##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

|           |  |                                                                                                                                                                
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(Mark One)
|[X]        |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2001; or                      
|          
|          
|          
|          
|[   ]      |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from___________________to__________________

Commission File Number: 0-27186

RAYTEL MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 94-2787342
(I.R.S. Employer
Identification No.)

2755 Campus Drive, Suite 200, San Mateo, California 94403
(Address of principal executive offices) (Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]   No [   ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

|                               |  |                                        |           | 
|------------------------------ |  | -------------------------------------- | --------- | 
|Class                          |  | Shares Outstanding as of July 31, 2001
|                               |  |                                       
|Common Stock
($.001 par value) |  |                                        | 2,918,425 | 





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                         
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS               
|                              |                                                                                               | Notes to Unaudited Condensed Consolidated Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risks                          
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 3. Defaults Upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 3.3                  
|EXHIBIT 10.69                



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##### Table of Contents



RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES

INDEX

|          |  |                                                                                                                       |  |     
|--------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                                                       |  | Page
|          |  |                                                                                                                       |  |     
|          |  | PART I. FINANCIAL INFORMATION                                                                                         |  |     
|         
|         
|         
|         
|Item 1.   |  | Financial Statements                                                                                                  |  |     
|         
|         
|         
|         
|          |  | Condensed Consolidated Balance Sheets as of
June 30, 2001 and September 30, 2000                                      |  | 3   
|         
|         
|         
|         
|          |  | Condensed Consolidated Statements of Operations
for the three months and the nine months ended June 30, 2001 and 2000 |  | 4   
|         
|         
|         
|         
|          |  | Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 2001 and 2000.                     |  | 5   
|         
|         
|         
|         
|          |  | Notes to Condensed Consolidated Financial Statements                                                                  |  | 6   
|         
|         
|         
|         
|Item 2.   |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                 |  | 9   
|         
|         
|         
|         
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risks                                                           |  | 16  
|         
|         
|         
|         
|          |  | PART II. OTHER INFORMATION                                                                                            |  |     
|         
|         
|         
|         
|Item 1.   |  | Legal Proceedings                                                                                                     |  | 17  
|         
|         
|         
|         
|Item 3.   |  | Defaults Upon Senior Securities                                                                                       |  | 17  
|         
|         
|         
|         
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 18  
|         
|         
|         
|         
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                      |  | 18  
|         
|         
|         
|         
|SIGNATURE |  |                                                                                                                       |  | 19  

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND SEPTEMBER 30, 2000
(000s omitted)
ASSETS

|                                                                       |                                                                 |   |                                            |         |   |             |        |               |   |         |  | 
|---------------------------------------------------------------------- | --------------------------------------------------------------- | - | ------------------------------------------ | ------- | - | ----------- | ------ | ------------- | - | ------- |  | 
|                                                                       |                                                                 |   |                                            |         |   | June 30,    |        | September 30,
|                                                                       |                                                                 |   |                                            |         |   | 2001        |        | 2000         
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   |                                            |         |   | (Unaudited) |        |               |   |        
|Current assets:                                                        |                                                                 |   |                                            |         |   |             |        |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Cash and cash equivalents                                              |                                                                 | $ | 6,053                                      |         |   | $           | 7,201  |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Cash held in escrow                                                    |                                                                 |   | 855                                        |         |   |             | 1,580  |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Receivables, net                                                       |                                                                 |   | 33,371                                     |         |   |             | 36,840 |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Prepaid expenses and other                                             |                                                                 |   | 2,545                                      |         |   |             | 2,597  |              
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   | Total current assets                       |         |   | 42,824      |        |               |   | 48,218  | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Property and equipment, less accumulated
depreciation and amortization |                                                                 |   | 14,803                                     |         |   |             | 19,651 |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Intangible assets, less accumulated
amortization                       |                                                                 |   | 18,996                                     |         |   |             | 41,672 |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other                                                                  |                                                                 |   | 47                                         |         |   |             | 56     |              
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   | Total assets                               |         | $ | 76,670      |        |               | $ | 109,597 | 
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Current liabilities:                                                   |                                                                 |   |                                            |         |   |             |        |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Current portion of long-term debt and
capital lease obligations |   | $                                          | 16,636  |   |             | $      | 1,067         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Accounts payable                                                |   |                                            | 5,929   |   |             |        | 5,258         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Accrued compensation and benefits                               |   |                                            | 2,099   |   |             |        | 3,177         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Accrued liabilities                                             |   |                                            | 3,647   |   |             |        | 6,329         |  
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   | Total current liabilities                  |         |   | 28,311      |        |               |   | 15,831  | 
|                                                                      
|Long-term debt and capital lease obligations,
net of current portion   |                                                                 |   | 10,075                                     |         |   |             | 24,130 |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Minority interest in consolidated entities                             |                                                                 |   | 1,050                                      |         |   |             | 1,774  |              
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   | Total liabilities                          |         |   | 39,436      |        |               |   | 41,735  | 
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|Stockholders equity:                                                  |                                                                 |   |                                            |         |   |             |        |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Common stock                                                    |   |                                            | 3       |   |             |        | 9             |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Additional paid-in capital                                      |   |                                            | 62,672  |   |             |        | 62,664        |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Common stock to be issued                                       |   |                                            |        |   |             |        | 69            |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Retained earnings (deficit)                                     |   |                                            | (21,819 | ) |             |        | 8,742         |  
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   | 40,856                                     |         |   |             | 71,484 |              
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Less treasury stock, at cost                                    |   |                                            | (3,622  | ) |             |        | (3,622        | )
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   | Total stockholders equity                 |         |   | 37,234      |        |               |   | 67,862  | 
|                                                                       |                                                                 |   |                                            |         |   |             |        |              
|                                                                       |                                                                 |   | Total liabilities and stockholders equity |         | $ | 76,670      |        |               | $ | 109,597 | 
|                                                                       |                                                                 |   |                                            |         |   |             |        |              

3



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##### Table of Contents






RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(000s omitted, except per share amounts)

|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |        |        |       |        |  
|------------------------------------------------------------- | ---------------------------------------- | --------------------------------- | ---------------------------------------------------------------- | ------------------------ | ----- | --------------------------- | ------ | -------------------------- | ------ | ----- | ------- | ------ | ------- | ------ | ------ | ------ | ------ | ----- | ------ | -
|                                                              |                                          |                                   |                                                                  |                          |       | Three Months Ended June 30, |        | Nine Months Ended June 30,
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                           
|                                                              |                                          |                                   |                                                                  |                          |       | 2001                        |        | 2000                       |        | 2001  |         | 2000  
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |       
|Revenues:                                                     |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Cardiac information services             |                                   | $                                                                | 9,449                    |       |                             | $      | 10,144                     |        |       | $       | 28,668 |         |        | $      | 31,149 |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Diagnostic imaging services              |                                   |                                                                  | 6,758                    |       |                             |        | 5,990                      |        |       |         | 19,250 |         |        |        | 16,843 |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Heart facilities and other               |                                   |                                                                  | 2,054                    |       |                             |        | 2,216                      |        |       |         | 5,737  |         |        |        | 6,862  |       
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                              |                                          |                                   |                                                                  | Total revenues           |       |                             | 18,261 |                            |        |       | 18,350  |        |         |        | 53,655 |        |        |       | 54,854 |  
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Costs and expenses:                                           |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Provision for OIG investigation expenses |                                   |                                                                  |                         |       |                             |        | 2,000                      |        |       |         | 2,000  |         |        |        | 2,000  |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Settlement with federal government       |                                   |                                                                  | 11,500                   |       |                             |        |                           |        |       |         | 11,500 |         |        |        |       |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Operating costs                          |                                   |                                                                  | 8,726                    |       |                             |        | 7,846                      |        |       |         | 24,832 |         |        |        | 22,966 |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Selling, general and administrative      |                                   |                                                                  | 7,445                    |       |                             |        | 7,947                      |        |       |         | 22,149 |         |        |        | 23,698 |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Depreciation and amortization            |                                   |                                                                  | 1,603                    |       |                             |        | 1,635                      |        |       |         | 4,928  |         |        |        | 4,923  |       
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                              |                                          |                                   |                                                                  | Total costs and expenses |       |                             | 29,274 |                            |        |       | 19,428  |        |         |        | 65,409 |        |        |       | 53,587 |  
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Operating income (loss)                                       |                                          |                                   | (11,013                                                          | )                        |       |                             | (1,078 | )                          |        |       | (11,754 | )      |         |        | 1,267  |       
|                                                             
|                                                             
|                                                             
|                                                             
|Interest expense                                              |                                          |                                   | 301                                                              |                          |       |                             | 522    |                            |        |       | 1,332   |        |         |        | 1,467  |       
|                                                             
|                                                             
|                                                             
|                                                             
|Other expense (income)                                        |                                          |                                   | (253                                                             | )                        |       |                             | (318   | )                          |        |       | (734    | )      |         |        | (801   | )     
|                                                             
|                                                             
|                                                             
|                                                             
|Minority interest                                             |                                          |                                   | 177                                                              |                          |       |                             | 204    |                            |        |       | 364     |        |         |        | 620    |       
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Loss from continuing operations
before income taxes (benefit) |                                          |                                   | (11,238                                                          | )                        |       |                             | (1,486 | )                          |        |       | (12,716 | )      |         |        | (19    | )     
|                                                             
|                                                             
|                                                             
|                                                             
|Provision for income taxes (benefit)                          |                                          |                                   | (1,124                                                           | )                        |       |                             | (579   | )                          |        |       | (1,700  | )      |         |        | (7     | )     
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Loss from continuing operations                               |                                          |                                   | (10,114                                                          | )                        |       |                             | (907   | )                          |        |       | (11,016 | )      |         |        | (12    | )     
|                                                             
|                                                             
|                                                             
|                                                             
|Discontinued operations:                                      |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                          |                                   | Income (loss) from discontinued operations,
net of tax (benefit) |                          |       |                            |        |                            |        | 84    |         |        |         | (192   | )      |        |        | 969   |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                          |                                   | Loss on disposal of discontinued operations                      |                          |      |                             |        |                            | (4,965 | )     |         |        | (19,353 | )      |        |        | (4,965 | )    
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Net loss                                                      |                                          | $                                 | (10,114                                                          | )                        |       | $                           | (5,788 | )                          |        | $     | (30,561 | )      |         | $      | (4,008 | )     
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Basic loss per share:                                         |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                          | Loss from continuing operations   |                                                                  | $                        | (3.47 | )                           |        | $                          | (.31   | )     |         | $      | (3.78   | )      |        | $      |       |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                          | Loss from discontinued operations |                                                                  |                          |      |                             |        |                            | (1.67  | )     |         |        | (6.70   | )      |        |        | (1.37  | )    
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                              |                                          |                                   |                                                                  | Total                    |       | $                           | (3.47  | )                          |        | $     | (1.98   | )      |         | $      | (10.48 | )      |        | $     | (1.37  | )
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Diluted loss per share:                                       |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                          | Loss from continuing operations   |                                                                  | $                        | (3.47 | )                           |        | $                          | (.31   | )     |         | $      | (3.78   | )      |        | $      |       |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                          | Loss from discontinued operations |                                                                  |                          |      |                             |        |                            | (1.67  | )     |         |        | (6.70   | )      |        |        | (1.37  | )    
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                              |                                          |                                   | Total                                                            |                          | $     | (3.47                       | )      |                            | $      | (1.98 | )       |        | $       | (10.48 | )      |        | $      | (1.37 | )     
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|Weighted average shares outstanding:                          |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                          | Basic                             |                                                                  |                          | 2,918 |                             |        |                            | 2,916  |       |         |        | 2,917   |        |        |        | 2,915  |      
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       
|                                                              |                                          | Diluted                           |                                                                  |                          | 2,918 |                             |        |                            | 2,916  |       |         |        | 2,917   |        |        |        | 2,915  |      
|                                                              |                                          |                                   |                                                                  |                          |       |                             |        |                            |        |       |         |        |         |        |        |       

4



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##### Table of Contents






RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(000s omitted)

|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |        |   |       |        |  
|---------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------- | --------------------------------------------------- | - | -------- | ------- | ------ | - | ----- | ------ | -
|                                                     |                                                   |                                                                                 |                                             |                                                     |   | June 30,
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |         
|                                                     |                                                   |                                                                                 |                                             |                                                     |   | 2001     |         | 2000  
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|Cash flows from operating activities:                |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                          |                                                                                 | $                                           | (30,561                                             | ) |          | $       | (4,008 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   | Adjustments to reconcile net loss to net cash provided
by operating activities: |                                             |                                                     |   |          |         |        |   |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 | Depreciation and amortization               |                                                     |   | 4,928    |         |        |   | 4,923 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 | Minority interest                           |                                                     |   | 364      |         |        |   | 620   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 | Loss on disposal of discontinued operations |                                                     |   | 19,353   |         |        |   | 4,965 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 | Settlement with federal government          |                                                     |   | 11,500   |         |        |   |      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 | Other, net                                  |                                                     |   | 394      |         |        |   | 1,212 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   | Changes in operating accounts:                                                  |                                             |                                                     |   |          |         |        |   |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 |                                             | Receivables, net                                    |   |          | 16      |        |   |       | 226    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 |                                             | Prepaid expenses and other                          |   |          | (338    | )      |   |       | (3     | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 |                                             | Accounts payable                                    |   |          | 671     |        |   |       | 860    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                   |                                                                                 |                                             | Accrued liabilities and other                       |   |          | (4,183  | )      |   |       | 1,045  |  
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|                                                     |                                                   |                                                                                 |                                             | Net cash provided by operating activities           |   |          | 2,144   |        |   |       | 9,840  |  
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|Cash flows from investing activities:                |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                              |                                                                                 |                                             | (2,192                                              | ) |          |         | (3,402 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from disposal of discontinued operations |                                                                                 |                                             | 8,876                                               |   |          |         |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other, net                                        |                                                                                 |                                             | 221                                                 |   |          |         | 169    |  
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|                                                     |                                                   |                                                                                 |                                             | Net cash provided by (used in) investing activities |   |          | 6,905   |        |   |       | (3,233 | )
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|Cash flows from financing activities:                |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income distributions to noncontrolling investors  |                                                                                 |                                             | (1,109                                              | ) |          |         | (1,546 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Paydown of line of credit                         |                                                                                 |                                             | (7,971                                              | ) |          |         | (3,180 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal repayments of debt, net                 |                                                                                 |                                             | (1,867                                              | ) |          |         | (1,150 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other, net                                        |                                                                                 |                                             | 25                                                  |   |          |         | (56    | )
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|                                                     |                                                   |                                                                                 |                                             | Net cash used in financing activities               |   |          | (10,922 | )      |   |       | (5,932 | )
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|Net increase (decrease) in cash and cash equivalents |                                                   |                                                                                 | (1,873                                      | )                                                   |   |          | 675     |       
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                   |                                                                                 | 8,781                                       |                                                     |   |          | 6,110   |       
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       
|Cash and cash equivalents at end of period           |                                                   | $                                                                               | 6,908                                       |                                                     |   | $        | 6,785   |       
|                                                     |                                                   |                                                                                 |                                             |                                                     |   |          |         |       

5



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##### Table of Contents






Notes to Unaudited Condensed Consolidated Financial Statements for the Three
and Nine Months Ended June 30, 2001 and 2000.

1. Presentation of Unaudited Interim Condensed Consolidated Financial Statements

Information in the accompanying interim condensed consolidated financials
statements and notes to the financial statements of Raytel Medical Corporation
(Raytel or the Company) as of June 30, 2001 and for the three month and
nine month periods ended June 30, 2001 and 2000 is unaudited. The accompanying
unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and notes required by accounting principles generally
accepted in the United States. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three months and nine months ended June 30, 2001 are not
necessarily indicative of results that may be expected for the year ending
September 30, 2001. For further information, refer to the consolidated
financial statements and notes included in the Companys Annual Report on Form
10-K for the year ended September 30, 2000 and Forms 8-K filed during the nine
months ended June 30, 2001.

2. Office of the Inspector General Investigation

From June 2000 through June 2001, Raytel was the subject of a grand jury
investigation of unspecified allegations concerning certain business practices
of its trans-telephonic cardiac pacemaker monitoring business. Raytel Cardiac
Services, Inc., a wholly-owned subsidiary of the Company, has reached agreement
with the federal government to end the investigation into its pacemaker
operations and Medicare billing practices. In return for the federal
government ceasing any further investigation into its pacemaker operations and
any additional potential criminal charges, the subsidiary pleaded guilty on
June 25, 2001 in U.S. District Court in Hartford Connecticut to a charge of
obstructing a criminal investigation arising out of the initial investigation
in June 2000. In addition, the Company and Raytel Cardiac Services have
reached an agreement in principle with the government to settle civil claims
relating to this matter. Under the criminal and civil settlements, the
subsidiary would pay a total of $11,500,000 (of which $3,500,000 and $8,000,000
is included in the current portion and long-term portion of debt, respectively,
on the accompanying balance sheet at June 30, 2001) to the government over a
five year period, with interest of 7% on the unpaid balance, and enter into a
Corporate Integrity Agreement (the Agreement). Other product lines offered
by the subsidiary have not been under investigation and are not affected by
this Agreement. Raytel will guarantee the payment owed by its subsidiary
associated with the Agreement.

In connection with the investigation, Raytel has reviewed its compliance
with Medicare billing and record-keeping requirements on a patient-by-patient
basis. Pending such confirmation, Raytel held Medicare reimbursement checks
received since June 23, 2000 in payment of invoices for pacemaker monitoring
services and established an escrow account for funds inadvertently deposited
with respect to such services received since the date of the investigation. In
addition, Raytel suspended billing for such services. Most of the checks have
been deposited, most of the cash has been released from escrow, and new
billings for services performed has commenced as most of the affected patients
records have been reviewed and found to be in compliance with applicable
Medicare requirements. The total amount of such uncashed checks and escrowed
funds was approximately $855,000 as of June 30, 2001. Since Raytel recognizes
revenue when patient services are provided, neither the escrow arrangement nor
the deferred billing has had a direct impact on Raytels operating results. If
the Companys review discloses any patient billings that have not been fully
compliant with Medicare requirements, any resulting billing adjustments or
reversals will be charged against operating results in that current period. In
addition, the Company has incurred, and expects to continue to incur,
substantial legal fees and other expenses in connection with the investigation
and has accrued a reserve of $4,000,000 to cover the estimated amounts of these
expenses. Additional expenses, if any, will adversely affect operating results
in future periods. As of June 30, 2001, the Company had incurred legal fees
and other expenses of approximately $3,578,000 related to the investigation.
These expenses include legal fees incurred by certain employees in connection
with the on-going investigation of certain employees in accordance with the
requirements of Delaware Law and the Companys By-Laws. The investigation, and
the related internal compliance review, diverted the efforts and attention of a
number of Raytels management and administrative personnel. The impact of this
diversion reduced the efficiency of Raytels pacemaker monitoring operations
during the last week of the quarter ended June 30, 2000 and adversely affected
both revenues and operating expenses for that period as well as the quarters
ended September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001.
Raytel expects that, while the impact of the investigation of the Companys
operations in future periods will be less significant now that the
investigation of the Company has been settled, it may require time of some
employees and it may continue to adversely affect operating results in future
periods.

6



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##### Table of Contents



3. Line of Credit

On December 15, 2000, the Companys line of credit agreement with two
banks was amended to reduce the line of credit to $20,000,000 and to revise
certain financial and other covenants and terms. The interest rate was changed
to be based on LIBOR plus 275 basis points, or the banks prime rate plus 50
basis points, at the option of the Company and the expiration date was extended
to October 1, 2001. A new non-financial covenant was added which states that
any civil financial settlement in excess of $1,000,000 and/or criminal charges
relating to the ongoing OIG investigation would constitute an event of default.

On March 16, 2001, the line of credit was paid down and permanently
reduced to $14,900,000 in connection with the sale of Heart and Family Health Institute of Port St.
Lucie, Inc. (HFHI).

Consistent with the terms of the December 2000 amendment to the line of
credit agreement, the available line of credit balance was further reduced by
$2,500,000 on June 30, 2001 to $12,400,000. At June 30, 2001, $12,287,000 was
outstanding under the line of credit.

The Company is currently in default of certain of its new covenants in
connection with its line of credit. The Company has requested a waiver from
the banks. If the banks do not grant the waiver, the banks have the right to
terminate the credit facility and demand payment in full of the outstanding
balance. See Part II, Item 3.  Defaults Upon Senior Securities.

4. Discontinued Operations

In March 2001, effective January 1, 2001, the Company completed the sale
of its wholly-owned subsidiary, HFHI, to a new company organized by physicians
practicing at HFHI. The Company received $8,876,000 (prior to estimated
transaction costs of $565,000) in cash in this transaction. The Company has
reported a $19,353,000 loss on the transaction related primarily to the
write-off of unamortized intangible assets. Due to the uncertainty of the
ultimate tax benefit to be realized as a result of the loss, the Company has
not provided for any tax benefit that may result from this transaction.

As a result, the Company reported the results of HFHI and the loss on
disposal as a discontinued operation and the related operating results have
been reported separately from continuing operations for all applicable periods
presented. The related net assets of HFHI are immaterial to the financial
statements and are included in the accompanying balance sheet at September 30,
2000.

Revenues applicable to HFHI during the three months ended June 30, 2001
and 2000 were $0 and $4,354,000, respectively, and during the nine months ended
June 30, 2001 and 2000 were $3,948,000 and $13,931,000, respectively. Income
(loss) from discontinued operations is net of taxes (benefit) of $0, $80,000,
$(123,000) and $616,000 for the three months ended June 30, 2001 and 2000 and
the nine months ended June 30, 2001 and 2000, respectively.

Effective May 2000, the Company disposed of its management of Southeast
Texas Cardiology Associates II, L.L.P. (SETCA) and the management of
Comprehensive Cardiology Consultants, a Medical Group, Inc. (CCMG).
Effective May 31, 2000, the Company sold substantially all of the assets of
Raytel Nuclear Imaging-Orange, L.P. and the Common Stock of Raytel Texas
Physicians Services, Inc., which effectively terminated its management of SETCA
as well as the termination of the associated heart center at Baptist Hospital.
As compensation for this transaction, physicians in the practice managed by the
Company agreed to terminate notes owed by the Company in the aggregate amount
of approximately $2,300,000 and the existing rights to receive 122,068 shares
of Raytels Common Stock. In addition, the Company discontinued its management
of CCMG. The Company has reported a $4,965,000 loss on the disposal (net of a
$3,367,000 tax benefit) related to the write-off of unamortized intangible
assets created at the inception of the management agreements, accounts
receivable and other assets less the amount due under the terminated notes and
the fair market value of the stock that was cancelled.

Accordingly, the results of these entities have been accounted for as a
discontinued operation and the related operating results have been reported
separately from continuing operations for all applicable periods presented.

Revenues applicable to these entities during the three months ended June
30, 2000 were $758,000 and during the nine months ended June 30, 2000 were
$3,189,000. Income (loss) from discontinued operations is net of taxes
(benefit) of $(27,000) and $3,000 for the three months and nine months ended
June 30, 2000, respectively.

5. Reverse Stock Split

On May 9, 2001, the Board of Directors declared a one-for-three reverse
split of the Companys Common Stock. The accompanying consolidated financial statements reflect such reverse
stock split for all periods presented.

7



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##### Table of Contents



6. Loss Per Share

For the three months and the nine months ended June 30, 2001 and 2000,
basic and diluted earnings per share are calculated as follows:

|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |       |  
|----------------------------------------- | ----- | ---- | -------------- | ----- | -------------- | ---- | ----- | ----- | - | - | ----- | ------ | - | - | ----- | ----- | -
|                                          |       |      | Three months   |       | Nine months   
|                                          |       |      | ended June 30, |       | ended June 30,
|                                          |       |      |                |       |               
|(000's omitted, except per share amounts) |       | 2001 |                | 2000  |                | 2001 |       | 2000 
|                                          |       |      |                |       |                |      |       |      
|Basic Loss per Share:                     |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|                                         
|                                         
|                                         
|                                         
|Loss from continuing operations           |       | $    | (3.47          | )     |                | $    | (.31  | )     |   | $ | (3.78 | )      |   | $ |      |      
|                                         
|                                         
|                                         
|                                         
|Loss from discontinued operations         |       |      |               |       |                |      | (1.67 | )     |   |   | (6.70 | )      |   |   | (1.37 | )    
|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|                                          | Total |      | $              | (3.47 | )              |      | $     | (1.98 | ) |   | $     | (10.48 | ) |   | $     | (1.37 | )
|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|Weighted average shares outstanding       |       |      | 2,918          |       |                |      | 2,916 |       |   |   | 2,917 |        |   |   | 2,915 |      
|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|Diluted Loss per Share:                   |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|                                         
|                                         
|                                         
|                                         
|Loss from continuing operations           |       | $    | (3.47          | )     |                | $    | (.31  | )     |   | $ | (3.78 | )      |   | $ |      |      
|                                         
|                                         
|                                         
|                                         
|Loss from discontinued operations         |       |      |               |       |                |      | (1.67 | )     |   |   | (6.70 | )      |   |   | (1.37 | )    
|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|                                          | Total |      | $              | (3.47 | )              |      | $     | (1.98 | ) |   | $     | (10.48 | ) |   | $     | (1.37 | )
|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|Weighted average shares outstanding       |       |      | 2,918          |       |                |      | 2,916 |       |   |   | 2,917 |        |   |   | 2,915 |      
|                                         
|                                         
|                                         
|                                         
|Shares to be issued                       |       |      | (a             | )     |                |      | (a    | )     |   |   | (a    | )      |   |   | (a    | )    
|                                         
|                                         
|                                         
|                                         
|Options                                   |       |      | (a             | )     |                |      | (a    | )     |   |   | (a    | )      |   |   | (a    | )    
|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      
|                                          |       |      | 2,918          |       |                |      | 2,916 |       |   |   | 2,917 |        |   |   | 2,915 |      
|                                          |       |      |                |       |                |      |       |       |   |   |       |        |   |   |       |      



---

|(a) |  | Due to the loss for the period shown, dilutives are not included in the
calculation.
|--- |  | ------------------------------------------------------------------------------------

Certain options and warrants to purchase shares of common stock were
outstanding during the three months and the nine months ended June 30, 2001 and
2000, 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 (all warrants expired
in December 2000) outstanding and their exercise prices are as follows:

|                                 |  |                |               |                |  |      |               |      |  |   |               |  |  |   |              | 
|-------------------------------- |  | -------------- | ------------- | -------------- |  | ---- | ------------- | ---- |  | - | ------------- |  |  | - | ------------ | 
|                                 |  | Three months   |               | Nine months   
|                                 |  | ended June 30, |               | ended June 30,
|                                 |  |                |               |               
|                                 |  | 2001           |               | 2000           |  | 2001 |               | 2000
|                                 |  |                |               |                |  |      |               |     
|Options and warrants outstanding |  |                | 463,677       |                |  |      | 387,671       |      |  |   | 455,087       |  |  |   | 347,196      | 
|                                
|                                
|                                
|                                
|Range of exercise prices         |  | $              | 2.625-$35.625 |                |  | $    | 9.375-$35.625 |      |  | $ | 2.625-$35.625 |  |  | $ | 9.375-$40.50 | 

7. New Accounting Standards

The Financial Accounting Standards Board issued Statement No. 141,
Business Combinations, and Statement No. 142, Goodwill and Other Intangible
Assets, in July 2001 (effective for fiscal 2002). Statement No. 141 will not
have an effect on the Companys results and the Company is currently assessing
what effect, if any, Statement No. 142 will have on its results.

8



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##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis includes a number of forward-looking
statements which reflect the Companys current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed under Business
Environment and Future Results and elsewhere in this Item, that could cause
actual results to differ materially from historical results or those
anticipated. In this Item, 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 its revenues from: cardiac information services,
which includes telephonic monitoring services for cardiac pacemaker patients
(Pacing), cardiac event detection services (CEDS) and Holter monitoring;
diagnostic imaging services; and heart facilities.

Following its initial public offering in December 1995, the Company
entered into a series of transactions which expanded its heart facilities
businesses. As a result, revenue has also been provided from: Raytel Heart
Center at Granada Hills (RHCGH) beginning on February 1, 1996; the management
of Southeast Texas Cardiology Associates II, L.L.P. (SETCA) beginning on
September 18, 1996 and ending on May 31, 2000; the management of Comprehensive
Cardiology Consultants, a Medical Group, Inc. (CCMG) beginning on November 1,
1996 and ending on May 31, 2000; and Cardiovascular Ventures, Inc. (CVI)
beginning on August 15, 1997, which included the multi-specialty clinic, HFHI
and six cardiovascular diagnostic facilities. HFHI was sold effective January
1, 2001.

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 and Louisiana and owned and
managed a cardiovascular diagnostic facility and a multi-specialty 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 have been or were to be issued.

Effective March 27, 1999, the Company entered into a revised agreement
with RHCGH. The new agreement results in significantly lower revenues and
expenses than revenues and expenses recognized under the previous agreements.

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

In order to settle a dispute and avoid protracted litigation, initiated by
SETCA, effective May 31, 2000, the Companys Board of Directors approved
managements plan to sell SETCA. Effective May 31, 2000, the Company sold
substantially all of the assets of Raytel Nuclear Imaging-Orange, L.P. and the
Common Stock of Raytel Texas Physicians Services, Inc. in exchange for
promissory notes in the aggregate amount of approximately $2,300,000 and the
physicians agreement to cancel existing rights to receive 122,068 shares of
Raytels Common Stock. Accordingly, the Company reported the results of
operations of those discontinued entities and the loss on disposal as
discontinued operations. The loss on disposal of $4,965,000, recorded at June
30, 2000, was net of an estimated tax benefit of approximately $3,367,000.

From June 2000 through June 2001, Raytel was the subject of a grand jury
investigation of unspecified allegations concerning certain business practices
of its trans-telephonic cardiac pacemaker monitoring business. Raytel Cardiac
Services, Inc., a wholly-owned subsidiary of the Company, has reached agreement
with the federal government to end the investigation into its pacemaker
operations and Medicare billing practices. In return for the federal
government ceasing any further investigation into its

9



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##### Table of Contents



pacemaker operations and any additional potential criminal charges, the
subsidiary pleaded guilty on June 25, 2001 in U.S. District Court in Hartford
Connecticut to a charge of obstructing a criminal investigation arising out of
the initial investigation in June 2000. In addition, the Company and Raytel
Cardiac Services have reached an agreement in principle with the government to
settle civil claims relating to this matter. Under the criminal and civil
settlements, the subsidiary would pay a total of $11,500,000 to the government
over a five year period, with interest of 7% on the unpaid balance, and enter
into a Corporate Integrity Agreement. Other product lines offered by the
subsidiary have not been under investigation and are not affected by this
Agreement. Raytel will guarantee the payment owed by its subsidiary associated
with the Agreement.

In connection with the investigation, Raytel has reviewed its compliance
with Medicare billing and record-keeping requirements on a patient-by-patient
basis. Pending such confirmation, Raytel held Medicare reimbursement checks
received since June 23, 2000 in payment of invoices for pacemaker monitoring
services and established an escrow account for funds inadvertently deposited
with respect to such services received since the date of the investigation. In
addition, Raytel suspended billing for such services. Most of the checks have
been deposited, most of the cash has been released from escrow, and new
billings for services performed has commenced as most of the affected patients
records have been reviewed and found to be in compliance with applicable
Medicare requirements. The total amount of such uncashed checks and escrowed
funds was approximately $855,000 as of June 30, 2001. Since Raytel recognizes
revenue when patient services are provided, neither the escrow arrangement nor
the deferred billing has had a direct impact on Raytels operating results. If
the Companys review discloses any patient billings that have not been fully
compliant with Medicare requirements, any resulting billing adjustments or
reversals will be charged against operating results in that current period. In
addition, the Company has incurred, and expects to continue to incur,
substantial legal fees and other expenses in connection with the investigation
and has accrued a reserve of $4,000,000 to cover the estimated amounts of these
expenses. Additional expenses, if any, will adversely affect operating results
in future periods. As of June 30, 2001, the Company had incurred legal fees
and other expenses of approximately $3,578,000 related to the investigation.
These expenses include legal fees incurred by certain employees in connection
with the on-going investigation of certain employees in accordance with the
requirements of Delaware Law and the Companys By-Laws. The investigation, and
the related internal compliance review, diverted the efforts and attention of a
number of Raytels management and administrative personnel. The impact of this
diversion reduced the efficiency of Raytels pacemaker monitoring operations
during the last week of the quarter ended June 30, 2000 and adversely affected
both revenues and operating expenses for that period as well as the quarters
ended September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001.
Raytel expects that, while the impact of the investigation on the Companys
operations in future periods will be less significant now that the
investigation of the Company has been settled, it may require time of some
employees and it may continue to adversely affect operating results in future
periods.

In March 2001, effective January 1, 2001, the Company completed the sale
of its wholly-owned subsidiary, HFHI, to a new company organized by physicians
practicing at HFHI, including David Wertheimer, M.D., who had served as
President of the subsidiary as well as a former officer of Raytel and a member
of Raytels Board of Directors. Raytel received a cash purchase price of
$8,311,000, net of transaction expenses, for all of the common stock of the
subsidiary. Approximately $1,234,000 of the proceeds were used to pre-pay
leases for equipment used at the HFHI facility, $5,100,000 was used to reduce
the indebtedness under the Companys bank credit facility and the balance was
used for working capital purposes. The Company reported the results of
operations of HFHI and the loss on disposal as discontinued operations for all
applicable periods presented. The loss on disposal of $19,353,000 represents a
one-time non-cash charge, consisting primarily of the write-off of intangible
assets. Due to the uncertainty of the ultimate tax benefit to be realized as a
result of the loss, the Company has not provided for any tax benefit that may
result from this transaction.

On May 9, 2001, the Board of Directors declared a one-for-three reverse
split of the Companys Common Stock. The accompanying consolidated financial statements reflect such reverse
stock split for all periods
presented.

Results of Operations

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30,
2000.

Revenues.For the three months ended June 30, 2001, total revenues were
$18,261,000 compared to $18,350,000 for the three months ended June 30, 2000,
representing a decrease of $89,000, or .5%.

10



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##### Table of Contents



Cardiac information services revenues were $9,449,000 for the three months
ended June 30, 2001, compared to $10,144,000 for the three months ended June
30, 2000, a decrease of $695,000, or 6.9%. The decrease in revenues for
cardiac information services was due to lower revenues from Pacing as a result
of lower test volumes and lower average selling prices. Diagnostic imaging
services revenue was $6,758,000 for the three months ended June 30, 2001
compared to $5,990,000 for the three months ended June 30, 2000, an increase of
$768,000, or 12.8%, due primarily to increases in revenue at certain centers
and the imaging network due to an increase in patient volumes. Heart
facilities and other revenues were $2,054,000 for the three months ended June
30, 2001, compared to $2,216,000 for the three months ended June 30, 2000, a
decrease of $162,000, or 7.3%, due primarily to lower revenue at certain
cardiovascular diagnostic facilities as a result of restructuring certain of
these facilities to be in compliance with new regulations.

Provision for OIG Investigation Expenses.The Company provided $2,000,000
for expected expenses associated with the OIG investigation for the three
months ended June 30, 2000.

Settlement with Federal Government.  The Company has recorded a one-time
charge of $11,500,000 in June 2001 related to the criminal and civil settlement
among one of its subsidiaries, Raytel Cardiac Services, and the federal
government.

Operating Expenses.Operating costs and selling, general and
administrative expenses increased by $378,000, or 2.4% (excluding the provision
for OIG investigation expenses and the settlement with the federal government),
from $15,793,000 for the three months ended June 30, 2000 to $16,171,000 for
the three months ended June 30, 2001, due primarily to increases in costs and
expenses at diagnostic imaging services, partially offset by decreased costs at
cardiac information services and at heart facilities and other. Included in
costs at cardiac information services, for the three months ended June 30,
2001, is a non-recurring charge of $410,000 in order to upgrade certain
components used in the business to be FDA compliant. Operating costs and
selling, general and administrative expenses as a percentage of total revenues
increased by 2.5%, from 86.1% for the three months ended June 30, 2000 to 88.6%
for the three months ended June 30, 2001.

Depreciation and Amortization.  Depreciation and amortization expense
decreased by $32,000, from $1,635,000 for the three months ended June 30, 2000
to $1,603,000 for the three months ended June 30, 2001 and decreased as a
percentage of revenues from 8.9% for the three months ended June 30, 2000 to
8.8% for the three months ended June 30, 2001, primarily as a result of lower
revenues.

Operating Loss.  As a result of the foregoing factors, operating loss
increased by $9,935,000 from $1,078,000 for the three months ended June 30,
2000 to $11,013,000 for the three months ended June 30, 2001.

Interest Expense.  Interest expense decreased by $221,000, or 42.3%, from
$522,000 for the three months ended June 30, 2000 to $301,000 for the three
months ended June 30, 2001 due primarily to lower average debt outstanding and
lower interest rates.

Other Expense (Income).Other income decreased by $65,000 from $318,000
for the three months ended June 30, 2000 to $253,000 for the three months ended
June 30, 2001.

Minority Interest.  Minority interest decreased by $27,000, or 13.2%, from
$204,000 for the three months ended June 30, 2000 to $177,000 for the three
months ended June 30, 2001 due primarily to decreased income in certain
cardiovascular diagnostic facilities.

Income Tax Benefit.  The provision for income tax benefit increased by
$545,000 from $579,000 for the three months ended June 30, 2000 to $1,124,000
for the three months ended June 30, 2001 as a result of decreased taxable
income.

Loss From Continuing Operations.  Loss from continuing operations increased
by $9,207,000 from $907,000 for the three months ended June 30, 2000 to
$10,114,000 for the three months ended June 30, 2001.

Discontinued Operations.Income from discontinued operations, net of tax
was $84,000 for the three months ended June 30, 2000. The loss on disposal of
the Practice Management Division in June 2000 was $4,965,000.

11



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Net Loss.As a result of the foregoing factors, the net loss increased by
$4,326,000 from $5,788,000 for the three months ended June 30, 2000 to
$10,114,000 for the three months ended June 30, 2001.

Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30,
2000.

Revenues.  For the nine months ended June 30, 2001, total revenues were
$53,655,000 compared to $54,854,000 for the nine months ended June 30, 2000,
representing a decrease of $1,199,000, or 2.2%.

Cardiac information services revenues were $28,668,000 for the nine months
ended June 30, 2001, compared to $31,149,000 for the nine months ended June 30,
2000, a decrease of $2,481,000, or 8.0%. The decrease in revenues for cardiac
information services was due primarily to lower revenues from Pacing as a
result of lower test volumes and lower average selling prices. Diagnostic
imaging services revenue was $19,250,000 for the nine months ended June 30,
2001, compared to $16,843,000 for the nine months ended June 30, 2000, an
increase of $2,407,000, or 14.3%, due primarily to increases in revenue at
certain centers and the imaging network due to an increase in patient volumes.
Heart facilities and other revenues were $5,737,000 for the nine months ended
June 30, 2001, compared to $6,862,000 for the nine months ended June 30, 2000,
a decrease of $1,125,000, or 16.4%, due primarily to lower revenue at certain
cardiovascular diagnostic facilities as a result of restructuring certain of
these facilities to be in compliance with new regulations and the termination
of an agreement with Baptist Hospital of Beaumont, Texas.

Provision for OIG Investigation Expenses.The Company provided $2,000,000
for expected expenses associated with the OIG investigation for the nine months
ended June 30, 2000 and 2001, respectively.

Settlement with Federal Government.  The Company has recorded a one-time
charge of $11,500,000 in June 2001 related to the criminal and civil settlement
among one of its subsidiaries, Raytel Cardiac Services, and the federal
government.

Operating Expenses.Operating costs and selling, general and
administrative expenses increased by $317,000, or .7% (excluding the provision
for OIG investigation expenses and the settlement with the federal government),
from $46,664,000 for the nine months ended June 30, 2000 to $46,981,000 for the
nine months ended June 30, 2001, due primarily to higher expenses at diagnostic
imaging services, partially offset by decreases in costs and expenses at
cardiac information services and heart facilities and other. Included in costs
at cardiac information services, for the nine months ended June 30, 2001, is a
non-recurring charge of $410,000 in order to upgrade certain components used in
the business to be FDA compliant. Operating costs and selling, general and
administrative expenses as a percentage of total revenues increased from 85.1%
for the nine months ended June 30, 2000 to 87.6% for the nine months ended June
30, 2001, primarily as a result of lower revenues.

Depreciation and Amortization.  Depreciation and amortization expense
increased by $5,000 from $4,923,000 for the nine months ended June 30, 2000 to
$4,928,000 for the nine months ended June 30, 2001 and increased as a
percentage of revenues from 9.0% for the nine months ended June 30, 2000 to
9.2% for the nine months ended June 30, 2001.

Operating Income (Loss).  As a result of the foregoing factors, operating
income decreased by $13,021,000, from income of $1,267,000 for the nine months
ended June 30, 2000 to an operating loss of $11,754,000 for the nine months
ended June 30, 2001.

Interest Expense.  Interest expense decreased by $135,000, or 9.2%, from
$1,467,000 for the nine months ended June 30, 2000 to $1,332,000 for the nine
months ended June 30, 2001 due primarily to a decrease in the average amount of
debt outstanding.

Other Expense (Income).Other income decreased by $67,000 from $801,000
for the nine months ended June 30, 2000 to $734,000 for the nine months ended
June 30, 2001.

Minority Interest.Minority interest decreased by $256,000, or 41.3%, from
$620,000 for the nine months ended June 30, 2000 to $364,000 for the nine
months ended June 30, 2001 due primarily to decreased income in certain
cardiovascular diagnostic facilities.

Income Tax Benefit.  The provision for income tax benefit increased by
$1,693,000 from $7,000 for the nine months ended June 30, 2000 to $1,700,000
for the nine months ended June 30, 2001 as a result of decreased taxable
income.

12



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##### Table of Contents



Loss From Continuing Operations.  Loss from continuing operations
increased by $11,004,000 from $12,000 for the nine months ended June 30, 2000
to $11,016,000 for the nine months ended June 30, 2001.

Discontinued Operations.  Loss from discontinued operations was $192,000
for the nine months ended June 30, 2001 compared to income from discontinued
operations, net of tax, of $969,000 for the nine months ended June 30, 2000.
The loss on disposal was $4,965,000 for the nine months ended June 30, 2000.
The loss on disposal of HFHI was $19,353,000 for the nine months ended June 30,
2001. Due to the uncertainty of the ultimate tax benefit to be realized as a
result of the loss, the Company has not provided for any tax benefit that may
result from the HFHI transaction.

Net Loss.  As a result of the foregoing factors, net loss increased by
$26,553,000 from $4,008,000 for the nine months ended June 30, 2000 to
$30,561,000 for the nine months ended June 30, 2001.

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 (see Note 2 to the consolidated
financial statements included in the Companys Annual Report on Form 10-K for
the year ended September 30, 2000) 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. The difference is due
to corporate overhead and other unallocated amounts which are reflected in the
reconciliation to consolidated earnings from continuing operations before
income taxes (in thousands):

|                                          |                                          |  |             |         |         |  |            |        |       |  |   |        |  |  |   |        |  
|----------------------------------------- | ---------------------------------------- |  | ----------- | ------- | ------- |  | ---------- | ------ | ----- |  | - | ------ |  |  | - | ------ | -
|                                          |                                          |  | Information |         | Imaging |  | Facilities |        | Total
|                                          |                                          |  |             |         |         |  |            |        |      
|For the three months ended June 30, 2001: |                                          |  |             |         |         |  |            |        |       |  |   |        |  |  |   |       
|                                         
|                                         
|                                         
|                                         
|                                          | Net revenue                              |  | $           | 9,449   |         |  | $          | 6,758  |       |  | $ | 2,054  |  |  | $ | 18,261 |  
|                                         
|                                         
|                                         
|                                         
|                                          | Total operating expenses                 |  |             | 20,169  |         |  |            | 5,030  |       |  |   | 1,400  |  |  |   | 26,599 |  
|                                          |                                          |  |             |         |         |  |            |        |       |  |   |        |  |  |   |       
|                                          | Segment contribution                     |  |             | (10,720 | )       |  |            | 1,728  |       |  |   | 654    |  |  |   | (8,338 | )
|                                         
|                                         
|                                         
|                                         
|                                          | Depreciation and amortization            |  |             | 866     |         |  |            | 399    |       |  |   | 237    |  |  |   | 1,502  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Interest expense                         |  |             |        |         |  |            | 33     |       |  |   | 28     |  |  |   | 61     |  
|                                         
|                                         
|                                         
|                                         
|                                          | Minority interest/other expense (income) |  |             | (17     | )       |  |            | (134   | )     |  |   | 88     |  |  |   | (63    | )
|                                          |                                          |  |             |         |         |  |            |        |       |  |   |        |  |  |   |       
|                                          | Segment profit (loss)                    |  | $           | (11,569 | )(a)    |  | $          | 1,430  |       |  | $ | 301    |  |  | $ | (9,838 | )
|                                          |                                          |  |             |         |         |  |            |        |       |  |   |        |  |  |   |       
|                                          | Segment assets                           |  | $           | 42,456  |         |  | $          | 15,299 |       |  | $ | 11,356 |  |  | $ | 69,111 |  
|                                          |                                          |  |             |         |         |  |            |        |       |  |   |        |  |  |   |       
|                                          | Capital expenditures                     |  | $           | 625     |         |  | $          | 36     |       |  | $ | 18     |  |  | $ | 679    |  
|                                          |                                          |  |             |         |         |  |            |        |       |  |   |        |  |  |   |       



---

|(a) |  | Includes an $11,500,000 settlement with the federal government.
|--- |  | ---------------------------------------------------------------

13



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|                                          |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |        |   | 
|----------------------------------------- | ---------------------------------------- |  | - | ----------- | ---- | ------- | - | ---------- | - | ----- | - | ------ |  |  | - | ------ | - | 
|                                          |                                          |  |   | Information |      | Imaging |   | Facilities |   | Total
|                                          |                                          |  |   |             |      |         |   |            |   |      
|For the three months ended June 30, 2000: |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       
|                                         
|                                         
|                                         
|                                         
|                                          | Net revenue                              |  | $ | 10,144      |      |         | $ | 5,990      |   |       | $ | 2,216  |  |  | $ | 18,350 |  
|                                         
|                                         
|                                         
|                                         
|                                          | Total operating expenses                 |  |   | 10,959      |      |         |   | 4,366      |   |       |   | 1,408  |  |  |   | 16,733 |  
|                                          |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |        |  
|                                          | Segment contribution                     |  |   | (815        | )    |         |   | 1,624      |   |       |   | 808    |  |  |   | 1,617  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Depreciation and amortization            |  |   | 767         |      |         |   | 422        |   |       |   | 361    |  |  |   | 1,550  |  
|                                         
|                                         
|                                         
|                                         
|                                          | Interest expense                         |  |   |            |      |         |   | 67         |   |       |   | 59     |  |  |   | 126    |  
|                                         
|                                         
|                                         
|                                         
|                                          | Minority interest/other expense (income) |  |   | (178        | )    |         |   | (47        | ) |       |   | 158    |  |  |   | (67    | )
|                                          |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |        |   | 
|                                          | Segment profit (loss)                    |  | $ | (1,404      | )(a) |         | $ | 1,182      |   |       | $ | 230    |  |  | $ | 8      |  
|                                          |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       
|                                          | Segment assets                           |  | $ | 38,953      |      |         | $ | 15,026     |   |       | $ | 35,198 |  |  | $ | 89,177 |  
|                                          |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       
|                                          | Capital expenditures                     |  | $ | 591         |      |         | $ | 139        |   |       | $ | 122    |  |  | $ | 852    |  
|                                          |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       



---

|(a) |  | Includes a $2,000,000 provision for OIG investigation expenses.
|--- |  | ---------------------------------------------------------------

|                                         |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |        |   | 
|---------------------------------------- | ---------------------------------------- |  | - | ----------- | ---- | ------- | - | ---------- | - | ----- | - | ------ |  |  | - | ------ | - | 
|                                         |                                          |  |   | Information |      | Imaging |   | Facilities |   | Total
|                                         |                                          |  |   |             |      |         |   |            |   |      
|For the nine months ended June 30, 2001: |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       
|                                        
|                                        
|                                        
|                                        
|                                         | Net revenue                              |  | $ | 28,668      |      |         | $ | 19,250     |   |       | $ | 5,737  |  |  | $ | 53,655 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Total operating expenses                 |  |   | 39,229      |      |         |   | 14,284     |   |       |   | 3,988  |  |  |   | 57,501 |  
|                                         |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |        |  
|                                         | Segment contribution                     |  |   | (10,561     | )    |         |   | 4,966      |   |       |   | 1,749  |  |  |   | (3,846 | )
|                                        
|                                        
|                                        
|                                        
|                                         | Depreciation and amortization            |  |   | 2,580       |      |         |   | 1,232      |   |       |   | 813    |  |  |   | 4,625  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Interest expense                         |  |   |            |      |         |   | 161        |   |       |   | 90     |  |  |   | 251    |  
|                                        
|                                        
|                                        
|                                        
|                                         | Minority interest/other expense (income) |  |   | (16         | )    |         |   | (173       | ) |       |   | 109    |  |  |   | (80    | )
|                                         |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |        |  
|                                         | Segment profit (loss)                    |  | $ | (13,125     | )(a) |         | $ | 3,746      |   |       | $ | 737    |  |  | $ | (8,642 | )
|                                         |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       
|                                         | Segment assets                           |  | $ | 42,456      |      |         | $ | 15,299     |   |       | $ | 11,356 |  |  | $ | 69,111 |  
|                                         |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       
|                                         | Capital expenditures                     |  | $ | 1,924       |      |         | $ | 138        |   |       | $ | 98     |  |  | $ | 2,160  |  
|                                         |                                          |  |   |             |      |         |   |            |   |       |   |        |  |  |   |       



---

|(a) |  | Includes a $2,000,000 provision for OIG investigation expenses and an
$11,500,000 settlement with the federal government.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|                                         |                                          |  |   |             |     |         |   |            |   |       |   |        |  |  |   |        |   | 
|---------------------------------------- | ---------------------------------------- |  | - | ----------- | --- | ------- | - | ---------- | - | ----- | - | ------ |  |  | - | ------ | - | 
|                                         |                                          |  |   | Information |     | Imaging |   | Facilities |   | Total
|                                         |                                          |  |   |             |     |         |   |            |   |      
|For the nine months ended June 30, 2000: |                                          |  |   |             |     |         |   |            |   |       |   |        |  |  |   |       
|                                        
|                                        
|                                        
|                                        
|                                         | Net revenue                              |  | $ | 31,149      |     |         | $ | 16,843     |   |       | $ | 6,862  |  |  | $ | 54,854 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Total operating expenses                 |  |   | 28,551      |     |         |   | 12,476     |   |       |   | 4,519  |  |  |   | 45,546 |  
|                                         |                                          |  |   |             |     |         |   |            |   |       |   |        |  |  |   |       
|                                         | Segment contribution                     |  |   | 2,598       |     |         |   | 4,367      |   |       |   | 2,343  |  |  |   | 9,308  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Depreciation and amortization            |  |   | 2,269       |     |         |   | 1,255      |   |       |   | 1,146  |  |  |   | 4,670  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Interest expense                         |  |   |            |     |         |   | 208        |   |       |   | 178    |  |  |   | 386    |  
|                                        
|                                        
|                                        
|                                        
|                                         | Minority interest/other expense (income) |  |   | (193        | )   |         |   | (127       | ) |       |   | 229    |  |  |   | (91    | )
|                                         |                                          |  |   |             |     |         |   |            |   |       |   |        |  |  |   |       
|                                         | Segment profit                           |  | $ | 522         | (a) |         | $ | 3,031      |   |       | $ | 790    |  |  | $ | 4,343  |  
|                                         |                                          |  |   |             |     |         |   |            |   |       |   |        |  |  |   |       
|                                         | Segment assets                           |  | $ | 38,953      |     |         | $ | 15,026     |   |       | $ | 35,198 |  |  | $ | 89,177 |  
|                                         |                                          |  |   |             |     |         |   |            |   |       |   |        |  |  |   |       
|                                         | Capital expenditures                     |  | $ | 2,290       |     |         | $ | 694        |   |       | $ | 152    |  |  | $ | 3,136  |  
|                                         |                                          |  |   |             |     |         |   |            |   |       |   |        |  |  |   |       



---

|(a) |  | Includes a $2,000,000 provision for OIG investigation expenses.
|--- |  | ---------------------------------------------------------------

14



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##### Table of Contents



|                                                    |                                         |   |                             |       |                            |   |        |       |      |   |         |       |   |   |       |       |  
|--------------------------------------------------- | --------------------------------------- | - | --------------------------- | ----- | -------------------------- | - | ------ | ----- | ---- | - | ------- | ----- | - | - | ----- | ----- | -
|                                                    |                                         |   | Three Months Ended June 30, |       | Nine Months Ended June 30,
|                                                    |                                         |   |                             |       |                           
|                                                    |                                         |   | 2001                        |       | 2000                       |   | 2001   |       | 2000
|                                                    |                                         |   |                             |       |                            |   |        |       |     
|Segment profit (loss)                               |                                         | $ | (9,838                      | )     |                            | $ | 8      |       |      | $ | (8,642  | )     |   | $ | 4,343 |      
|                                                   
|                                                   
|                                                   
|                                                   
|Unallocated amounts:                                |                                         |   |                             |       |                            |   |        |       |      |   |         |       |   |   |       |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Corporate general and administrative    |   |                             | 1,072 |                            |   |        | 1,060 |      |   |         | 2,980 |   |   |       | 3,118 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Corporate depreciation and amortization |   |                             | 101   |                            |   |        | 85    |      |   |         | 303   |   |   |       | 253   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Corporate interest expense              |   |                             | 240   |                            |   |        | 396   |      |   |         | 1,081 |   |   |       | 1,081 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Corporate other expense (income)        |   |                             | (13   | )                          |   |        | (47   | )    |   |         | (290  | ) |   |       | (90   | )
|                                                    |                                         |   |                             |       |                            |   |        |       |      |   |         |       |   |   |       |      
|Loss from continuing operations
before income taxes |                                         | $ | (11,238                     | )     |                            | $ | (1,486 | )     |      | $ | (12,716 | )     |   | $ | (19   | )    
|                                                    |                                         |   |                             |       |                            |   |        |       |      |   |         |       |   |   |       |      

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, 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. The Companys Pacing
revenue has 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 on Pacing revenue for
calendar 1999. There was a slight increase in Medicare reimbursement rates
effective January 1, 2000 and again effective January 1, 2001. 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.

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 increase demands on its
systems and controls. There can be no assurances that businesses acquired by
the Company, 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

15



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##### Table of Contents



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

At June 30, 2001 the Company had working capital of $14,513,000
($30,300,000 before deducting the outstanding amount under the Companys line
of credit and the current portion of the debt related to the settlement with
the federal government of $12,287,000 and $3,500,000; respectively), compared
to $32,387,000 at September 30, 2000. At June 30, 2001, the Company had cash
and temporary cash investments of $6,908,000.

In connection with the settlement of the OIG investigation, the Company
made an initial payment of $1,000,000 in July 2001.

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, with the collection of these
receivables occurring primarily during the subsequent fourth fiscal quarter.

On December 15, 2000, the Companys line of credit agreement with two
banks was amended to reduce the line of credit to $20,000,000 and to revise
certain financial and other covenants and terms. The interest rate was changed
to be based on LIBOR plus 275 basis points, or the banks prime rate plus 50
basis points, at the option of the Company, and the date for repayment was
extended to October 1, 2001. A new non-financial covenant was added which
states any civil financial settlement in excess of $1,000,000 and/or criminal
charges relating to the ongoing OIG investigation would constitute an event of
default. On March 16, 2001, the line of credit was further reduced to
$14,900,000 in connection with the sale of the Companys subsidiary HFHI.

Consistent with the terms of the December 2000 amendment to the line of
credit agreement, the available line of credit balance was further reduced by
$2,500,000 on June 30, 2001 to $12,400,000.

The Company is currently negotiating with the banks to restructure the
line, including the extension of maturity. The Company is also exploring
alternative financing.

The Company is currently in default of certain of its new covenants in
connection with its line of credit. The Company has requested a waiver from
the banks. If the banks do not grant the waiver, the banks have the right to
demand payment in full of the outstanding balance. See Part II, Item 3. 
Defaults Upon Senior Securities.

The Companys long-term capital requirements will depend on numerous
factors, including the rate at which the Company develops new products and
services and acquires other businesses, if any. The Companys ability to meet
its working capital and capital expenditure needs for the next twelve months is
dependent upon its ability to restructure its current financing and achieve
profitability.




Item 3. Quantitative 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.

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##### Table of Contents






PART II. OTHER INFORMATION




Item 1. Legal Proceedings

Raytel Cardiac Services, Inc., or RCS, a wholly-owned subsidiary of
Raytel, was the subject of a grand jury investigation being conducted under the
direction of the United States Attorney for the District of Connecticut and the
Office of the Inspector General of the U.S. Department of Health and Human
Services (the OIG). On June 23, 2000, the OIG and other federal agents
executed a search warrant for information concerning unspecified allegations of
impropriety in RCS business practices related to Medicare-covered services.
Subsequently, subpoenas were served on RCS for the production of additional
documents, and RCS employees and contractors were subpoenaed to provide
documents and testimony before the grand jury.

RCS has reached agreement with the federal government to end the
investigation into its pacemaker operations and Medicare billing practices. In
return for the federal government ceasing any further investigation into its
pacemaker operations and any additional potential criminal charges, the
subsidiary pleaded guilty on June 25, 2001 in U.S. District Court in Hartford
Connecticut to a charge of obstructing a criminal investigation arising out of
the initial investigation in June 2000. In addition, the registrant and Raytel
Cardiac Services have reached an agreement in principle with the government to
settle civil claims relating to this matter. Under the criminal and civil
settlements, the subsidiary would pay a total of $11.5 million to the
government over a five year period and enter into a Corporate Integrity
Agreement. Other product lines offered by the subsidiary have not been under
investigation and are not affected by this agreement. Raytel will guarantee
the payment owed by its subsidiary associated with the agreement.

In connection with the investigation, Raytel is confirming its compliance
with Medicare billing and record-keeping requirements on a patient-by-patient
basis. Pending such confirmation, Raytel held Medicare reimbursement checks
received subsequent to June 23, 2000 in payment of invoices for pacemaker
monitoring services and established an escrow account for funds inadvertently
deposited with respect to such services. In addition, Raytel suspended billing
for such services. The checks are being deposited, the cash released from
escrow, and additional bills sent, only after the affected patients records
have been reviewed and found to be in compliance with applicable Medicare
requirements. The total amount of such uncashed checks and escrowed funds was
approximately $855,000 as of June 30, 2001.

Raytel has internal procedures in place designed to assure compliance by
Raytel and its subsidiaries with applicable laws and governmental regulations,
including Medicare reimbursement laws. RCS has incurred, and expects to
continue to incur, substantial legal fees and other expenses in connection with
the investigation and has accrued a reserve of $4,000,000 to cover the
estimated amount of these expenses. Expenses in excess of the reserve, if any,
will adversely affect operating results in future periods. The investigation
and the related internal review diverted, and may continue to divert, the
efforts and attention of some of RCS management and administrative personnel.

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




Item 3. Defaults Upon Senior Securities

The Company is currently in default of certain of its financial covenants
in connection with its $12,400,000 revolving line of credit with two banks.
These covenants require the Company to maintain certain financial ratios. The
Company has requested a waiver from the banks. If the banks do not grant the
waiver, the banks have the right to terminate the credit facility and demand
payment in full of the outstanding balance. The amount outstanding under the
credit line as of June 30, 2001 was $12,287,000.

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##### Table of Contents






Item 4. Submission of Matters to a Vote of Security Holders



| | a. |  | The Companys annual meeting of stockholders was held on May 9,
2001.            
| | -- |  | ---------------------------------------------------------------------------------
|
| | b. |  | The following persons nominated by management were elected to
serve as directors:

|                 |  |        |           |          |  |  |           | 
|---------------- |  | ------ | --------- | -------- |  |  | --------- | 
|                 |  | Shares
|                 |  |       
|Name             |  | For    |           | Withheld
|                 |  |        |           |         
|Richard F. Bader |  |        | 6,006,826 |          |  |  | 1,098,396 | 
|                
|                
|                
|                
|Allan Zinberg    |  |        | 6,070,373 |          |  |  | 1,034,849 | 



| |    |  | The following directors remained in office; Thomas J. Fogarty, M.D., Gene
Miller and Mary M. Lampe (Ms. Lampe resigned as a director in June 2001).
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| | c. |  | The following additional matters voted upon at the meeting and
the results of the voting were as follows:                                          
|

|   |  |                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | To ratify the appointment of Arthur Andersen LLP as the
independent accountants of the Company for the fiscal year ending
September 30, 2001.

|          |  |         |       |         |  |  |        | 
|--------- |  | ------- | ----- | ------- |  |  | ------ | 
|Shares   
|         
|For       |  | Against |       | Abstain
|          |  |         |       |        
|7,076,922 |  |         | 9,500 |         |  |  | 18,800 | 



|   |  |                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. |  | To approve the amendment to the certificate of
incorporation to effect a reverse split of the Companys
Outstanding Common Stock by a ratio of between one-for-two and
one-for-four.

|          |  |         |           |         |  |  |        | 
|--------- |  | ------- | --------- | ------- |  |  | ------ | 
|Shares   
|         
|For       |  | Against |           | Abstain
|          |  |         |           |        
|5,466,353 |  |         | 1,616,923 |         |  |  | 21,946 | 




Item 6.    Exhibits and Reports on Form 8-K

a.         Exhibits:

The following exhibit is filed as a part of this Report:

|        |  |                                                                                                        |  |  |  | 
|------- |  | ------------------------------------------------------------------------------------------------------ |  |  |  | 
|Exhibit |  |                                                                                                        |  |  |  | 
|Number  |  | Title                                                                                                  |  |  |  | 
|        |  |                                                                                                        |  |  |  | 
|3.3     |  | Certificate of Amendment of Certificate of Incorporation.                                             
|       
|       
|       
|       
|10.69   |  | Plea Agreement, dated June 25, 2001,
resolving the governments criminal investigation of the
Company.

b.         Reports on Form 8-K:



| |  |  | On May 23, 2001, the Company filed a report on Form 8-K announcing
the appointment of Frank J. Abella, Jr to its Board of Directors (Mr.
Abella subsequently resigned as a director in June 2001). In
addition, the Board approved the implementation of a one-for-three
reverse stock split of the Companys Outstanding Common Stock.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On June 27, 2001, the Company filed a report on Form 8-K stating that
Raytel Cardiac Services, a wholly-owned subsidiary of Raytel Medical
Corporation, reached an agreement with the federal government to end
an investigation into its pacemaker operations and Medicare billing
practices.                                         

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##### Table of Contents






SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                       |                                                                                                                          |                        
|---------------------- | ------------------------------------------------------------------------------------------------------------------------ | -----------------------
|                       | RAYTEL MEDICAL CORPORATION                                                                                              
|                      
|Dated: August 10, 2001 | By:                                                                                                                      | /s/ John F. Lawler, Jr.
|                       |                                                                                                                         
|                       | John F. Lawler, Jr.
Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)

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EXHIBIT INDEX

|        |  |                                                                                                        |  |  |  | 
|------- |  | ------------------------------------------------------------------------------------------------------ |  |  |  | 
|Exhibit |  |                                                                                                        |  |  |  | 
|Number  |  | Title                                                                                                  |  |  |  | 
|        |  |                                                                                                        |  |  |  | 
|3.3     |  | Certificate of Amendment of Certificate of Incorporation.                                             
|       
|       
|       
|       
|10.69   |  | Plea Agreement, dated June 25, 2001,
resolving the governments criminal investigation of the
Company.

20