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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 March 31, 2002; 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                                                       |  | 94-2787342                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

7 Waterside Crossing, Windsor, Connecticut 06095
(Address of principal executive offices) (Zip code)

(860) 298-6100
(Registrants telephone number, including area code)

2755 Campus Drive, Suite 200, San Mateo, California 94403
(Former name, former address and former fiscal year, if changed since
last report)

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 April 30, 2002
|                               |  |                                        
|Common Stock
($.001 par value) |  |                                         | 2,988,687 | 





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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 5. Other Information and Regulation FD Disclosure                                       
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT 10.77                



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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 March 31, 2002 and September 30, 2001                                     |  | 3   
|          |  | Condensed Consolidated Statements of Operations for the three months and the six months ended
March 31, 2002 and 2001 |  | 4   
|          |  | Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2002
and 2001                      |  | 5   
|          |  | Notes to Condensed Consolidated Financial Statements                                                                  |  | 6   
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 12  
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risks                                                           |  | 17  
|          |  | PART II. OTHER INFORMATION                                                                                            |  |     
|Item 1.   |  | Legal Proceedings                                                                                                     |  | 18  
|Item 3.   |  | Defaults Upon Senior Securities                                                                                       |  | 19  
|Item 5.   |  | Other Information and Regulation FD Disclosure                                                                        |  | 19  
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                      |  | 19  
|SIGNATURE |  | 21                                                                                                                   

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PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND SEPTEMBER 30, 2001
(000s omitted)

ASSETS

|                                                                       |                                                                 |                                         |                                            |        |             |        |               |        |         |        | 
|---------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------- | ------------------------------------------ | ------ | ----------- | ------ | ------------- | ------ | ------- | ------ | 
|                                                                       |                                                                 |                                         |                                            |        | March 31,   |        | September 30,
|                                                                       |                                                                 |                                         |                                            |        | 2002        |        | 2001         
|                                                                       |                                                                 |                                         |                                            |        |             |        |              
|                                                                       |                                                                 |                                         |                                            |        | (Unaudited) |        |               |        |        
|Current assets:                                                        |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       | Cash and cash equivalents                                       |                                         | $                                          | 5,092  |             |        | $             | 6,095  |        
|                                                                       | Cash held for special purpose                                   |                                         |                                            | 121    |             |        |               | 400    |        
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | Total cash                                 |        |             | 5,213  |               |        |         | 6,495  | 
|                                                                       | Receivables, net                                                |                                         |                                            | 32,821 |             |        |               | 31,404 |        
|                                                                       | Prepaid expenses and other                                      |                                         |                                            | 1,922  |             |        |               | 2,485  |        
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | Total current assets                       |        |             | 39,956 |               |        |         | 40,384 | 
|Property and equipment, less accumulated depreciation
and amortization |                                                                 |                                         | 12,893                                     |        |             |        | 14,187        |       
|Intangible assets, less accumulated amortization                       |                                                                 |                                         | 18,143                                     |        |             |        | 18,590        |       
|Other assets                                                           |                                                                 |                                         | 56                                         |        |             |        | 68            |       
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | Total assets                               |        | $           | 71,048 |               |        | $       | 73,229 | 
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                  
|Current liabilities:                                                   |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       | Current portion of long-term debt and capital lease obligations |                                         | $                                          | 2,876  |             |        | $             | 15,151 |        
|                                                                       | Accounts payable                                                |                                         |                                            | 5,355  |             |        |               | 4,757  |        
|                                                                       | Accrued compensation and benefits                               |                                         |                                            | 3,628  |             |        |               | 2,636  |        
|                                                                       | Accrued liabilities                                             |                                         |                                            | 4,172  |             |        |               | 4,898  |        
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | Total current liabilities                  |        |             | 16,031 |               |        |         | 27,442 | 
|Long-term debt and capital lease obligations, net of current portion   |                                                                 |                                         | 22,581                                     |        |             |        | 9,853         |       
|Minority interest in consolidated entities                             |                                                                 |                                         | 1,075                                      |        |             |        | 1,003         |       
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | Total liabilities                          |        |             | 39,687 |               |        |         | 38,298 | 
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|Stockholders equity:                                                  |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       | Common stock                                                    |                                         |                                            | 3      |             |        |               | 3      |        
|                                                                       | Additional paid-in capital                                      |                                         |                                            | 62,678 |             |        |               | 62,672 |        
|                                                                       |                                                                 | Retained earnings (accumulated deficit) |                                            |        | (27,698     | )      |               |        | (24,122 | )     
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | 34,983                                     |        |             |        | 38,553        |       
|                                                                       | Less treasury stock, at cost                                    |                                         |                                            | (3,622 | )           |        |               | (3,622 | )      
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | Total stockholders equity                 |        |             | 31,361 |               |        |         | 34,931 | 
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       
|                                                                       |                                                                 |                                         | Total liabilities and stockholders equity |        | $           | 71,048 |               |        | $       | 73,229 | 
|                                                                       |                                                                 |                                         |                                            |        |             |        |               |       

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RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(000s omitted, except per share amounts)

|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |         |       |        |  
|--------------------------------------------------------- | ----------------------------------------------------- | --------------------------------- | ------------------------ | ----- | ------------------ | ------ | ---------------- | ------- | ----- | ------ | ------ | ------ | ----- | ------ | ------- | ------- | ----- | ------ | -
|                                                          |                                                       |                                   |                          |       | Three Months Ended |        | Six Months Ended
|                                                          |                                                       |                                   |                          |       | March 31,          |        | March 31,       
|                                                          |                                                       |                                   |                          |       |                    |        |                 
|                                                          |                                                       |                                   |                          |       | 2002               |        | 2001             |         | 2002  |        | 2001  
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |       
|Revenues:                                                 |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          | Cardiac information services                          |                                   | $                        | 8,625 |                    |        | $                | 9,668   |       |        | $      | 17,924 |       |        | $       | 19,219  |      
|                                                          | Diagnostic imaging services                           |                                   |                          | 6,945 |                    |        |                  | 6,494   |       |        |        | 13,797 |       |        |         | 12,492  |      
|                                                          | Heart facilities and other                            |                                   |                          | 2,031 |                    |        |                  | 1,984   |       |        |        | 3,941  |       |        |         | 3,683   |      
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       |                                   | Total revenues           |       |                    | 17,601 |                  |         |       | 18,146 |        |        |       | 35,662 |         |         |       | 35,394 |  
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Costs and expenses:                                       |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          | Provision for OIG investigation expenses              |                                   |                          |      |                    |        |                  | 2,000   |       |        |        |       |       |        |         | 2,000   |      
|                                                          | Operating costs                                       |                                   |                          | 8,625 |                    |        |                  | 8,329   |       |        |        | 17,034 |       |        |         | 16,106  |      
|                                                          | Selling, general and administrative expenses          |                                   |                          | 7,566 |                    |        |                  | 7,549   |       |        |        | 14,784 |       |        |         | 14,704  |      
|                                                          | Depreciation and amortization                         |                                   |                          | 1,507 |                    |        |                  | 1,650   |       |        |        | 3,044  |       |        |         | 3,325   |      
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       |                                   | Total costs and expenses |       |                    | 17,698 |                  |         |       | 19,528 |        |        |       | 34,862 |         |         |       | 36,135 |  
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Operating income (loss)                                   |                                                       |                                   | (97                      | )     |                    |        | (1,382           | )       |       |        | 800    |        |       |        | (741    | )      
|Interest expense                                          |                                                       |                                   | 454                      |       |                    |        | 471              |         |       |        | 950    |        |       |        | 1,031   |        
|Other expense (income), net                               |                                                       |                                   | (210                     | )     |                    |        | (263             | )       |       |        | (366   | )      |       |        | (481    | )      
|Tender offer expenses                                     |                                                       |                                   | 3,485                    |       |                    |        |                 |         |       |        | 3,568  |        |       |        |        |        
|Minority interest                                         |                                                       |                                   | 211                      |       |                    |        | 134              |         |       |        | 224    |        |       |        | 187     |        
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Loss from continuing operations before income tax benefit |                                                       |                                   | (4,037                   | )     |                    |        | (1,724           | )       |       |        | (3,576 | )      |       |        | (1,478  | )      
|Provision for income tax benefit                          |                                                       |                                   | (180                     | )     |                    |        | (671             | )       |       |        |       |        |       |        | (576    | )      
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Loss from continuing operations                           |                                                       |                                   | (3,857                   | )     |                    |        | (1,053           | )       |       |        | (3,576 | )      |       |        | (902    | )      
|Discontinued operations:                                  |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          | Loss from discontinued operations, net of tax benefit |                                   |                          |      |                    |        |                  | (51     | )     |        |        |       |       |        |         | (192    | )    
|                                                          | Loss on disposal of discontinued operations           |                                   |                          |      |                    |        |                  | (19,353 | )     |        |        |       |       |        |         | (19,353 | )    
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Net loss                                                  |                                                       | $                                 | (3,857                   | )     |                    | $      | (20,457          | )       |       | $      | (3,576 | )      |       | $      | (20,447 | )      
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Basic loss per share:                                     |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       | Loss from continuing operations   |                          | $     | (1.32              | )      |                  | $       | (.36  | )      |        | $      | (1.22 | )      |         | $       | (.31  | )     
|                                                          |                                                       | Loss from discontinued operations |                          |       |                   |        |                  |         | (6.65 | )      |        |        |      |        |         |         | (6.70 | )     
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       |                                   | Total                    |       | $                  | (1.32  | )                |         | $     | (7.01  | )      |        | $     | (1.22  | )       |         | $     | (7.01  | )
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Diluted loss per share:                                   |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       | Loss from continuing operations   |                          | $     | (1.32              | )      |                  | $       | (.36  | )      |        | $      | (1.22 | )      |         | $       | (.31  | )     
|                                                          |                                                       | Loss from discontinued operations |                          |       |                   |        |                  |         | (6.65 | )      |        |        |      |        |         |         | (6.70 | )     
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       |                                   | Total                    |       | $                  | (1.32  | )                |         | $     | (7.01  | )      |        | $     | (1.22  | )       |         | $     | (7.01  | )
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|Weighted average shares outstanding:                      |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       | Basic                             |                          |       | 2,920              |        |                  |         | 2,917 |        |        |        | 2,920 |        |         |         | 2,917 |       
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        
|                                                          |                                                       | Diluted                           |                          |       | 2,920              |        |                  |         | 2,917 |        |        |        | 2,920 |        |         |         | 2,917 |       
|                                                          |                                                       |                                   |                          |       |                    |        |                  |         |       |        |        |        |       |        |         |        

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RAYTEL MEDICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(000s omitted)

|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |         |   |        |        |  
|------------------------------------------------ | ------------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------------------------------- | - | ---------------- | ------ | ------- | - | ------ | ------ | -
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   | Six Months Ended
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   | March 31,       
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                 
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   | 2002             |        | 2001   
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|Cash flows from operating activities:            |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|                                                 | Net loss                                          |                                                                                           | $                                               | (3,576                                              | ) |                  | $      | (20,447 | )
|                                                 |                                                   | Adjustments to reconcile net loss to net cash provided
by (used in) operating activities: |                                                 |                                                     |   |                  |        |         |   |       
|                                                 |                                                   |                                                                                           | Depreciation and amortization                   |                                                     |   | 3,044            |        |         |   | 3,325  |       
|                                                 |                                                   |                                                                                           | Minority interest                               |                                                     |   | 224              |        |         |   | 187    |       
|                                                 |                                                   |                                                                                           | Net loss on disposal of discontinued operations |                                                     |   |                 |        |         |   | 19,353 |       
|                                                 |                                                   |                                                                                           | Other, net                                      |                                                     |   | 178              |        |         |   | 400    |       
|                                                 |                                                   | Changes in operating accounts:                                                            |                                                 |                                                     |   |                  |        |         |   |       
|                                                 |                                                   |                                                                                           | Receivables, net                                |                                                     |   | (1,417           | )      |         |   | (547   | )     
|                                                 |                                                   |                                                                                           | Prepaid expenses and other                      |                                                     |   | 563              |        |         |   | (294   | )     
|                                                 |                                                   |                                                                                           | Accounts payable                                |                                                     |   | 598              |        |         |   | (196   | )     
|                                                 |                                                   |                                                                                           | Accrued liabilities and other                   |                                                     |   | 558              |        |         |   | (1,803 | )     
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|                                                 |                                                   |                                                                                           |                                                 | Net cash provided by (used in) operating activities |   |                  | 172    |         |   |        | (22    | )
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|Cash flows from investing activities:            |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|                                                 | Capital expenditures                              |                                                                                           |                                                 | (1,399                                              | ) |                  |        | (1,512  | )
|                                                 | Proceeds from disposal of discontinued operations |                                                                                           |                                                 |                                                    |   |                  |        | 8,876   |  
|                                                 | Other, net                                        |                                                                                           |                                                 | 130                                                 |   |                  |        | 9       |  
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|                                                 |                                                   |                                                                                           |                                                 | Net cash provided by (used in) investing activities |   |                  | (1,269 | )       |   |        | 7,373  |  
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|Cash flows from financing activities:            |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|                                                 | Income distributions to limited partners          |                                                                                           |                                                 | (655                                                | ) |                  |        | (778    | )
|                                                 | Cash contributions from limited partners          |                                                                                           |                                                 | 588                                                 |   |                  |        |        |  
|                                                 | Proceeds from (pay-down of) line of credit        |                                                                                           |                                                 | 820                                                 |   |                  |        | (7,441  | )
|                                                 | Principal repayments of debt                      |                                                                                           |                                                 | (370                                                | ) |                  |        | (1,673  | )
|                                                 | Capitalized financing costs                       |                                                                                           |                                                 | (493                                                | ) |                  |        |        |  
|                                                 | Other, net                                        |                                                                                           |                                                 | (75                                                 | ) |                  |        | 30      |  
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|                                                 |                                                   |                                                                                           |                                                 | Net cash used in financing activities               |   |                  | (185   | )       |   |        | (9,862 | )
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|Net decrease in cash and cash equivalents        |                                                   |                                                                                           | (1,282                                          | )                                                   |   |                  | (2,511 | )      
|Cash and cash equivalents at beginning of period |                                                   |                                                                                           | 6,495                                           |                                                     |   |                  | 8,781  |        
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        
|Cash and cash equivalents at end of period       |                                                   | $                                                                                         | 5,213                                           |                                                     |   | $                | 6,270  |        
|                                                 |                                                   |                                                                                           |                                                 |                                                     |   |                  |        |        

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Notes to Unaudited Condensed Consolidated Financial Statements for the Three
Month and Six Month Periods Ended March 31, 2002 and 2001.

1. Presentation of Unaudited Interim Condensed Consolidated Financial
Statements

Information in the accompanying interim condensed consolidated financial
statements and notes to the financial statements of Raytel Medical Corporation
(Raytel or the Company) as of March 31, 2002 and for the three month and
six month periods ended March 31, 2002 and 2001 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 information
considered necessary for a fair presentation have been included. Operating
results for the three months and the six months ended March 31, 2002 are not
necessarily indicative of results that may be expected for the year ending
September 30, 2002. 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, 2001 and the Companys Quarterly Report
on Form 10-Q for the three months ended December 31, 2001 and Forms 8-K filed
during the six months ended March 31, 2002.

2. Office of the Inspector General Investigation

From June 2000 through June 2001, Raytel was the subject of a grand jury
investigation conducted under the direction of the United States Attorney for
the District of Connecticut and the Office of the Inspector General of the
Department of Health and Human Services (the OIG). The investigation involved
certain business practices of the transtelephonic cardiac pacemaker monitoring
business conducted by Raytel Cardiac Services, Inc., a wholly-owned subsidiary
of the Company (RCS), at its facilities in Windsor, Connecticut and New York,
New York. The investigation did not involve Raytels other healthcare services,
such as RCS cardiac event detection services or Raytels diagnostic imaging
services or other cardiac-related businesses, nor did it involve RCS
transtelephonic pacemaker monitoring operations conducted at its Haddonfield,
New Jersey facility, which followed testing practices similar to those followed
at the Connecticut and New York facilities.

In June 2001, RCS reached an agreement with the federal government to
resolve the issues that were the subject of the investigation. In accordance
with that agreement, on June 25, 2001, RCS pled guilty 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, in October
2001, the Company and RCS entered into an agreement with the government to
resolve related civil claims. Under the criminal and civil settlements, RCS
agreed to pay a total of $11,500,000 to the government over a five year period,
with interest of 7% per annum on the unpaid balance, to resolve the criminal
and civil allegations relating to the practices of RCS Connecticut and New
York transtelephonic monitoring operations which were the subject of the
investigation. Raytel guaranteed RCS payment obligations under the settlement
agreement. RCS also entered into a corporate integrity agreement under which it
agreed that its ongoing operations would conform to specified guidelines. As of
March 31, 2002, $1,500,000 had been paid to the government, and the next
payment of $2,000,000 is due in June 2002. RCS guilty plea did not adversely
affect its participation in the Medicare program or other federal healthcare
programs.

The Company incurred substantial legal fees and other expenses in
connection with the investigation and established a reserve of $4,600,000 to
cover the estimated amounts of these expenses. As of March 31, 2002, the
Company had incurred legal fees and other expenses of approximately $4,410,900
related to the investigation, including legal fees incurred by certain RCS
employees in connection with the investigation which were reimbursed by RCS in
accordance with the requirements of Delaware law and RCS By-Laws. The
remaining balance of the reserve is included in accrued liabilities on the
Companys balance sheet. Additional expenses, if any, will adversely affect
operating results in future periods.

In addition to these direct expenses, the investigation, the related
internal compliance review, and settlement negotiations with the government
diverted the efforts and attention of a number of Raytels management and
administrative personnel. The impact of this diversion reduced the efficiency
of RCS 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 quarter ended September 30, 2000 and throughout
the fiscal year ended September 30, 2001. Although the investigation has now
been concluded, implementation of the corporate integrity agreement continues
to require the time and attention of Raytel and RCS management and a number of
RCS administrative personnel. In addition, RCS guilty plea entered into under
its agreement with the government constituted a default under Raytels bank
credit facility. In November 2001, Raytel entered into a new revolving line of
credit arrangement and repaid all outstanding indebtedness under its bank
facility. However, RCS guilty plea could adversely affect Raytels ability to
obtain debt or equity financing in the future.

6



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##### Table of Contents



In connection with the civil settlement agreement, neither the Company nor
RCS admitted liability for the governments allegations, and the settlement
agreement did not release the Company or RCS from any future claims arising out
of their other business operations, including RCS transtelephonic pacemaker
operations conducted at its New Jersey facility. In December 2001, RCS
submitted claims which would result in reimbursements totaling approximately
$1,500,000 for transtelephonic monitoring services performed at the New Jersey
facility between June 2000 and January 2001 which had not complied in all
respects with certain technical requirements of Medicares policy guidelines
relating to the duration of testing sessions. These claims are currently
pending with RCS Medicare carrier. By letter dated December 28, 2001, the
Department of Health and Human Services advised RCS that it could not instruct
the carrier to pay claims for services that did not comply with these
guidelines. In January 2002, the carrier advised RCS that it would require
additional information to adjudicate the claims. RCS has provided the carrier
with additional information, based on a random sample of the tests. No
response has been received to date, and the claims remain pending. RCS believes
that its testing procedures were clinically adequate and intends to appeal any
adverse decision of the carrier with respect to these claims. Since January
2001, tests performed at the New Jersey facility have complied with the policy
guidelines in question.

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 date for repayment was
extended to October 1, 2001. A new non-financial covenant was added under which
any civil financial settlement in excess of $1,000,000 or any 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 HFHI subsidiary. Consistent with the
terms of the December 2000 amendments to the line of credit agreement, the line
of credit was further reduced by $2,500,000 on June 30, 2001 to $12,400,000.
RCS guilty plea, entered into under its settlement with the federal
government, constituted a default under the line of credit agreement. See Note
2. In October and November 2001, the interest rate under the line of credit was
increased to 400 basis points over the banks prime rate.

In November 2001, the Company entered into a new two-year revolving credit
facility with Healthcare Business Credit Corporation (HBCC) under which it
may borrow up to $15,000,000. Loans under the facility bear interest at prime
plus 1% per annum and are secured by accounts receivable, inventories, capital
equipment and other assets of Raytel and certain of its subsidiaries and
affiliated entities. The Companys access to the line of credit is subject to
certain financial and other covenants and conditions. Raytel used the initial
proceeds of the new facility to repay outstanding indebtedness of approximately
$12,300,000 under the credit line that matured on October 1, 2001. At March 31,
2002, there was approximately $13,107,000 outstanding under the line of credit
which was classified as long-term debt on the Companys balance sheet. As of
March 31, 2002, we were in default of certain financial covenants under our
credit facility agreement, due principally to the significant expenses which we
incurred in connection with the recently-completed tender offer. At our
request, HBCC waived these defaults and agreed to modify the covenants
prospectively, among other things to eliminate the tender offer expenses from
the calculation of certain financial ratios. 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, Heart and Family Health Institute (HFHI), to
a new company organized by physicians practicing at HFHI. The Company received
a cash purchase price of $8,311,000, net of transaction expenses, for all the
common stock of the subsidiary. The Company 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 did not provide 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.

Revenues attributable to HFHI during the three months and the six months
ended March 31, 2001 were $0 and $3,948,000, respectively. The losses from
discontinued operations of $51,000 and $192,000 for the three months and the
six months ended March 31, 2001, respectively, were attributable to HFHI and
were net of a tax benefit of $33,000 and $123,000, respectively.

7



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5. Reverse Stock Split

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

6. Net Loss Per Share

For the three months and the six months ended March 31, 2002 and 2001,
basic and diluted loss per share are calculated as follows:

|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |       |  
|----------------------------------- | ----- | - | ----------------------------------------- | ----- | --------------- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                    |       |   | Three months                              |       | Six months     
|                                    |       |   | ended March 31,                           |       | ended March 31,
|                                    |       |   |                                           |       |                
|                                    |       |   | 2002                                      |       | 2001            |   | 2002  |       | 2001
|                                    |       |   |                                           |       |                 |   |       |       |     
|                                    |       |   | (000's omitted, except per share amounts)
|Basic Loss per Share:               |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|Loss from continuing operations     |       | $ | (1.32                                     | )     |                 | $ | (.36  | )     |      | $ | (1.22 | )     |   | $ | (.31  | )    
|Loss from discontinued operations   |       |   |                                          |       |                 |   | (6.65 | )     |      |   |      |       |   |   | (6.70 | )    
|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|                                    | Total |   | $                                         | (1.32 | )               |   | $     | (7.01 | )    |   | $     | (1.22 | ) |   | $     | (7.01 | )
|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|Weighted average shares outstanding |       |   | 2,920                                     |       |                 |   | 2,917 |       |      |   | 2,920 |       |   |   | 2,917 |      
|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|Diluted Loss per Share:             |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|Loss from continuing operations     |       | $ | (1.32                                     | )     |                 | $ | (.36  | )     |      | $ | (1.22 | )     |   | $ | (.31  | )    
|Loss from discontinued operations   |       |   |                                          |       |                 |   | (6.65 | )     |      |   |      |       |   |   | (6.70 | )    
|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|                                    | Total |   | $                                         | (1.32 | )               |   | $     | (7.01 | )    |   | $     | (1.22 | ) |   | $     | (7.01 | )
|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|Weighted average shares outstanding |       |   | 2,920                                     |       |                 |   | 2,917 |       |      |   | 2,920 |       |   |   | 2,917 |      
|Shares to be issued                 |       |   | (a                                        | )     |                 |   | (a    | )     |      |   | (a    | )     |   |   | (a    | )    
|Dilutive effect of options          |       |   | (a                                        | )     |                 |   | (a    | )     |      |   | (a    | )     |   |   | (a    | )    
|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      
|                                    |       |   | 2,920                                     |       |                 |   | 2,917 |       |      |   | 2,920 |       |   |   | 2,917 |      
|                                    |       |   |                                           |       |                 |   |       |       |      |   |       |       |   |   |       |      



---

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

Outstanding options and their exercise prices are as follows:

|                         |  |           |              |      |  |   |               | 
|------------------------ |  | --------- | ------------ | ---- |  | - | ------------- | 
|                         |  | March 31,
|                         |  |          
|                         |  | 2002      |              | 2001
|                         |  |           |              |     
|Options outstanding      |  |           | 444,313      |      |  |   | 465,969       | 
|Range of exercise prices |  | $         | 1.95-$35.625 |      |  | $ | 2.625-$35.625 | 

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 2003). 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. In August
2001, (effective for fiscal 2003) Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,was issued. The Company is
currently assessing what effect, if any, Statement No. 144 will have on its
results.

8. Merger Agreement

On February 7, 2002, the Company entered into a definitive merger
agreement pursuant to which SHL TeleMedicine Ltd. (SWX: SHLTN or SHL), a
developer and marketer of telemedicine devices and provider of telemedicine
services, will acquire Raytel. According to the terms of the agreement, an
indirect, wholly-owned subsidiary of SHL commenced a tender offer for all of
Raytels outstanding shares at a price of $10.25 per share in cash. On April
2, 2002, SHL, through its subsidiary, accepted all shares tendered for payment
and provided a subsequent offering period for stockholders to tender their
shares. An aggregate of 2,408,006 shares of Raytel common stock, representing
approximately 81% of the outstanding Raytel stock, was acquired by SHL in the
tender offer. The SHL subsidiary will be merged into Raytel in a transaction
in which any Raytel shares not tendered will be converted into the

8



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right to receive the same per share cash price paid in the tender offer.
A special meeting of Raytel stockholders is scheduled to be held on June 4,
2002 to vote upon the merger. The merger is expected to close promptly
following the special meeting of stockholders. In connection with the
transaction, Raytel recorded tender offer expenses, consisting primarily of
legal fees, investment banking fees, bonus payments to certain employees
related to the change in control and other related costs of $3,485,000 and
$3,568,000 for the three and six months ended March 31, 2002.

9. Segment Information

Our reportable segments are strategic business units that offer different
services. We have three reportable segments: Cardiac Information Services
(Information); Diagnostic Imaging Services (Imaging); and Heart Facilities
and Other (Facilities). The Information segment provides Pacing, CEDS and
Holter monitoring services utilizing telephonic and Internet communication
technology. The Imaging segment operates a network of diagnostic 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 our Annual Report on Form 10-K for the year
ended September 30, 2001) except that we do not allocate all interest expense,
taxes or corporate overhead to the individual segments. We evaluate performance
based on profit or loss from operations before income taxes and unallocated
amounts. The totals per the schedules below do not agree to the consolidated
totals due to corporate overhead and other unallocated amounts which are
reflected in the reconciliation to consolidated earnings before income taxes
and discontinued operations (in thousands):

|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |        |  
|------------------------------------------ | ---------------------------------------- |  | ----------- | ------ | ------- |  | ---------- | ------ | ----- |  | - | ------ |  |  | - | ------ | -
|                                           |                                          |  | Information |        | Imaging |  | Facilities |        | Total
|                                           |                                          |  |             |        |         |  |            |        |      
|For the three months ended March 31, 2002: |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Net revenue                              |  | $           | 8,625  |         |  | $          | 6,945  |       |  | $ | 2,031  |  |  | $ | 17,601 |  
|                                           | Total operating expenses                 |  |             | 8,206  |         |  |            | 5,572  |       |  |   | 1,490  |  |  |   | 15,268 |  
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Segment contribution                     |  |             | 419    |         |  |            | 1,373  |       |  |   | 541    |  |  |   | 2,333  |  
|                                           | Depreciation and amortization            |  |             | 863    |         |  |            | 428    |       |  |   | 165    |  |  |   | 1,456  |  
|                                           | Interest expense                         |  |             |       |         |  |            | 28     |       |  |   | 21     |  |  |   | 49     |  
|                                           | Minority interest/other expense (income) |  |             |       |         |  |            | (108   | )     |  |   | 97     |  |  |   | (11    | )
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Segment profit (loss)                    |  | $           | (444   | )       |  | $          | 1,025  |       |  | $ | 258    |  |  | $ | 839    |  
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Segment assets                           |  | $           | 41,869 |         |  | $          | 15,281 |       |  | $ | 10,254 |  |  | $ | 67,404 |  
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Capital expenditures                     |  | $           | 237    |         |  | $          | 34     |       |  | $ | 136    |  |  | $ | 407    |  
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       

|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |        |  
|------------------------------------------ | ---------------------------------------- |  | ----------- | ------ | ------- |  | ---------- | ------ | ----- |  | - | ------ |  |  | - | ------ | -
|                                           |                                          |  | Information |        | Imaging |  | Facilities |        | Total
|                                           |                                          |  |             |        |         |  |            |        |      
|For the three months ended March 31, 2001: |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Net revenue                              |  | $           | 9,668  |         |  | $          | 6,494  |       |  | $ | 1,984  |  |  | $ | 18,146 |  
|                                           | Total operating expenses                 |  |             | 10,647 |         |  |            | 4,855  |       |  |   | 1,349  |  |  |   | 16,851 |  
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Segment contribution                     |  |             | (979   | )       |  |            | 1,639  |       |  |   | 635    |  |  |   | 1,295  |  
|                                           | Depreciation and amortization            |  |             | 865    |         |  |            | 405    |       |  |   | 279    |  |  |   | 1,549  |  
|                                           | Interest expense                         |  |             |       |         |  |            | 67     |       |  |   | 31     |  |  |   | 98     |  
|                                           | Minority interest/other expense (income) |  |             | (5     | )       |  |            | (40    | )     |  |   | 41     |  |  |   | (4     | )
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Segment profit (loss)                    |  | $           | (1,839 | )(a)    |  | $          | 1,207  |       |  | $ | 284    |  |  | $ | (348   | )
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Segment assets                           |  | $           | 42,362 |         |  | $          | 14,989 |       |  | $ | 12,213 |  |  | $ | 69,564 |  
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                           | Capital expenditures                     |  | $           | 556    |         |  | $          | 56     |       |  | $ |       |  |  | $ | 612    |  
|                                           |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       

9



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---

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

|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |   |  |   |        |  
|---------------------------------------- | ---------------------------------------- |  | ----------- | ------ | ------- |  | ---------- | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                         |                                          |  | Information |        | Imaging |  | Facilities |        | Total
|                                         |                                          |  |             |        |         |  |            |        |      
|For the six months ended March 31, 2002: |                                          |  |             |        |         |  |            |        |       |  |   |        |   |  |   |       
|                                         | Net revenue                              |  | $           | 17,924 |         |  | $          | 13,797 |       |  | $ | 3,941  |   |  | $ | 35,662 |  
|                                         | Total operating expenses                 |  |             | 16,306 |         |  |            | 10,930 |       |  |   | 2,885  |   |  |   | 30,121 |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |   |  |   |       
|                                         | Segment contribution                     |  |             | 1,618  |         |  |            | 2,867  |       |  |   | 1,056  |   |  |   | 5,541  |  
|                                         | Depreciation and amortization            |  |             | 1,716  |         |  |            | 841    |       |  |   | 376    |   |  |   | 2,933  |  
|                                         | Interest expense                         |  |             |       |         |  |            | 60     |       |  |   | 46     |   |  |   | 106    |  
|                                         | Minority interest/other expense (income) |  |             |       |         |  |            | (203   | )     |  |   | (17    | ) |  |   | (220   | )
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |   |  |   |       
|                                         | Segment profit (loss)                    |  | $           | (98    | )       |  | $          | 2,169  |       |  | $ | 651    |   |  | $ | 2,722  |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |   |  |   |       
|                                         | Segment assets                           |  | $           | 41,869 |         |  | $          | 15,281 |       |  | $ | 10,254 |   |  | $ | 67,404 |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |   |  |   |       
|                                         | Capital expenditures                     |  | $           | 546    |         |  | $          | 691    |       |  | $ | 162    |   |  | $ | 1,399  |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |   |  |   |       

|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |        |  
|---------------------------------------- | ---------------------------------------- |  | ----------- | ------ | ------- |  | ---------- | ------ | ----- |  | - | ------ |  |  | - | ------ | -
|                                         |                                          |  | Information |        | Imaging |  | Facilities |        | Total
|                                         |                                          |  |             |        |         |  |            |        |      
|For the six months ended March 31, 2001: |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                         | Net revenue                              |  | $           | 19,219 |         |  | $          | 12,492 |       |  | $ | 3,683  |  |  | $ | 35,394 |  
|                                         | Total operating expenses                 |  |             | 19,060 |         |  |            | 9,254  |       |  |   | 2,588  |  |  |   | 30,902 |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                         | Segment contribution                     |  |             | 159    |         |  |            | 3,238  |       |  |   | 1,095  |  |  |   | 4,492  |  
|                                         | Depreciation and amortization            |  |             | 1,714  |         |  |            | 833    |       |  |   | 576    |  |  |   | 3,123  |  
|                                         | Interest expense                         |  |             |       |         |  |            | 128    |       |  |   | 62     |  |  |   | 190    |  
|                                         | Minority interest/other expense (income) |  |             | 1      |         |  |            | (39    | )     |  |   | 21     |  |  |   | (17    | )
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                         | Segment profit (loss)                    |  | $           | (1,556 | )(a)    |  | $          | 2,316  |       |  | $ | 436    |  |  | $ | 1,196  |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                         | Segment assets                           |  | $           | 42,362 |         |  | $          | 14,989 |       |  | $ | 12,213 |  |  | $ | 69,564 |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       
|                                         | Capital expenditures                     |  | $           | 1,299  |         |  | $          | 101    |       |  | $ | 80     |  |  | $ | 1,480  |  
|                                         |                                          |  |             |        |         |  |            |        |       |  |   |        |  |  |   |       



---

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

10



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|                      |                                                           |   |                    |        |                  |   |      |        |      |   |       |        |   |   |       |        |  
|--------------------- | --------------------------------------------------------- | - | ------------------ | ------ | ---------------- | - | ---- | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|                      |                                                           |   | Three Months Ended |        | Six Months Ended
|                      |                                                           |   | March 31,          |        | March 31,       
|                      |                                                           |   |                    |        |                 
|                      |                                                           |   | 2002               |        | 2001             |   | 2002 |        | 2001
|                      |                                                           |   |                    |        |                  |   |      |        |     
|Segment profit (loss) |                                                           | $ | 839                |        |                  | $ | (348 | )      |      | $ | 2,722 |        |   | $ | 1,196 |       
|Unallocated amounts:  |                                                           |   |                    |        |                  |   |      |        |      |   |       |        |   |   |       |       
|                      | Corporate general and administrative expenses             |   |                    | 923    |                  |   |      | 1,027  |      |   |       | 1,697  |   |   |       | 1,908  |  
|                      | Corporate depreciation and amortization                   |   |                    | 51     |                  |   |      | 101    |      |   |       | 111    |   |   |       | 202    |  
|                      | Corporate interest expense                                |   |                    | 405    |                  |   |      | 373    |      |   |       | 844    |   |   |       | 841    |  
|                      | Corporate other expense (income), net                     |   |                    | 3,497  |                  |   |      | (125   | )    |   |       | 3,646  |   |   |       | (277   | )
|                      |                                                           |   |                    |        |                  |   |      |        |      |   |       |        |   |   |       |       
|                      | Loss from continuing operations before
income tax benefit |   | $                  | (4,037 | )                |   | $    | (1,724 | )    |   | $     | (3,576 | ) |   | $     | (1,478 | )
|                      |                                                           |   |                    |        |                  |   |      |        |      |   |       |        |   |   |       |       

|                |                  |   |           |        |      |   |        |        | 
|--------------- | ---------------- | - | --------- | ------ | ---- | - | ------ | ------ | 
|                |                  |   | March 31,
|                |                  |   |          
|                |                  |   | 2002      |        | 2001
|                |                  |   |           |        |     
|Segment assets: |                  |   |           |        |      |   |        |       
|                | Information      |   | $         | 41,869 |      |   | $      | 42,362 | 
|                | Imaging          |   |           | 15,281 |      |   |        | 14,989 | 
|                | Facilities       |   |           | 10,254 |      |   |        | 12,213 | 
|                | Corporate assets |   |           | 3,644  |      |   |        | 8,535  | 
|                |                  |   |           |        |      |   |        |        | 
|Total assets    |                  | $ | 71,048    |        |      | $ | 78,099 |       
|                |                  |   |           |        |      |   |        |        | 

10. Principal Payors

Cash receipts received from Medicare during the three and six month
periods ended March 31, 2002 were approximately $2,937,000 and $8,670,000,
respectively. No other third party payor paid more than 10% of quarterly
revenues during such periods.

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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 management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

We generate our revenues from cardiac information services (which includes
telephonic monitoring services for cardiac pacemaker patients (Pacing),
cardiac event detection services (CEDS) and Holter monitoring), from
diagnostic imaging services and from facilities providing diagnostic,
therapeutic and patient management services primarily associated with
cardiovascular disease.

From June 2000 through June 2001, Raytel was the subject of a grand jury
investigation conducted under the direction of the United States Attorney for
the District of Connecticut and the Office of the Inspector General of the
Department of Health and Human Services (the OIG). The investigation involved
certain business practices of the transtelephonic cardiac pacemaker monitoring
business conducted by Raytel Cardiac Services, Inc., our wholly-owned
subsidiary (RCS), at its facilities in Windsor, Connecticut and New York, New
York. The investigation did not involve our other healthcare services, such as
RCS cardiac event detection services or Raytels diagnostic imaging services
or other cardiac-related businesses, nor did it involve RCS transtelephonic
pacemaker monitoring operations conducted at its Haddonfield, New Jersey
facility, which followed testing practices similar to those followed at the
Connecticut and New York facilities.

In June 2001, RCS reached an agreement with the federal government to
resolve the issues that were the subject of the investigation. In accordance
with that agreement, on June 25, 2001, RCS pled guilty 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, in October
2001, Raytel and RCS entered into an agreement with the government to resolve
related civil claims. Under the criminal and civil settlements, RCS agreed to
pay a total of $11,500,000 to the government over a five year period, with
interest of 7% per annum on the unpaid balance, to resolve the criminal and
civil allegations relating to the practices of RCS Connecticut and New York
transtelephonic monitoring operations which were the subject of the
investigation. Raytel guaranteed RCS payment obligations under the settlement
agreement. RCS also entered into a corporate integrity agreement under which it
agreed that its ongoing operations would conform to specified guidelines. As of
March 31, 2002, $1,500,000 had been paid to the government, and the next
payment of $2,000,000 is due in June 2002. RCS guilty plea did not adversely
affect its participation in the Medicare program or other federal healthcare
programs.

We incurred substantial legal fees and other expenses in connection with
the investigation and established a reserve of $4,600,000 to cover the
estimated amounts of these expenses. As of March 31, 2002, we had incurred
legal fees and other expenses of approximately $4,410,900 related to the
investigation, including legal fees incurred by certain RCS employees in
connection with the investigation which were reimbursed by RCS in accordance
with the requirements of Delaware law and RCS By-Laws. The remaining balance
of the reserve is included in accrued liabilities on our balance sheet.
Additional expenses, if any, will adversely affect our operating results in
future periods.

In addition to these direct expenses, the investigation, the related
internal compliance review, and settlement negotiations with the government
diverted the efforts and attention of a number of our management and
administrative personnel. The impact of this diversion reduced the efficiency
of RCS 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 quarter ended September 30, 2000 and throughout
the fiscal year ended September 30, 2001. Although the investigation has now
been concluded, implementation of the corporate integrity agreement continues
to require the time and attention of Raytel and RCS management and a number of
RCS administrative personnel. In addition, RCS guilty plea entered into under
its agreement with the government constituted a default under Raytels bank
credit facility. In November 2001, Raytel entered into a new revolving line of
credit arrangement and repaid all outstanding indebtedness under its bank
facility. However, RCS guilty plea could adversely affect our ability to
obtain debt or equity financing in the future.

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In connection with the civil settlement agreement, neither Raytel nor RCS
admitted liability for the governments allegations, and the settlement
agreement did not release Raytel or RCS from any future claims arising out of
their other business operations, including RCS transtelephonic pacemaker
operations conducted at its New Jersey facility. In December 2001, RCS
submitted claims which would result in reimbursements totaling approximately
$1,500,000 for transtelephonic monitoring services performed at the New Jersey
facility between June 2000 and January 2001 which had not complied in all
respects with certain technical requirements of Medicares policy guidelines
relating to the duration of testing sessions. These claims are currently
pending with RCS Medicare carrier. By letter dated December 28, 2001, the
Department of Health and Human Services advised RCS that it could not instruct
the carrier to pay claims for services that did not comply with these
guidelines. In January 2002, the carrier advised RCS that it would require
additional information to adjudicate the claims. RCS has provided the carrier
with additional information, based on a random sample of the tests. No
response has been received to date, and the claims remain pending. RCS believes
that its testing procedures were clinically adequate and intends to appeal any
adverse decision of the carrier with respect to these claims. Since January
2001, tests performed at the New Jersey facility have complied with the policy
guidelines in question.

In March 2001, effective January 1, 2001, we completed the sale of our
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 an officer of Raytel and a member of
Raytels Board of Directors. We 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 our bank credit facility and the balance was used for
working capital purposes. We 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,
we have not provided for any tax benefit that may result from this transaction.
Revenues attributable to HFHI in the three months and the six months ended
March 31, 2001 were $0 and $3,948,000, respectively. The losses from
discontinued operations of $51,000 and $192,000 for the three months and the
six months ended March 31, 2001, respectively, were attributable to HFHI and
were net of a tax benefit of $33,000 and $123,000, respectively.

On February 7, 2002, the Company entered into a definitive merger
agreement pursuant to which SHL TeleMedicine Ltd. (SWX: SHLTN or SHL), a
developer and marketer of telemedicine devices and provider of telemedicine
services, will acquire Raytel. According to the terms of the agreement, an
indirect, wholly-owned subsidiary of SHL commenced a tender offer for all of
Raytels outstanding shares at a price of $10.25 per share in cash. On April
2, 2002, SHL, through its subsidiary, accepted all shares tendered for payment
and provided a subsequent offering period for stockholders to tender their
shares. An aggregate of 2,408,006 shares of Raytel common stock, representing
approximately 81% of the outstanding Raytel stock, was acquired by SHL in the
tender offer. The SHL subsidiary will be merged into Raytel in a transaction
in which any Raytel shares not tendered will be converted into the right to
receive the same per share cash price paid in the tender offer. A special
meeting of Raytel stockholders is scheduled to be held on June 4, 2002 to vote
upon the merger. The merger is expected to close promptly following the
special meeting of stockholders. In connection with the transaction, Raytel
recorded tender offer expenses, consisting primarily of legal fees, investment
banking fees, bonus payments to certain employees related to the change in
control and other related costs of $3,485,000 and $3,568,000 for the three and
six months ended March 31, 2002.

Results of Operations

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001.

Revenues.For the three months ended March 31, 2002, total revenues were
$17,601,000 compared to $18,146,000 for the three months ended March 31, 2001,
representing a decrease of $545,000, or 3.0%.

Cardiac information services revenues were $8,625,000 for the three months
ended March 31, 2002, compared to $9,668,000 for the three months ended March
31, 2001, a decrease of $1,043,000, or 10.8%. The decrease in revenues for
cardiac information services was due primarily to lower revenues from Pacing
operations as a result of lower average selling prices due primarily to a
reduction in Medicare reimbursement rates effective January 1, 2002 and also to
lower test volumes and, to a lesser extent, lower revenues from CEDS due to
lower average selling prices and Holter monitoring due to lower test volumes.
Diagnostic imaging services revenues were $6,945,000 for the three months ended
March 31, 2002, compared to $6,494,000 for the three months ended March 31,
2001, an increase of $451,000, or 6.9%, due primarily to increases in revenue
at certain centers and the imaging network resulting from increases in patient
volumes. Heart facilities and other revenues were $2,031,000 for the three
months ended March

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31, 2002, compared to $1,984,000 for the three months ended March 31,
2001, an increase of $47,000, or 2.4%, due primarily to higher revenues at
certain cardiovascular diagnostic facilities.

Provision for OIG Investigation Expenses. The Company provided $2,000,000
for expected expenses associated with the OIG investigation for the period
ended March 31, 2001.

Operating Expenses.Operating costs and selling, general and
administrative expenses increased by $313,000, or 1.9%, from $15,878,000
(excluding the provision for OIG investigation expenses) for the three months
ended March 31, 2001 to $16,191,000 for the three months ended March 31, 2002,
due primarily to higher expenses related to diagnostic imaging services,
partially offset by decreases in costs and expenses related to cardiac
information services. Operating costs and selling, general and administrative
expenses (excluding the provision for OIG investigation expenses) as a
percentage of total revenues increased by 4.5%, from 87.5% for the three months
ended March 31, 2001 to 92.0% for the three months ended March 31, 2002.

Depreciation and Amortization. Depreciation and amortization expense
decreased by $143,000, or 8.7%, from $1,650,000 for the three months ended
March 31, 2001 to $1,507,000 for the three months ended March 31, 2002 and
decreased as a percentage of revenues from 9.1% for the three months ended
March 31, 2001 to 8.6% for the three months ended March 31, 2002.

Operating Loss. As a result of the foregoing factors, operating loss
decreased by $1,285,000, or 93.0%, from $1,382,000 for the three months ended
March 31, 2001 to $97,000 for the three months ended March 31, 2002.

Interest Expense. Interest expense decreased by $17,000, or 3.6%, from
$471,000 for the three months March 31, 2001 to $454,000 for the three months
ended March 31, 2002.

Other Expense (Income).Other income decreased by $53,000 from $263,000
for the three months ended March 31, 2001 to $210,000 for the three months
ended March 31, 2002.

Tender Offer Expenses.These expenses consist primarily of legal fees,
investment banking fees, bonus payments to certain employees related to the
change in control and other related costs.

Minority Interest. Minority interest increased by $77,000 from $134,000
for the three months ended March 31, 2001 to $211,000 for the three months
ended March 31, 2002 due primarily to increased income in certain
cardiovascular diagnostic facilities.

Income Tax Benefit. The provision for income tax benefit decreased by
$491,000 from $671,000 for the three months ended March 31, 2001 to $180,000
for the three months ended March 31, 2002 as a result of reversing the
provision for income taxes recorded as of December 31, 2001. Due to the
uncertainty of realization, a tax benefit will not be provided for the pre-tax
loss for the six months ended March 31, 2002.

Loss From Continuing Operations. Loss from continuing operations
increased by $2,804,000 from $1,053,000 for the three months ended March 31,
2001 to $3,857,000 for the three months ended March 31, 2002.

Discontinued Operations. Loss from discontinued operations, net of tax
was $51,000 for the three months ended March 31, 2001. The loss on disposal of
the HFHI business was approximately $19,353,000. Due to the uncertainty of the
ultimate tax benefit to be realized as a result of the loss, the Company did
not provide for any tax benefit from this transaction.

Net Loss.As a result of the foregoing factors, net loss decreased by
$16,600,000 from $20,457,000 for the three months ended March 31, 2001 to
$3,857,000 for the three months ended March 31, 2002.

Six Months Ended March 31, 2002 Compared to Six Months Ended March 31,
2001.

Revenues.For the six months ended March 31, 2002, total revenues were
$35,662,000 compared to $35,394,000 for the six months ended March 31, 2001,
representing an increase of $268,000, or 0.8%.

Cardiac information services revenues were $17,924,000 for the six
months ended March 31, 2002 compared to $19,219,000 for the six months
ended March 31, 2001, a decrease of $1,295,000, or 6.7%. The decrease
in revenues for cardiac information services was due primarily to lower
revenues from Pacing operations as a result of lower average selling
prices due primarily to a reduction in Medicare reimbursement rates
effective January 1, 2002 and also to lower

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test volumes and, to a lesser extent, lower revenues from CEDS due
to lower average selling prices and Holter monitoring due to lower test
volumes. Diagnostic imaging services revenues were $13,797,000 for the
six months ended March 31, 2002, compared to $12,492,000 for the six
months ended March 31, 2001, an increase of $1,305,000, or 10.4%, 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 $3,941,000 for the six months ended March 31, 2002,
compared to $3,683,000 for the six months ended March 31, 2001, an
increase of $258,000, or 7.0%, due primarily to higher revenues at
certain cardiovascular diagnostic facilities.

Provision for OIG Investigation Expenses.The Company provided $2,000,000
for expected expenses associated with the OIG investigation for the period
ended March 31, 2001.

Operating Expenses.Operating costs and selling, general and
administrative expenses increased by $1,008,000, or 3.2%, from $30,810,000
(excluding the provision for OIG investigation expenses) for the six months
ended March 31, 2001 to $31,818,000 for the six months ended March 31, 2002,
due primarily to higher expenses at diagnostic imaging services, partially
offset by decreases in costs and expenses related to cardiac information
services. Operating costs and selling, general and administrative expenses
(excluding the provision for OIG investigation expenses) as a percentage of
total revenues increased from 87.0% for the six months ended March 31, 2001 to
89.2% for the six months ended March 31, 2002, primarily as a result of higher
costs.

Depreciation and Amortization. Depreciation and amortization expense
decreased by $281,000, from $3,325,000 for the six months ended March 31, 2001
to $3,044,000 for the six months ended March 31, 2002 and decreased as a
percentage of revenues from 9.4% for the six months ended March 31, 2001 to
8.5% for the six months ended March 31, 2002.

Operating Income (Loss).As a result of the foregoing factors, operating
results improved from an operating loss of $741,000 for the six months ended
March 31, 2001 to operating income of $800,000 for the six months ended March
31, 2002.

Interest Expense.Interest expense decreased by $81,000, or 7.9%, from
$1,031,000 for the six months ended March 31, 2001 to $950,000 for the six
months ended March 31, 2002, due primarily to a decrease in the average amount
of debt outstanding.

Other Expense (Income).Other income decreased by $115,000, or 23.9%,
from $481,000 for the six months ended March 31, 2001 to $366,000 for the six
months ended March 31, 2002.

Tender Offer Expenses.These expenses consist primarily of legal fees,
investment banking fees, bonus payments to certain employees related to the
change in control and other related costs.

Minority Interest. Minority interest increased by $37,000, or 19.8%, from
$187,000 for the six months ended March 31, 2001 to $224,000 for the six months
ended March 31, 2002 due primarily to increased income in certain
cardiovascular diagnostic facilities.

Income Taxes (Benefit).The provision for income taxes increased by
$576,000, or 100%, from an income tax benefit of $576,000 for the six months
ended March 31, 2001 to an income tax provision of $0 for the six months ended
March 31, 2002 as a result of not recording a tax benefit for the pre-tax loss
due to the uncertainty of its realization.

Loss From Continuing Operations. Loss from continuing operations
increased by $2,674,000 from $902,000 for the six months ended March 31, 2001
to $3,576,000 for the six months ended March 31, 2002.

Discontinued Operations.Loss from discontinued operations, net of tax,
was $192,000 for the six months ended March 31, 2001. The loss on disposal of
the HFHI business was approximately $19,353,000. Due to the uncertainty of the
ultimate tax benefit to be realized as a result of the loss, the Company did
not provide for any tax benefit from this transaction.

Net Loss.As a result of the forgoing factors, net loss decreased by
$16,871,000 from $20,447,000 for the six months ended March 31, 2001 to
$3,576,000 for the six months ended March 31, 2002.

Business Environment and Future Results

Our 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 our control.

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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 our 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. Revenue from our Pacing operations during the last
three fiscal years has been impacted by Medicare reimbursement changes.
Reimbursement rate reductions applicable to our Pacing procedures became
effective on January 1, 1999 and had a negative effect on Pacing revenue for
calendar year 1999. There was a slight increase in Medicare reimbursement rates
effective January 1, 2000 and again effective January 1, 2001; however, there
was a decrease effective January 1, 2002. We 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 us, or that future reimbursement
of any service that we offer 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 our 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 our
business.

An element of our strategy is to expand, in part, through acquisitions and
investments in complementary healthcare businesses. The implementation of this
strategy may place significant strain on our administrative, operational and
financial resources and increase demands on our systems and controls. There can
be no assurances that businesses which we may acquire, in the future will be
integrated successfully and profitably into our 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 we will be able to maintain existing regulatory
approvals or obtain regulatory approvals that may be required to expand our
services or that new laws or regulations will not be enacted or adopted that
will have a material adverse effect on our business, financial condition or
operating results.

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

Liquidity and Capital Resources

At March 31, 2002, we had working capital of $23,925,000, compared to
$12,942,000 at September 30, 2001, which reflected the $12,287,000 balance
outstanding under our former line of credit as a current liability. At March
31, 2002, we had cash and cash equivalents of $5,092,000.

We batch-bill 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 our
second and third fiscal quarters, with the collection of these receivables
occurring primarily during the subsequent fourth fiscal quarter.

On December 15, 2000, our 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 our option, and the date for repayment was extended to October 1,
2001. A new non-financial covenant was added under which any civil financial
settlement in excess of $1,000,000 or any criminal charges relating to the
then-pending 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 our HFHI subsidiary. Consistent with the terms of the December
2000 amendments to the line of credit agreement, the line of credit was further
reduced by $2,500,000 on June 30, 2001 to $12,400,000. RCS guilty plea,
entered into under its settlement with the federal government, constituted a
default under the line of credit agreement. In October and November 2001, the
interest rate under the line of credit was increased to 400 basis points over
the banks prime rate.

In November 2001, we entered into a new two-year revolving credit facility
with Healthcare Business Credit Corporation under which we may borrow up to
$15,000,000. Loans under the facility bear interest at prime plus 1% per annum
and are secured by accounts receivable, inventories, capital equipment and
other assets of Raytel and certain of its subsidiaries and affiliated entities.
We used the initial proceeds of the new facility to repay outstanding
indebtedness of approximately $12,300,000 under the credit line that

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matured on October 1, 2001. At March 31, 2002, there was approximately
$13,107,000 outstanding under the new credit facility. The facility matures on
November 30, 2003 and, therefore, indebtedness outstanding under the line as of
March 31, 2002 was classified as a long-term liability on our balance sheet.
As of March 31, 2002, we were in default of certain financial covenants under
our credit facility agreement, due principally to the significant expenses
which we incurred in connection with the recently-completed tender offer. At
our request, HBCC waived these defaults and agreed to modify the covenants
prospectively, among other things to eliminate the tender offer expenses from
the calculation of certain financial ratios. See Part II, Item 3.  Defaults
Upon Senior Securities.

Our long-term capital requirements will depend on numerous factors,
including the rate at which we develop new products and services and acquire
other businesses, if any. Our ability to meet our working capital and capital
expenditure needs for the next twelve months is dependent upon our ability to
sustain profitability.

We may require additional capital if, for example, we were to experience
operating losses or if we were to pursue one or more business acquisitions. We
cannot be certain that additional financing will be available when required, or
at all. RCS guilty plea pursuant to the settlement agreement entered into with
the federal government in 2001 could adversely affect our ability to obtain
debt or equity financing in the future.




Item 3. Quantitative and Qualitative Disclosures about Market Risks

We do not hold any marketable equity securities, foreign currencies or
derivative financing instruments in our investment portfolio. We are exposed to
market risk from interest rate fluctuations because we use variable rate debt
to finance working capital requirements. We do not believe that there is any
material market risk exposure with respect to other financial instruments that
would require disclosure under this Item.

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PART II. OTHER INFORMATION




Item 1. Legal Proceedings

From June 2000 through June 2001, Raytel was the subject of a grand jury
investigation conducted under the direction of the United States Attorney for
the District of Connecticut and the Office of the Inspector General of the
Department of Health and Human Services (the OIG). The investigation involved
certain business practices of the transtelephonic cardiac pacemaker monitoring
business conducted by Raytel Cardiac Services, Inc., our wholly-owned
subsidiary (RCS), at its facilities in Windsor, Connecticut and New York, New
York. The investigation did not involve our other healthcare services, such as
RCS cardiac event detection services or Raytels diagnostic imaging services
or other cardiac-related businesses, nor did it involve RCS transtelephonic
pacemaker monitoring operations conducted at its Haddonfield, New Jersey
facility, which followed testing practices similar to those followed at the
Connecticut and New York facilities.

In June 2001, RCS reached an agreement with the federal government to
resolve the issues that were the subject of the investigation. In accordance
with that agreement, on June 25, 2001, RCS pled guilty 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, in October
2001, Raytel and RCS entered into an agreement with the government to resolve
the related civil claims. Under the criminal and civil settlements, RCS agreed
to pay a total of $11,500,000 to the government over a five year period, with
interest of 7% per annum on the unpaid balance, to resolve the criminal and
civil allegations relating to the practices of RCS Connecticut and New York
transtelephonic monitoring operations which were the subject of the
investigation. Raytel guaranteed RCS payment obligations under the settlement
agreement. RCS also entered into a corporate integrity agreement under which it
agreed that its ongoing operations would conform to specified guidelines. As of
March 31, 2002, $1,500,000 had been paid to the government, and the next
payment of $2,000,000 is due in June 2002. RCS guilty plea did not adversely
affect its participation in the Medicare program or other federal healthcare
programs.

We incurred substantial legal fees and other expenses in connection with
the investigation and established a reserve of $4,600,000 to cover the
estimated amounts of these expenses. As of March 31, 2002, we had incurred
legal fees and other expenses of approximately $4,410,900 related to the
investigation, including legal fees incurred by certain RCS employees in
connection with the investigation which were reimbursed by RCS in accordance
with the requirements of Delaware law and RCS By-Laws. The remaining balance
of the reserve is included in accrued liabilities on our balance sheet.
Additional expenses, if any, will adversely affect our operating results in
future periods.

In addition to these direct expenses, the investigation, the related
internal compliance review, and settlement negotiations with the government
diverted the efforts and attention of a number of our management and
administrative personnel. The impact of this diversion reduced the efficiency
of RCS 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 quarter ended September 30, 2000 and throughout
the fiscal year ended September 30, 2001. Although the investigation has now
been concluded, implementation of the corporate integrity agreement continues
to require the time and attention of Raytel and RCS management and a number of
RCS administrative personnel. In addition, RCS guilty plea entered into under
its agreement with the government constituted a default under Raytels bank
credit facility. In November 2001, Raytel entered into a new revolving line of
credit arrangement and repaid all outstanding indebtedness under its bank
facility. However, RCS guilty plea could adversely affect our ability to
obtain debt or equity financing in the future.

In connection with the civil settlement agreement, neither Raytel nor RCS
admitted liability for the governments allegations, and the settlement
agreement did not release Raytel or RCS from any future claims arising out of
their other business operations, including RCS transtelephonic pacemaker
operations conducted at its New Jersey facility. In December 2001, RCS
submitted claims which would result in reimbursements totaling approximately
$1,500,000 for transtelephonic monitoring services performed at the New Jersey
facility between June 2000 and January 2001 which had not complied in all
respects with certain technical requirements of Medicares policy guidelines
relating to the duration of testing sessions. These claims are currently
pending with RCS Medicare carrier. By letter dated December 28, 2001, the
Department of Health and Human Services advised RCS that it could not instruct
the carrier to pay claims for services that did not comply with these
guidelines. In January 2002, the carrier advised RCS that it would require
additional information to adjudicate the claims. RCS has provided the carrier
with additional information, based on a random sample of the tests. No
response to this information has been received to date. RCS believes that its
testing procedures were clinically adequate and intends to appeal any adverse
decision of the carrier with respect to these claims. Since January 2001, tests
performed at the New Jersey facility have complied with the policy guidelines
in question.

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Raytel and members of its board of directors have been named as defendants
in a purported class action lawsuit filed by an alleged stockholder of Raytel
in the San Mateo County, California Superior Court on February 13, 2002
opposing the proposed merger transaction with SHL Telemedicine, Ltd (SHL).
SHL is not named as a defendant in the complaint. The plaintiff generally
alleges that the individual defendants breached their fiduciary duties of
loyalty, good faith and independence in connection with the proposed merger
transaction by engaging in self-dealing. Raytel believes that the complaint
lacks merit and intends to vigorously defend the lawsuit.

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




Item 3. Defaults Upon Senior Securities

As of March 31, 2002, the Company was in default of certain financial
covenants under its $15,000,000 credit facility agreement, due principally to
the significant expenses which it incurred in connection with the
recently-completed tender offer. At the Companys request, HBCC waived these
defaults and agreed to modify the covenants prospectively, among other things
to eliminate the tender offer expenses from the calculation of certain
financial ratios. The amount outstanding under the credit line as of March 31,
2002 was $13,107,000.




Item 5. Other Information and Regulation FD Disclosure

On February 7, 2002, the Company entered into a definitive merger
agreement pursuant to which SHL Telemedicine Ltd. (SWX: SHLTN or SHL), a
developer and marketer of telemedicine devices and provider of telemedicine
services, will acquire Raytel. According to the terms of the agreement, an
indirect, wholly-owned subsidiary of SHL commenced a tender offer for all of
Raytels outstanding shares at a price of $10.25 per share in cash. On April
2, 2002, SHL, through its subsidiary, accepted all shares tendered for payment
and provided a subsequent offering period for stockholders to tender their
shares. An aggregate of 2,408,006 shares of Raytel common stock, representing
approximately 81% of the outstanding Raytel stock, was acquired by SHL in the
tender offer. The SHL subsidiary will be merged into Raytel in a transaction
in which any Raytel shares not tendered will be converted into the right to
receive the same per share cash price paid in the tender offer. A special
meeting of Raytel stockholders is scheduled to be held on June 4, 2002 to vote
upon the merger. The merger is expected to close promptly following the
special meeting of stockholders.

Pursuant to the Merger Agreement, SHL is entitled to designate such number
of directors to be elected to the Board of Directors of Raytel (the Board),
rounded up to the next whole number, as is equal to the product obtained by
multiplying the total number of directors on the Board by the percentage that
the number of shares so purchased and paid forbears to the total number of
shares then outstanding. Four individuals designated by SHL have been elected
directors of Raytel and now make up a majority of Raytels six member board.

On April 8, 2002, Richard F. Bader resigned as Raytels Chairman of the
Board, Chief Executive Officer and as a director. Mr. Bader did not indicate
in his letter that he was resigning as a director because of a disagreement
with Raytel on any matter relating to Raytels operations, policies or
practices. Mr. Yariv Alroy has been appointed, as Mr. Baders successor, to be
the Chairman of Raytels Board and Chief Executive Officer.




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                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                
|10.77   |  | Consent, Waiver and First Amendment to Loan and Security Agreement, dated as of April 1, 2002, by
and among, Raytel, certain subsidiaries of Raytel and Healthcare Business Credit Corporation.

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| | b. |  | Report on From 8-K
| | -- |  | ------------------



| |  | Current Report on Form 8-K dated February 13, 2002 announcing that Raytel
had entered into a definitive merger agreement with SHL Telemedicine Ltd.                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Current Report on Form 8-K dated April 2, 2002 announcing that a change of
control of Raytel had occurred as a result of
SHLs successful completion of its tender offer for all of Raytels
outstanding common stock.

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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: May 14, 2002 | By:                                                                                                                      | /s/ John F. Lawler, Jr.
|                    |                                                                                                                         
|                    | John F. Lawler, Jr.
Vice President and Chief Financial Officer
(duly authorized officer and principal financial officer)

21