEDICAL CORPORATION
                                  2755 Campus Drive, Suite 200
                                  San Mateo, CA 94403
                                  www.raytel.com

                                  1463-AR-00