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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission File Number 0-13617

LIFELINE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MASSACHUSETTS                                                  |  | 20-1591429                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|111 Lawrence Street, Framingham, Massachusetts                 |  | 01702-8156                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

(508) 988-1000

(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of
the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.02 par value (including associated Preferred Stock Purchase Rights)

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ̈No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ̈No x

Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days. Yes x No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                         |  |                     |  |                       
|------------------------ |  | ------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer x |  | Non-accelerated filer ̈



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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈No  x

As of February 28, 2006, 14,235,332 shares of the Registrants Common Stock were outstanding
and the aggregate market value of such Common Stock held by non-affiliates of the Registrant (based on the closing price of the Common Stock on the Nasdaq National Market on June 30, 2005) was approximately $409,078,000.



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Exhibit index is located on pages 79 through 82 of
this Report.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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PART I



|ITEM 1. | Business
|------- | --------

Our Company

Lifeline Systems, Inc. provides 24-hour personal emergency response monitoring services and related products to subscribers, primarily elderly or disabled individuals
with medical or age-related conditions, who wish to continue to live independently in their home. We were instrumental in pioneering the industry in 1974 and are the leading provider of these services in the United States and Canada. Our products
and services consist principally of a home communicator connected to the telephone and a wireless personal help button which, when activated, initiates an automated digital telephone signal to one of our centralized monitoring facilities. Our
monitoring technology platform retrieves the subscribers record from our centralized database and routes the call to one of our highly-trained monitoring professionals. Our monitoring professionals follow a prescribed response protocol to
quickly assess the nature of the call and provide a prompt, appropriate response in a respectful and compassionate manner, which may consist of contacting local ambulance, police or fire services or family, friends and neighbors.

We also offer to our senior living customers a Lifeline emergency call system, which utilizes our call button pendants, two-way voice or non-voice communicators and
software, allowing the facility to locally monitor their residents.

We generate revenue through recurring monthly service fees and from product sales to
our customers. Our personal emergency response customers consist of approximately 2,500 community hospitals and other health care providers in the United States and Canada. These customers typically offer our services to their patients and clients,
whom we refer to as subscribers, through a co-branded name that demonstrates their affiliation with us. As of December 31, 2005, we were monitoring approximately 469,000 subscribers on our 24-hour centralized monitoring platforms located in
Framingham, Massachusetts, Toronto, Ontario and Montreal, Quebec. Approximately 75,000 additional individuals are monitored independently by community hospitals and other health care providers on monitoring platforms purchased from us.

The personal emergency response services, or PERS, industry provides emergency response assistance on a 24-hour basis for seniors and disabled persons who wish to
live independently in their home. PERS users wear a personal help button, typically around the neck or on the wrist, which communicates with a two-way, voice-to-voice communications system located in the users home, which is connected to a
24-hour monitoring facility. When the personal help button is pressed, a wireless signal is sent from the button to a communicator, which initiates a telephone call from the users home to the monitoring facility. A monitor, through
speakerphone communications, determines the nature of the call and initiates an appropriate response. A response may consist of contacting one or more of the following: local emergency services, including ambulance, police and fire departments, or
family, friends or neighbors. A response may also involve simply assuring subscribers that we are available for them at any time, if needed.



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Initially, the PERS industry was primarily an equipment business predicated on selling personal help buttons,
communicators and monitoring platforms to community hospitals and other health care providers seeking to operate a local PERS program for their patients. These health care providers established their own sales and marketing activities, purchased the
monitoring equipment from the PERS provider and performed all monitoring and administrative tasks. During the 1990s, spending cutbacks and increased administrative costs, coupled with reduced Medicare and Medicaid reimbursement for hospital
services generally, resulted in the inability of many hospitals and health care providers to efficiently manage the growing demand of their PERS programs. This trend created demand among many hospitals and health care providers for outsourced PERS
monitoring services. In order to keep pace with this trend, PERS providers were required to make capital expenditures to support these new responsibilities, including establishing centralized monitoring facilities, developing sales, marketing and
subscriber service infrastructure and supporting the purchase, installation, refurbishing and maintenance of PERS equipment. Currently, PERS products and services are offered through health care providers or directly to subscribers for a monthly
fee, typically paid on a private pay basis, or in some states through Medicaid programs.

Business Developments

On January 18, 2006, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Koninklijke Philips Electronics N.V.
(Philips) and DAP Merger Sub, Inc., an indirect, wholly owned subsidiary of Philips (Merger Sub), pursuant to which Merger Sub will merge with and into Lifeline, with Lifeline continuing after the merger as the surviving
corporation and as an indirect, wholly owned subsidiary of Philips (the Merger). At the effective time of the Merger, each issued and outstanding share of our common stock, par value $0.02 per share, will be converted into the right to
receive $47.75 in cash. Also, at the effective time of the Merger, each outstanding option to purchase shares of our common stock, whether vested or unvested, will be terminated and cancelled in consideration for a cash payment equal to the product
of (1) the excess of $47.75 over the exercise price for the option multiplied by (2) the number of shares subject to the option.

The
consummation of the Merger is subject to, among other things, approval of our shareholders and other customary closing conditions. The Merger has been unanimously approved by our Board of Directors and will be considered by our shareholders at a
special meeting of shareholders to be held on March 21, 2006. If our shareholders approve the Merger, we would expect the closing of the Merger to occur soon thereafter. If the Merger is consummated, our common stock would be delisted from the
Nasdaq National Market and we would cease to be a publicly traded company.

Our Products and Services

PERS Service Offerings

Our PERS offerings utilize a home
communicator, which is primarily either the Lifeline CarePartner Telephone 9500 with Reminders or Lifeline CarePartner 6700 Communicator, both of which connect to the telephone line in a subscribers home and a wireless personal help button



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worn by the subscriber around the neck or on the wrist. By pressing the personal help button, the subscriber initiates an automated digital telephone signal
to one of our centralized monitoring facilities or, in some cases, a monitoring facility maintained by one of our customers. These calls are answered by a monitoring professional through immediate voice-to-voice communication with the subscriber.

We offer four service offerings allowing our customers to choose their level of financial investment in, and resource commitment to, their Lifeline
program. These service offerings are described in the following table:



|                                 |  |                                                                         |  |                                                                                                                        |  |                                                                                    |  |                                                            
|-------------------------------- |  | ----------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|Offering                         |  | Target Customer                                                         |  | Product Description                                                                                                    |  | Services Description                                                               |  | Payor                                                      
|                                 |  |                                                                         |  |                                                                                                                       
|Lifeline OneSource               |  |    Customer outsources monitoring and administrative services          |  |    Subscriber obtains use of home communicator and personal help button from Lifeline as part of a single monthly
fee |  |    Lifeline provides monitoring service and administers the PERS program          |  |    Subscriber, family caregiver or state Medicaid programs
|                                 |  |                                                                         |  |                                                                                                                       
|Lifeline Monitoring Services     |  |    Customer outsources monitoring, but retains administrative services |  |    Customer purchases home communicator and personal help button from Lifeline                                        |  |    Lifeline provides monitoring service and customer administers the PERS program |  |    Health care customer                                   
|                                 |  |                                                                         |  |                                                                                                                       
|Lifeline Product and Service Fee |  |    Customer outsources monitoring, but retains administrative services |  |    Customer rents home communicator and personal help button from Lifeline                                            |  |    Lifeline provides monitoring service and customer administers the PERS program |  |    Health care customer                                   
|                                 |  |                                                                         |  |                                                                                                                       
|Lifeline Site Monitoring         |  |    Customer retains monitoring and administrative services             |  |    Customer purchases home communicator, personal help button and monitoring platform from Lifeline                   |  |    Customer provides monitoring service and administers the PERS program          |  |    Health care customer                                   

Lifeline OneSource. This is our full-service offering which allows community hospitals and other health
care providers that do not have the resources or desire to provide the services and administrative functions associated with a PERS program to offer the complete Lifeline program to their patients and clients. In a Lifeline OneSource
offering, we directly provide subscribers with a comprehensive service offering, which includes monitoring and the use of a Lifeline-owned home communicator for a single monthly fee. In addition, we manage the day-to-day administrative tasks of our
service for the customer, including managing referrals, sales and marketing efforts, subscriber inquiries, subscriber enrollment, service installation and billing and collections. Our average monthly revenue per Lifeline OneSource subscriber
is approximately three times larger than the average monthly revenue per subscriber for our Lifeline Monitoring Service. Lifeline OneSourcesubscribers pay a single monthly fee directly to us that includes use of the home communicator
and the monitoring service.

Lifeline Monitoring Services. This offering provides our customers monitoring services for their subscribers
through our monitoring facilities, and our customers typically retain all other responsibilities for the operation of the Lifeline program. The customer typically purchases



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home communicators and personal help buttons from us which it then rents to subscribers. We charge the customer a monthly per-subscriber fee for the
monitoring service, which is then passed on by the customer to the subscriber. Monthly fees charged to the subscriber are determined by the individual health care customer.

Lifeline Product and Service Fee. This offering is a variation of our Lifeline Monitoring Servicesprogram and is designed for customers that want a convenient way to offer our service, but do not have
the funds available to purchase home communicator equipment or replace existing outdated equipment. Under this program, we provide all of the services associated with the Lifeline Monitoring Servicesoffering; however, the home communicator
and personal help button are rented, rather than sold, to the customer in exchange for a monthly fee.

Lifeline Site Monitoring. This offering is
tailored to customers who choose to monitor their own subscribers locally, rather than through our centralized monitoring facilities. For these customers, we sell monitoring platforms, which consist of one or more personal computers with preloaded
software that is designed to answer calls from our home communicators, as well as personal help buttons and home communicators.

Senior Living
Offering

Our senior living products are installed in senior living facilities and include the following:



| |  |  | an emergency response center, consisting of one or more personal computers with preloaded software, which enables the senior living facility to monitor, perform administrative
functions and receive and archive all system activity;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | monitoring software, which helps the senior living facility administrator manage monitoring activity, including the documentation of events, identification of resident call trends,
inventory management and maintenance programs and compliance with Health Insurance Portability and Accountability Act of 1996, or HIPAA, requirements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a speakerphone or telephone with reminder service for installation in residents homes or rooms; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | other accessories, including body motion activation devices for physically-disabled individuals.
| | - |  | ------------------------------------------------------------------------------------------------

Our senior living offering consists primarily of product sales. We have established a senior living division with a dedicated sales and marketing team, engineering group and technical support and installation
organization to implement our senior living strategy.

Centralized Monitoring Facilities

We have two monitoring facilities located in Framingham, Massachusetts to service our U.S. subscribers and monitoring facilities located in Montreal, Quebec and Toronto,
Ontario to service our Canadian subscribers. We believe the centralized location of these facilities is critical to our



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ability to control, review and assess the quality of our monitoring services as well as hire and train monitoring professionals.

Our monitoring facilities utilize a sophisticated, customized and scalable computer and telecommunications hardware and software platform to identify, track, route and
respond to subscriber calls. Our technology platform receives incoming calls from our subscribers home communicators, matches and retrieves the appropriate subscriber record from our centralized database and routes both the subscriber call and
the related record to one of our highly-trained monitoring professionals. Our monitoring capabilities are based on a redundant architecture so as to substantially reduce the likelihood of total system failure and to enable us to efficiently transfer
incoming calls to one facility in the event of an interruption of service at another facility. Further redundancy is achieved by equipping each of our monitoring facilities with back-up power generators. We respond to an average call volume of
approximately 25,000 calls per day.

Our monitoring platform creates comprehensive call logs and records, providing valuable data, such as the frequency
and nature of subscriber calls, as well as the peak times when our call capacity will be most tested. These data allow us to tailor our training programs to those subscriber calls a monitoring professional will most likely receive and develop
efficient and effective response protocols. In addition, these data better enable us to manage and staff our monitoring facilities, reducing the likelihood of over-staffing in off-peak hours, resulting in lower labor and overall operating costs of
the monitoring facility.

Sales and Marketing

We
employ approximately 215 sales and marketing professionals located at our corporate offices in Framingham, MA, and at our offices in Toronto, ON, Denver, CO, Stafford, TX, Concord, CA, Roswell, GA and Lawrenceville, GA as well as out of home offices
across the United States and Canada.

Our sales and marketing team trains customers to manage their Lifeline program, develop and implement effective
marketing plans, and improve customer service skills and referral market development. Typical marketing plans address the introduction of our services to the prospective customers key decision makers and the development of local referral
networks of elder care and other service organizations to position our services as part of a continued care plan. Our personnel also provide continuing operational support, ongoing consultation, and program evaluations.

Customers

As of December 31, 2005, our PERS customer base
included approximately 2,500 community hospitals, health care providers and other large national organizations serving the needs of seniors, each of which co-brands with us to offer our service directly to subscribers.

In addition, approximately 11% of our services revenue is derived from PERS subscribers whose service is paid for, in full or in part, directly by state Medicaid
programs.

As we further expand our senior living division and penetrate that industry, we anticipate our



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customer base to include increasing numbers of senior and assisted living facilities offering our service directly to their residents. These facilities range
in size from smaller, locally-managed group homes, to larger, nationally-managed continuing care retirement communities. As of December 31, 2005, our senior living products were installed in approximately 1,500 senior living facilities
throughout the United States and Canada.

Manufacturing and Suppliers

We design, develop, manufacture, assemble and/or customize our own products and software, including our personal help buttons, home communicators, U.S. monitoring software and our products sold to senior living
facilities, at our headquarters located in Framingham, Massachusetts. We believe manufacturing our own products and developing our own monitoring software enables us to consistently offer a service meeting rigorous quality and reliability standards.
We offer a two-year warranty on our home communicators and a three-year warranty on our personal help buttons.

We also rely on outside vendors for some of
our components, including the plastic casings for our home communicators and personal help button, circuit boards, batteries and software applications used in our Lifeline Site Monitoringand senior living offerings. All of our PERS vendors
are required to adhere to our rigorous manufacturing quality standards and, from time to time, are subject to onsite inspections from our manufacturing team. Although we believe our components may be purchased from a number of qualified vendors, we
may be subject to manufacturing delays if the vendors are unable to provide us with necessary components as a result of process difficulties, component shortages or for other reasons. Any such delay could have a material adverse effect on our
business and, in particular, our manufacturing capabilities.

Product Engineering and Development

We design our own equipment, including the home communicators and personal help buttons, at our facility located in Framingham, Massachusetts. Our product engineering and
development efforts are primarily focused on developing new products and enhancing existing PERS products, such as improvements to our personal help buttons and increasing the range of communication between our home communicator and personal help
button.

In addition, we also focus substantial product engineering and development efforts on our initiatives in the senior living industry. These efforts
include integration of our existing technologies with acquired technologies.

Product engineering and development expenses were approximately $2.4 million,
$2.1 million and $1.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Competition

We are the leading provider of PERS programs in the United States and Canada. As of December 31, 2005, we monitored approximately 469,000 subscribers with
approximately 75,000 additional individuals monitored independently by community hospitals and other health care providers on monitoring platforms purchased from us. We estimate that approximately 40



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to 50 companies, operating primarily on a local or regional basis, are providers of PERS products and services competitive with those offered by us. We
believe these competitors service, in the aggregate, approximately 350,000 subscribers of a total estimated served subscriber base of 900,000. In addition, there are a number of other companies providing non-PERS monitoring and other related
services to their customers. If these or other companies enter the PERS industry, they may have a competitive advantage by having greater financial, sales and marketing, engineering and manufacturing resources, a larger installed base of existing
customers and economies of scale not available to us.

We believe the competitive factors our customers and subscribers consider when choosing a PERS
provider include the quality of the monitoring service, product performance and reliability, customer support and service, value and reputation and experience in the industry. We believe we compete favorably with regard to each of these factors.

Patents, Licenses and Trademarks

We consider our
proprietary know-how with respect to the development and marketing of our PERS products and providing our service to be a valuable asset. We believe continued development of new services and products and the improvement of existing services and
products are important in maintaining a competitive advantage.

Although we own numerous patents and patent applications in the United States and Canada,
we do not believe our business as a whole is or will be materially dependent upon the protection afforded by our patents.

Our Lifeline trademark and
servicemark are registered by the United States Patent and Trademark Office and in some foreign countries. We also have a number of other trademarks for our products.

Government Regulation

Our products have received an equipment authorization from the Federal Communication
Commission, or FCC, and comply with FCC regulations pertaining to radio frequency devices (Part 15) connected to the telephone system (Part 68). Our equipment has also been certified by Industry Canada. As new models are developed, they are
submitted to appropriate agencies for registration or certification as required. Our services are not required to be licensed under any FCC regulations or the Communications Act in the United States or any Industry Canada regulations or the Radio
Communication Act in Canada. We rely on unlicensed spectrum for communications between the personal help button and the home communicator, and communications between the subscriber and the monitoring facility take place over the subscribers
pre-existing telephone line. Our home communicator products are registered with the Food and Drug Administration, or FDA.

In the United States,
collection, use and disclosure of individually identifiable health information is regulated under laws such as HIPAA, which impose health care transaction, data privacy and data security regulatory standards and similar state laws. Similarly,
federal and provincial laws in Canada regulate our collection, use and disclosure of personal information. As a recipient of



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reimbursement payments under state government-funded health care programs such as Medicaid, our relationships with health care providers, institutions and
other businesses are affected by these programs eligibility, coverage and payment policies and are subject to fraud and abuse, anti-referral and anti-kickback laws and regulations. In addition, much of our business is conducted under
contractual service arrangements with hospitals and other health care providers that are, in turn, required by HIPAA or other applicable laws or regulations to impose certain privacy, security and transaction requirements through their contracts
with us. We continue to invest in our HIPAA-compliant data entry, billing, subscriber management and cash application system, which is fully integrated in our monitoring platform.

Our contracts with government-administered programs may be subject to termination at the election of the government or unilateral changes in coverage policies and payment rates.

Employees

As of December 31, 2005, we had 829 full-time
employees and 152 part-time employees. None of our employees is represented by a collective bargaining unit, and we believe our relations with our employees are good.

Backlog/Seasonality

Because of the nature of the industry in which we operate, we endeavor to minimize the time that
elapses from the receipt of a purchase order to the date of delivery of our products and services. Accordingly, our backlog as of the end of any period represents only a small portion of our expected sales for the succeeding period and is not
significant in understanding our business. We do not believe the industry in which we operate is seasonal.

General

Our wholly-owned subsidiary, Lifeline Systems Company, was organized in Massachusetts in 1974. In December 2004, we completed an internal corporate reorganization for
purposes of creating a holding company structure. As a result, holders of the common stock of Lifeline Systems Company exchanged their shares for shares of our common stock. Our principal offices are located at 111 Lawrence Street, Framingham,
Massachusetts 01702. Our corporate Internet address is www.lifelinesys.com and copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, are made available through our
website, free of charge, as soon as reasonably practicable following our electronic filing or furnishing of such materials to the Securities and Exchange Commission.



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|ITEM 1A. | Risk Factors
|-------- | ------------

The following important factors, among others, could
cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time.

If the proposed Merger with Philips is not completed, our business and stock price will be adversely affected.

On January 18, 2006, we entered into the Merger Agreement with Philips and Merger Sub, pursuant to which Merger Sub will merge with and into Lifeline, with Lifeline
continuing after the Merger as the surviving corporation and as an indirect, wholly owned subsidiary of Philips. At the effective time of the Merger, each issued and outstanding share of our common stock will be converted into the right to receive
$47.75 in cash. Also, at the effective time of the Merger, each outstanding option to purchase shares of our common stock, whether vested or unvested, will be terminated and cancelled in consideration for a cash payment equal to the product of
(1) the excess of $47.75 over the exercise price for the option multiplied by (2) the number of shares subject to the option.

The consummation
of the Merger is subject to, among other things, approval of our shareholders and other customary closing conditions. The Merger has been unanimously approved by our Board of Directors and will be considered by our shareholders at a special meeting
of shareholders to be held on March 21, 2006. If our shareholders approve the Merger, we would expect the closing of the Merger to occur soon thereafter.

We expect to incur expenses of approximately $1.6 million related to the Merger. These Merger-related expenses include investment banking fees and legal and professional fees. A contingent termination fee of $21.0 million is payable by us
to Philips in the event that the Merger Agreement is terminated as a result of certain events detailed in the Merger Agreement.

Our business and stock
price will be adversely affected if the Merger is not completed as a result of several factors, including, but not limited to, the following:



| |  |  | the stock price payable by Philips represents a premium to the price at which our shares were trading before the announcement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | our customers, prospective customers and investors in general may view this failure as a poor reflection on our business or prospects;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | customers or prospective customers may have delayed their purchase commitments until the Merger was complete and the product integration plan and roadmap was clarified or may have
chosen to not purchase at all;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | certain of our suppliers and business partners may have sought to change or terminate their relationships with us as a result of the proposed Merger;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our key employees may have sought other employment opportunities; and
| | - |  | ---------------------------------------------------------------------



| |  |  | our management team may have been distracted from day-to-day operations as a result of the proposed Merger.
| | - |  | -----------------------------------------------------------------------------------------------------------



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If our recent marketing initiatives are not effective, we may not grow as we anticipate.

We have undertaken a number of marketing initiatives to increase our service and other revenue, including a direct marketing campaign directed at health care providers
likely to refer our services to their patients, a direct-to-subscriber campaign to target caregivers as purchasers of our service on behalf of their parents and other relatives, and recent initiatives focused on the senior living industry and
e-commerce. We have allocated, and expect to continue to allocate, significant resources and capital expenditures to support these efforts and anticipate that our future growth will depend, in part, on the success of these initiatives. If these
marketing efforts are unsuccessful, we may not grow as anticipated, or at all, and our results of operations may be harmed.

If our customers do not
successfully manage and grow their local Lifeline programs, or if we are unable to maintain and build these customer relationships, the distribution of our products and services will be materially and adversely affected and we could experience
decreased sales or slower than expected growth in revenues.

We rely primarily on community hospitals and other health care providers to sell and
distribute our products and services to subscribers. These customers may not seek to grow their Lifeline subscriber bases as actively as we might if we were selling our service directly to subscribers due to their limited resources or because our
customers, which are often non-profit institutions, may have reasons for implementing a Lifeline program that could be different from ours. Limited or ineffective marketing of our products and services by our customers could lead to decreased sales
or slower than expected growth in revenues.

If we fail to maintain our leadership position in the PERS industry, our sales and competitive position
will suffer and our results of operations will be harmed.

Our future success will depend in large part on our ability to maintain our leadership
position in the PERS industry. We must continue to enhance our current product and service offerings, achieve greater market penetration among our target subscribers and expand into complementary businesses such as the senior living industry. If we
fail in these endeavors, our revenues may not grow as we anticipate or may decline.

Our future growth is dependent, in part, on acquiring other PERS
providers and businesses strategic to us. If we are unable to identify and acquire suitable acquisition candidates, our future growth may be curtailed.

One of our principal growth strategies is to expand our business through acquisitions of PERS providers and other complementary businesses that we believe are strategic, such as businesses providing products and services to the senior
living industry. If we are unable to continue to identify, attract and close future acquisitions, our growth may slow, and our subscriber base and revenues may decline. In addition, negotiations for acquisitions could result in significant diversion
of management time, as well as substantial out-of-pocket costs.

If we acquire other businesses, we may be unable to effectively integrate them with
our business, or we may not realize the anticipated financial and strategic goals for any such transactions.

Even if we are successful in
identifying and acquiring businesses strategic to us, these activities involve a number of risks, including:



| |  |  | we may find the acquired business does not further our business strategy, that we overpaid for the company or the economic assumptions underlying our acquisition decision have
changed or were not accurate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | difficulties integrating the acquired companies products and services and subscriber base with our existing PERS and senior living offerings;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties integrating the operations, technology or monitoring platform and personnel of an acquired company, or retaining the key personnel of the acquired company critical to
its continued operation and success;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | disruption of our ongoing business and diversion of managements attention by transition or integration issues and the complexity of managing geographically or culturally
diverse enterprises;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties maintaining uniform standards, controls, procedures and policies across locations and businesses;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | litigation by terminated employees or third parties; and
| | - |  | --------------------------------------------------------



| |  |  | problems or liabilities associated with product quality, technology and legal contingencies relating to the acquired business or technology, such as intellectual property matters.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These and other factors could have a material adverse effect on our results of operations, particularly in the case of a larger acquisition
or multiple acquisitions in a short period of time. Acquisitions may also have a negative effect on our earnings per share. If we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we
could be required to use a substantial portion of our available cash to consummate any acquisition or investment. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options, stock appreciation rights
and warrants, existing shareholders may be diluted and earnings per share may decrease. In addition, acquisitions and investments may result in the incurrence of debt, large one-time write-offs, such as of acquired in-process research and
development costs, and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

Our Canadian operations subject us to risks that could harm our business.

Our Canadian operations, which represented approximately 11% of our total revenues for the year ended December 31, 2005 subject us to risks, including:



| |  |  | foreign exchange fluctuations;
| | - |  | ------------------------------



| |  |  | changes in and differences between domestic and foreign regulatory requirements; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------

Failure to adequately address any
of these risks could adversely affect our ability to operate our Canadian facilities.

If we fail to adapt our products and services to changes in
technology or in the marketplace, we could lose existing customers and subscribers and be unable to attract new business.

Our business depends, in
part, on our ability to enhance our current products and to develop new services and products that keep pace with continuing technological changes, evolving industry standards, changing customer and subscriber preferences and new service and product
introductions by our competitors. Although we believe the introduction of products utilizing



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new, non-telephony-based communications may be limited by the availability of such communications technologies in the homes of our target market, others may
be successful in introducing monitoring services through other communications technologies. If we are not successful in developing, marketing and selling new services and products that meet changing demands, our business may be harmed.

We currently face and expect to continue to face competition in our industry.

Although we believe we are the leader in the PERS industry, there are a large number of smaller providers, primarily at the local or regional level, who we compete with for customers and subscribers. In addition,
there are a number of other companies providing non-PERS monitoring and other related services to their customers. If these or other companies enter the PERS industry, they may have a competitive advantage by having greater financial, sales and
marketing, engineering and manufacturing resources, a larger installed based of existing customers and economies of scale not available to us.

We
derive a portion of our revenue from government-funded health care programs such as Medicaid. If these programs tighten eligibility standards or coverage policies or if current reimbursement rates are reduced, we may lose subscribers and our
revenues may decline.

As of December 31, 2005, less than 10% of our centrally-monitored subscribers were billed under state Medicaid
contracts, representing approximately 8% of our total revenue for the year then ended. As we pursue our acquisition strategy, we anticipate that the proportion of our revenues from Medicaid programs may increase due to the large number of Medicaid
subscribers associated with the smaller locally-operated PERS providers that are acquisition prospects. If government-funded health care programs tighten their program eligibility standards, impose new coverage restrictions or reduce or eliminate
payments for our services, these subscribers may not have the financial resources to continue our service. In addition, it is typically more difficult to collect accounts receivable from sales to Medicaid programs than from private payors.

Our business is subject to U.S. state and federal government regulation, as well as Canadian regulation, and may be subject to additional
regulations in the future. If we fail to comply with applicable regulations, our revenue, operating margin and profitability could suffer.

Our
monitoring equipment is registered with the FCC and the FDA in the United States and certified by Industry Canada in Canada. Our revenue, operating margin and profitability could be adversely affected by new laws and/or regulations, changes in the
interpretation of existing laws and/or regulations, reductions in funding or imposition of additional limits on reimbursements. Furthermore, as a provider of services under government-funded health care programs, we are subject to fraud and abuse,
anti-referral and anti-kickback laws and regulations that impose stringent limitations on our compensation, consulting, marketing and other business relationships with health care providers and other businesses.

In addition, our business is affected by HIPAA, which imposed comprehensive national standards for privacy, security and electronic transactions involving individually
identifiable health information. Since our government services business conducts electronic health claim transactions relating to the coordination of health care treatment for individual persons, it may be covered by the HIPAA privacy, security and
transaction standards. Much of our business is conducted under contractual service arrangements with hospitals and other health care providers that are, in turn, required by HIPAA to impose certain privacy, security and transaction



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requirements through their contracts with us. The HIPAA regulations define minimum national standards, but individual states are permitted to adopt and
enforce more stringent health data privacy and security rules.

Because we are engaged in commercial activities in Canada, our business is subject to
Canadian privacy legislation. In addition, we must comply with provincial health information legislation as a result of the individually identifiable health information of our subscribers that we maintain. These federal and provincial laws require
us to obtain consent to collect, use and disclose personal information and to implement procedures to keep this information secure.

Variation in
regulatory requirements among different jurisdictions may cause us to incur significant compliance costs. Violations of these laws by us could have a material and adverse impact on our business and may subject us to substantial fines and penalties.

If we lose the services of one or more members of our executive management team or other key employees, we may not be able to execute our business
strategy.

Our future success depends to a significant extent upon the continued service of our executive management team and other key employees.
The loss of the services of one or more of these individuals could harm our business and our ability to execute on our business strategy.

If we are
unable to attract, train and retain qualified monitoring personnel, our ability to provide high quality monitoring services and continue to develop and successfully market our service could be harmed.

We believe our business depends, in part, on the talents and efforts of our monitoring personnel, who are key to delivering high quality, caring monitoring services. As a
result, our future growth is dependent on our ability to identify, attract, train, retain and motivate these persons. Any of our current employees may terminate their employment with us at any time. We may not be able to hire or retain the personnel
necessary to fulfill our monitoring function. The loss of a significant portion of our monitoring personnel would materially and adversely affect our business and ability to deliver high-quality monitoring services to our subscribers.

If our monitoring products fail or contain design or other defects, or if our monitoring personnel do not appropriately respond to a call, our reputation may be
damaged, we may lose subscribers and we may have significant damage claims against us.

Subscribers rely on our monitoring equipment and services in
emergency situations. Our monitoring products may contain design defects or fail to operate or transmit in an emergency situation. In addition, after a subscriber pushes their personal help button, we rely on wireless signals to initiate the call
from the home communicator attached to the subscribers telephone. The wireless signals that we use may be subject to interference and the frequencies may become congested over time. Additionally, although our monitoring professionals are
highly trained in emergency response and are required to follow a response protocol established by us, these employees must exercise judgment about how best to respond to each particular emergency. In the event our products fail to operate or
transmit properly, or if our monitoring personnel do not appropriately respond to a call, such as by failing to send an appropriate responder to the subscribers home, especially in an emergency situation, we may suffer significant adverse
consequences, including:



| |  |  | negative publicity and damage to our reputation;
| | - |  | ------------------------------------------------



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| |  |  | loss of customers and subscribers;
| | - |  | ----------------------------------



| |  |  | increased service and warranty expenses;
| | - |  | ----------------------------------------



| |  |  | diversion of our product engineering, management and other resources; and
| | - |  | -------------------------------------------------------------------------



| |  |  | liability for breach of warranty, product liability and other claims against us and payment of damages, which could be significant as our products and services are used to respond
to emergency situations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If we experience interruptions or failures in our centralized monitoring facilities, we may lose subscribers
or have significant damage claims against us.

We have two monitoring centers located in Framingham, Massachusetts to service U.S. subscribers, as
well as two additional monitoring centers, in Toronto, Ontario and Montreal, Quebec, to service Canadian subscribers. We believe that our fully-redundant second U.S. monitoring facility adds significantly to our disaster recovery capabilities as it
equips us with the stability, redundancy and scalability to maintain a high level of fault tolerance. Although we chose to locate our two U.S. monitoring centers close to one another after analysis as to the likely causes of center failure, the
close proximity of these two centers may mean that failures caused by regional emergencies, such as an earthquake, storm or electrical outage, may cause both of our U.S. monitoring facilities to fail. In the event that one or more of these
monitoring centers fails, we may not be able to respond to subscriber emergencies, possibly for an extended period of time. Failure of our ability to answer subscribers calls during an emergency could expose us to significant liability claims,
negative publicity and loss of subscribers.

We have from time to time been named as a defendant in lawsuits alleging damages based on our response to
subscriber calls. We seek to manage our product liability risk through contractual limits on liability and damages, and by carrying comprehensive liability insurance. However, the contractual limits may not be enforceable in all jurisdictions or
circumstances. A successful claim may be made for damages which exceeds the coverage under any insurance policy. In the future, our insurance costs may become more expensive and, as a result, additional insurance may not be available on acceptable
terms, or at all.

If there is an unauthorized disclosure of customer data, whether through a breach of our computer systems or otherwise, we could
be exposed to costly litigation or we could lose customers.

We store sensitive subscriber data on our computer networks, including names,
addresses, credit card information and health information. If our network security is compromised by a third party, or such data are otherwise misappropriated, we could be subject to civil liability claims, regulatory enforcement actions under laws
such as HIPAA or similar state laws, loss of reputation and loss of customers



|ITEM 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|ITEM 2. | Properties
|------- | ----------

Our corporate headquarters is located in Framingham, MA
and consists of an 84,000 square foot facility. This facility houses our management team as well as our primary monitoring center for



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U.S.-based subscribers. We lease this facility under a fifteen-year lease expiring in 2013, with two five-year renewal options. Our average base rental
payment under this lease is approximately $941,000 per year.

We lease a second facility in Framingham, MA, consisting of 35,000 square feet, which houses
our second U.S. monitoring facility, some of our marketing personnel, and the Lifeline Learning and Development Center. Our lease expires in 2012 and has two five-year renewal options. Our average base rental payment under this lease is
approximately $251,000 per year.

We also lease facilities in other locations to support our field and Canadian operations.



|ITEM 3. | Legal Proceedings
|------- | -----------------

We are not a party to any material legal
proceedings.



|ITEM 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.

PART II



|ITEM 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

Our common stock is traded on the Nasdaq National Market under the symbol LIFE. On February 28, 2006, we had 460 registered shareholders.

The following table sets forth the high and low sales prices of our common stock for each quarter during the last two full fiscal years.



|     |  |                                           |  |      |       |     |   |      
|---- |  | ----------------------------------------- |  | ---- | ----- | --- | - | -----
|     |  |                                           |  | High |       | Low
|2006 |  | First Quarter (through February 28, 2006) |  | $    | 47.68 |     | $ | 36.77
|     |  |                                           | 
|2005 |  | First Quarter                             |  | $    | 31.65 |     | $ | 24.00
|     |  | Second Quarter                            |  |      | 35.13 |     |   | 29.54
|     |  | Third Quarter                             |  |      | 34.73 |     |   | 30.62
|     |  | Fourth Quarter                            |  |      | 37.91 |     |   | 31.48
|     |  |                                           | 
|2004 |  | First Quarter                             |  | $    | 21.58 |     | $ | 16.53
|     |  | Second Quarter                            |  |      | 24.40 |     |   | 18.50
|     |  | Third Quarter                             |  |      | 24.98 |     |   | 18.76
|     |  | Fourth Quarter                            |  |      | 29.16 |     |   | 21.50

During the periods presented, we have not paid or declared any cash dividends on our common stock. While the
payment of dividends is within the discretion of our Board of Directors, we presently expect to retain all of our earnings for use in financing our future growth.



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|ITEM 6. | Selected Financial Data
|------- | -----------------------



|                                            |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |       
|------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------
|                                            |  | Years Ended December 31,
|(In thousands, except per share data)       |  | 2005                     |         | 2004 |   | 2003    |  | 2002 |         | 2001
|OPERATING RESULTS                           |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |       
|Total revenues                              |  | $                        | 151,152 |      | $ | 130,549 |  | $    | 116,159 |      | $ | 105,008 |  | $ | 96,560
|Income from operations                      |  |                          | 23,525  |      |   | 19,098  |  |      | 16,870  |      |   | 13,571  |  |   | 10,561
|Income before income taxes                  |  |                          | 24,663  |      |   | 19,555  |  |      | 17,098  |      |   | 13,550  |  |   | 10,223
|Net income                                  |  |                          | 18,237  |      |   | 12,499  |  |      | 10,259  |      |   | 8,130   |  |   | 6,320 
|Net income per share, diluted               |  | $                        | 1.24    |      | $ | 0.88    |  | $    | 0.76    |      | $ | 0.60    |  | $ | 0.49  
|Diluted weighted average shares outstanding |  |                          | 14,652  |      |   | 14,160  |  |      | 13,539  |      |   | 13,450  |  |   | 12,962
|                                            |  |                          |         |      |  
|FINANCIAL POSITION1                         |  |                          |         |      |   |         |  |      |         |      |   |         |  |   |       
|                                            |  | December 31,            
|                                            |  | 2005                     |         | 2004 |   | 2003    |  | 2002 |         | 2001
|Working capital                             |  | $                        | 42,229  |      | $ | 48,056  |  | $    | 33,496  |      | $ | 19,548  |  | $ | 15,018
|Total assets                                |  |                          | 151,822 |      |   | 129,048 |  |      | 101,467 |      |   | 83,660  |  |   | 76,989
|Long-term obligations2                      |  |                          | 2,090   |      |   | 3,270   |  |      | 1,004   |      |   | 6       |  |   | 5,000 
|Stockholders equity                        |  |                          | 121,993 |      |   | 97,741  |  |      | 79,226  |      |   | 62,793  |  |   | 52,209



|1 | There were no cash dividends paid or declared during any of the periods presented.
|- | ----------------------------------------------------------------------------------



|2 | Excludes current portion of long-term obligations related to the assignment of our lease portfolio. See Note D to the Consolidated Financial Statements included in
Item 8 below.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All share and per share amounts have been adjusted to reflect a two-for-one stock split, in the form of a stock dividend
of one additional share for each share held, effected by us on December 17, 2003.



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|ITEM 7. | Managements Discussion and Analysis of Results of Operations and Financial Condition
|------- | -------------------------------------------------------------------------------------

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), with respect to, among
other things, our future revenues, operating income, or earnings per share. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to
identify forward-looking statements. There are a number of factors that may cause our actual results to vary materially from those forecast or projected in any such forward-looking statement. These factors include, without limitation, those set
forth above under the caption Risk Factors. Our failure to successfully address any of these factors could have a material adverse effect on our future results of operations.

Executive Overview

We provide 24-hour personal emergency response monitoring services and related products to
subscribers, primarily elderly or disabled individuals with medical or age-related conditions, who wish to continue to live independently in their home. We were instrumental in pioneering the PERS industry with our inception in 1974 and have been
the leading provider of PERS products and services for over 30 years. Initially, we were primarily an equipment business predicated on selling PERS products to community hospitals and other health care providers seeking to operate local PERS
programs for their patients. Due to industry trends primarily relating to economic pressures on these hospitals to reduce costs, our business evolved into primarily a services-based business, providing PERS products and monitoring services as a
unified service offering.

Our PERS products and services consist principally of a home communicator connected to the telephone and a wireless personal
help button which, when activated, initiates an automated digital telephone signal to one of our centralized monitoring facilities. Our monitoring technology platform retrieves the subscribers record from our centralized database and routes
the call to one of our highly-trained monitoring professionals. Our monitoring professionals follow a prescribed response protocol to quickly assess the nature of the call through immediate two-way, voice-to-voice communication and provide a prompt,
appropriate response in a respectful and compassionate manner. This response may consist of contacting local ambulance, police or fire services or family, friends and neighbors. As of December 31, 2005, we monitored approximately 469,000 PERS
subscribers in the United States and Canada. Approximately 75,000 additional individuals are monitored independently by hospitals and other health care providers on monitoring platforms purchased from us.

In 2003, we formed our senior living division to provide complementary PERS products to assisted living and other senior living facilities as a replacement for, or
upgrade from, existing emergency call systems. We believe our senior living products are superior to existing call systems in these facilities, which are typically operated by a pull-cord and do not allow for immediate two-way, voice-to-voice
communication. Our senior living products include a personal help button, home communicator and monitoring platform with preloaded, customized monitoring software for use by the facility. As of December 31, 2005 our senior living products were
installed in approximately 1,500 senior living facilities in all 50 states, which monitored approximately 120,000 residents using our monitoring platforms.

We generate services revenue through recurring monthly fees by billing subscribers or their families who receive our Lifeline OneSource (OneSource) offering, or by billing customers that outsource their



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monitoring activities to us.In addition, we generate revenue from product sales in connection with our other PERS offerings, as well as product sales
to senior living facilities. Our PERS offerings are generally private pay offerings, although in some cases we receive reimbursement from government-funded health care programs, such as Medicaid, which we administer through our small
government services division.

Historically, we have grown our PERS business through sales and marketing efforts focused on educating health care
professionals about the benefits of PERS programs to their organizations and the patients they serve. In addition, we have grown our subscriber base by acquiring other PERS providers, some of which were former customers. We are growing our senior
living division through direct sales and marketing efforts and strategic acquisitions of products and technology. We plan to continually evaluate potential acquisition candidates that fit within our growth strategy.

RESULTS OF OPERATIONS

2005 Compared
with 2004

Total revenues for the year ended December 31, 2005 increased approximately 16% to $151.2 million, from $130.5 million recorded in 2004.

Services Revenue

Services revenue increased
approximately 16% for the year ended December 31, 2005 to $119.6 million from $103.2 million for the year ended December 31, 2004. The increase in our services revenue is mainly a result of the growth of our monitored subscriber base by
11% to approximately 469,000 subscribers as of December 31, 2005 from approximately 423,000 subscribers as of December 31, 2004. Our service to approximately 600 subscribers was interrupted as a result of the hurricanes that hit the Gulf
Cost during the third quarter; however, these events did not have a material impact on our revenue results for 2005 nor are they expected to have a material impact on our revenue results in the future. The increase in our services revenue was also a
result of our continued improvement in both the average monthly revenue per subscriber and the lifetime revenue per subscriber we generate.

Our ability to
sustain this level of services revenue growth depends on our ability to continue with enhancements in service delivery, retain subscribers for longer periods of time, develop and implement strategies to increase the revenue each subscriber
generates, expand the market for our personal response services and focus on health care channel and other initiatives to help grow our and our customers subscriber base. We believe that the high quality of our services, the quality of our
equipment, and our commitment to providing caring and rapid response to the at-risk elderly will be factors in meeting our growth objectives.

Net
Product Sales

Net product sales increased approximately 18% to $31.3 million for the year ended December 31, 2005, from $26.5 million in the prior
year. The increase is primarily attributable to the approximate 59% growth in product revenue we generated from our senior living business. We were also successful in encouraging our hospital programs to grow their Lifeline programs as well as
upgrade their subscribers PERS products, resulting in additional health care product sales. We believe that sales to our senior living customers may continue to mitigate or exceed some of the otherwise expected decline in PERS equipment sales
in periods subsequent to December 31, 2005.



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Cost of Services

We
believe that service gross margin (services revenue less cost of services) is a key factor of our profitability. We have focused on continued improvement in our service gross margin in part by undertaking cost reduction initiatives. These
initiatives include improved productivity in our monitoring facilities, greater efficiency of subscriber enrollment and leveraging the capabilities of our CareSystem monitoring platform.

Cost of services, as a percentage of services revenue, improved to 45% for the year ended December 31, 2005 from 48% for the year ended December 31, 2004. On a dollar basis, cost of services increased by
approximately $4.9 million for the year ended December 31, 2005 as compared to the prior year mainly as a result of continued growth in the number of subscribers serviced under our OneSource offering. This increase in the number of OneSource
subscribers resulted in an increase in related expenses such as depreciation of Lifeline-owned home communicators provided to OneSource subscribers as part of that service, certain operational costs, including data entry, customer service,
distribution, administration, sales and support, and increased costs for our government services division. Despite the dollar increase, our ability to leverage our fixed cost base has resulted in continued improvements in our service gross margin
and we expect to continue with our service gross margin initiatives in periods subsequent to 2005.

Cost of Product Sales

For the year ended December 31, 2005, cost of product sales as a percentage of net product sales was approximately 36% as compared to 35% for the year ended
December 31, 2004. The increased cost percentage was primarily due to our senior living products representing a higher percentage of total product sales, as products associated with sales of emergency call systems to senior living facilities
have higher costs as a percentage of product sales than our traditional home communicator sales. Increased spending for distribution and warranty in support of our senior living product line also contributed to the increased costs. These negative
factors were slightly offset by increased sales of our PERS products at higher average selling prices for the year ended December 31, 2005 as compared the year ended December 31, 2004.

We expect that we may experience an increase in cost of product sales as a percentage of net product sales for the year ending December 31, 2006 as we continue with
our senior living initiative.

Selling, General and Administrative (SG&A) Expenses

SG&A expenses were approximately 40% of total revenues for the year ended December 31, 2005 compared to 39% for the year ended December 31, 2004, and
equated to a dollar increase of approximately $8.9 million to $59.8 million for the year ended December 31, 2005.

We continued to invest in our
senior living initiative, including approximately $1.6 million of incremental operational costs associated with the acquisitions we completed in June 2004 and October 2005. We also incurred approximately $5.3 million of increased expenditures
associated with higher corporate-related expenses as a result of the growth of our business and other business and marketing initiatives, including the ongoing investment in our health care direct marketing campaign, e-commerce and other marketing
and channel development programs, including our new consumer marketing initiative. We expect that SG&A expenses as a percentage of total revenues will remain constant or may



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increase as a percentage of total revenues for the year ending December 31, 2006 as we continue with our business initiatives.

Research and Development Expenses

Research and development expenses
represented approximately 2% of our total revenues for the years ended December 31, 2005 and 2004. Research and development efforts are focused on ongoing product improvements and developments. We expect to maintain these expenses, as a
percentage of total revenues, at a relatively consistent level.

Taxes

Our effective tax rate was 26.1% for the year ended December 31, 2005 compared to 36.1% for the year ended December 31, 2004. The effective tax rate for 2005 was affected by an approximate $2.9 million
reduction of accrued tax liabilities related to the expiration of certain statutes of limitations on previous tax positions and favorable adjustments as a result of tax settlements. Our normalized effective tax rate was 37.7% for the year ended
December 31, 2005 mainly related to our holding company reorganization, which we completed in December 2004.

2004 Compared with 2003

Total revenues for the year ended December 31, 2004 increased approximately 12% to $130.5 million, from $116.2 million recorded in 2003.

Services Revenue

Services revenues increased
approximately 14% to $103.2 million for the year ended December 31, 2004 compared to $90.7 million for the year ended December 31, 2003. The increase in our services revenues was mainly a result of the growth of our monitored subscriber
base by 10% to approximately 423,000 subscribers as of December 31, 2004 from approximately 386,000 subscribers as of December 31, 2003 and our continued success acquiring the Lifeline programs of our customers and transitioning the
subscribers to our higher revenue producing OneSource offering.

Net Product Sales

We experienced a 10% increase in net product sales to $26.5 million for the year ended December 31, 2004, from $24.2 million in the prior year. The increase was primarily attributable to the 67% growth in product
revenue we generated from our senior living initiative, principally representing sales of wireless emergency call systems for the senior living industry following our acquisition of suppliers of these systems in June 2004 and July 2003.

Finance Income

Finance income, representing income earned from
our portfolio of sales-type leases decreased 33% to $0.9 million for the year ended December 31, 2004 as compared to $1.3 million for the year ended December 31, 2003.

In December 2003, we entered into a program agreement with a third party to underwrite new equipment



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leases for customers of our senior living division and our PERS equipment business. In the initial transaction under this agreement, we assigned
approximately $1.5 million of our lease-portfolio net investment to the third party for approximately $1.6 million in cash. The net investment of the assigned portfolio remains with us with an offsetting liability which is being amortized over the
remaining terms of the leases, as paid. We also recorded deferred finance income on the assignment that is being recognized as part of finance income as the leases expire.

In December 2004, we entered into a second agreement to assign our remaining $4.0 million lease-portfolio net investment to the aforementioned third party for approximately $4.0 million in cash. Similar to the
December 2003 transaction, the net investment of the assigned portfolio remains with us with an offsetting liability which is being amortized over the remaining terms of the leases, as paid. We also recorded deferred finance income on the assignment
that is being recognized as part of finance income as the leases expire.

Cost of Services

Cost of services, as a percentage of service revenues, improved 4% to 48% for the year ended December 31, 2004 from 52% for the year ended December 31, 2003. On
a dollar basis, cost of services increased by approximately $1.8 million for the year ended December 31, 2004 as compared to the prior year due to the following factors: 1) the growth in the number of subscribers serviced under our OneSource
offering resulted in an increase in related expenses such as depreciation of Lifeline-owned home communicators rented to OneSource subscribers, certain operational costs including data entry, customer service, sales and support and integration costs
associated with an acquisition of a small regional service provider; and 2) our costs incurred from a full year of operations of our second U.S. monitoring facility increased approximately 55% and included such items as depreciation of leasehold
improvements and other fixed assets associated with the facility.

Cost of Product Sales

For the year ended December 31, 2004, cost of product sales, as a percentage of net product sales, was 35% as compared to 33% for the year ended December 31,
2003. The percentage increase was mainly due to increased sales of wireless emergency call systems to senior living facilities following our acquisition of suppliers of these systems in June 2004 and July 2003, as the products associated with these
sales have higher costs as a percentage of product sales than our PERS product sales.

Selling, General and Administrative Expenses

SG&A expenses were 39% of total revenues for the year ended December 31, 2004 compared to 37% for the year ended December 31, 2003, and equated to a dollar
increase of approximately $8.0 million to $50.9 million for the year ended December 31, 2004.

Costs incurred for our compliance efforts with the
Sarbanes-Oxley Act of 2002 and costs for our holding company reorganization contributed over $1.0 million towards the increase. Increased expenses for our senior living initiative, including approximately $1.2 million of incremental operational
costs associated with our June 2004 acquisition, also contributed to the increase. We incurred approximately $1.5 million of increased expenditures associated with our business and marketing initiatives, including the ongoing investment in our
health care direct marketing campaign and costs associated with the introduction of a new communicator in the second quarter of 2004. We experienced increased information technology



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costs related to these business and marketing initiatives, including additional personnel and higher maintenance and licensing fees for our computer systems.

Research and Development Expenses

Research and
development expenses represented approximately 2% of our total revenues in 2004 and 2003. Research and development efforts were focused on ongoing product improvements and developments, such as our new communicator introduced in the second quarter
of 2004.

Non-Recurring Item

On May 1, 2003, we
reached an agreement with one of our former vendors related to our previously announced erroneous low-battery signal in some of our personal help buttons. The vendor paid us $0.7 million in exchange for a mutual release of claims, and we recorded
this settlement as an other non-recurring item. The payment reimbursed us for some of the costs we incurred in addressing this matter.

Taxes

Our effective tax rate was 36% for the year ended December 31, 2004 as compared to 40% for the year ended December 31, 2003. The lower
effective tax rate was primarily due to our holding company reorganization, which contributed a 3.5% reduction in our effective tax rate for the year ended December 31, 2004.

On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 into law, which did not have a material impact on our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

During the
year ended December 31, 2005, our portfolio of cash and cash equivalents decreased approximately $11.2 million to $31.2 million from $42.4 million at December 31, 2004. The decrease resulted from the investment of excess cash reserves as
we implemented a strategy to invest in long-term investments for our excess cash and cash equivalents. Our overall portfolio of cash and cash equivalents and investments grew by approximately $12.6 million for the year ended December 31, 2005
as a result of an increase in cash provided by operating activities of approximately $30.6 million resulting from the growth in our profitability, the impact of continued improvements in collections of our accounts receivable portfolio (which
resulted in a reduction in days sales outstanding from 33 days for the year ended December 31, 2004 to 30 days for the year ended December 31, 2005) and the benefit of our outsourced leasing program. In addition to proceeds provided by
operating activities, proceeds from stock option exercises of $3.7 million also contributed to the increase.

Offsetting this increase was net payments of
approximately $3.3 million for income tax obligations, net of the tax benefit on employee stock options exercised, and approximately $12.3 million used for purchases of property and equipment in the ordinary course of business, including
approximately $4.7 million for Lifelineowned equipment rented to customers and subscribers under our OneSource and Product and Service Fee (PSF) offerings. We also spent a total of $9.3 million during 2005 for business
purchases and other, of which $1.6 million was spent for provider agreements for Lifeline Monitoring Services (LMS) and PSF offerings and $6.6 million was spent for business acquisitions, including the acquisition of a supplier of
emergency call systems for the senior living industry, the acquisition of a regional service provider and acquisitions of OneSource businesses.

We have a
$30.0 million credit facility with Citizens Bank of Massachusetts that expires in July 2007.



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As of December 31, 2005, we did not have any debt outstanding under this facility.

The following table summarizes our existing contractual obligations as of December 31, 2005 and the effect such obligations are expected to have on our liquidity
and cash flows in future periods:



|                             |  |      |       |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      
|---------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | -------------- |  | - | ----- |  | - | -----
|(Dollars in thousands)       |  | 2006 |       | 2007 |   | 2008  |  | 2009 |       | 2010 |   | Thereafter (1)
|Contractual Obligations (2): |  |      |       |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      
|Operating leases             |  | $    | 1,815 |      | $ | 1,718 |  | $    | 1,588 |      | $ | 1,618          |  | $ | 1,612 |  | $ | 4,317
|                             |  |      |       |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      
|Total Obligations            |  | $    | 1,815 |      | $ | 1,718 |  | $    | 1,588 |      | $ | 1,618          |  | $ | 1,612 |  | $ | 4,317
|                             |  |      |       |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      

|(1) | The majority of this amount represents contractual obligations under our corporate facility lease through 2013 and our second U.S. monitoring facility through 2012.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The table does not include the line of credit, for up to $30.0 million, which matures in July 2007 and under which no amounts were outstanding at December 31, 2005, or certain
earnout provisions for some of our acquisitions, which are payable over three years.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect that funding requirements for operations and
future growth are expected to be met primarily from operating cash flow, existing cash and investment balances and, if necessary, our line of credit. We expect these sources will be sufficient to finance our operating cash needs through the next
twelve months. These needs include continued investments in our response center platform and our back-up U.S. monitoring facility and other investments in support of our current business and potential acquisitions.

CRITICAL ACCOUNTING POLICIES

The
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements. The preparation of these consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. We have identified the following accounting policies as critical to understanding the preparation of our consolidated financial statements and results of operations.

Revenue Recognition

We record monitoring service revenue in the
month service is provided under our OneSource, PSF and LMS service offerings. Under our OneSource and PSF offerings, the monitoring service can be cancelled without penalty at any time by the subscriber, and no product revenue is recognized because
the subscriber does not acquire title to any product. However, customers who choose our LMS service offering purchase the home communicators from us which the customer then provides to its subscribers. In this instance, we record product revenue
upon shipment, as title to the equipment passes to the customer at that time.

Under our LMS and PSF offerings, we charge the customer a nominal fee for
one-time administrative set up and data entry of new subscribers. Under our OneSource offering, we charge subscribers a nominal fee for installation of the personal response devices, including a one-time administrative set-up fee for data entry of
the new subscribers. Since incremental direct costs related to the installation and administrative tasks associated with new subscribers exceed installation and one-time administrative



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set-up revenue, we expense these costs in the period incurred. We review our installation and one-time administrative set-up revenue quarterly and have not
experienced situations where this revenue exceeds incremental direct costs.

We also record deferred revenue. A portion of our deferred revenue relates to
situations where we contract with our customers to install our personal response products in their facilities (i.e., senior living customers). Rather than record product revenue upon shipment, we defer our product revenue until the installation of
the equipment is complete. Also, as a result of certain payment terms and conditions under general contractor agreements we have entered into for our senior living division, we defer our product revenue until the payment terms and conditions have
been realized by us. We also record deferred revenue related to billings to customers for annual service contracts for which revenue has not been recognized because the service has not yet been provided. Service contract revenues are recognized
ratably over the contractual period.

While we do not have a specific right of return policy, we do record a provision for an estimated amount of future
returns based on historical experience. Such returns have historically been immaterial to our total product revenue, and we do not foresee any change that would have a material adverse impact on our operating results.

Goodwill and intangible assets

Acquisition accounting requires
extensive use of estimates and judgments to allocate the purchase price to the fair market value of the assets and liabilities purchased. The cost of acquisitions is allocated first to their identifiable tangible assets based on estimated fair
values at the date of acquisition. Costs are then allocated to identifiable intangible assets and are amortized on a straight-line basis over the estimated useful lives of the assets. The excess of the purchase price over the fair value of
identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.

During the year ended December 31, 2005, we entered into a variety
of LMS and PSF provider agreements and purchased several OneSource businesses. We used accounting estimates and judgments to determine the fair value of assets and liabilities, if any. We did not record any cost in excess of net asset value (i.e.,
goodwill) as a result of the acquisition accounting for these arrangements; however, we did record intangible assets related to the specific arrangements and we are amortizing these costs over the expected lives of the identified intangible assets,
which range from five to 15 years. Any change in assumptions could either result in a decrease or increase in the estimated life. A decrease in estimated life would reduce our net income and an increase in estimated life would increase our net
income.

During the year ended December 31, 2005, we completed the purchase accounting for previous acquisitions of a supplier of wireless emergency
call systems for the senior living industry and service providers in both the U.S. and Canada. As a result, we recorded approximately $1.4 million of non-amortizable goodwill and $3.4 million of amortizable intangible assets, the majority of which
will be amortized between seven and 15 years. In accordance with our assessment of the fair value of assets acquired from previous years acquisitions, we also recorded approximately $1.1 million of additional goodwill as a result of payments
for certain earnout provisions associated with the agreements.

In measuring whether goodwill or other intangible assets are impaired, we use an estimate
of our future undiscounted net cash flows of the business over the estimated remaining life. If our expectation of future undiscounted net cash flows indicates an impairment, we would write down the appropriate assets to their estimated realizable
values, based on discounted cash flows.



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Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We estimate the allowance based upon historical collection experience,
analysis of accounts receivable by aging categories, customer credit quality and analytics. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required. Based on our experience, we have historically maintained reasonable estimates of our allowance for doubtful accounts.

Inventories

We value our inventories at the lower of cost or market, as determined by the first-in, first-out method. We regularly review inventory quantities on
hand and record a provision for excess or obsolete inventory based upon our estimated forecast of product demand. If actual future demand is less than the projections made by management, then additional provisions may be required. Based on our
experience, we have historically maintained reasonable provisions for our inventory.

Warranty

Our products are generally under warranty against defects in material and workmanship. We provide an accrual for estimated warranty costs at the time of sale of the
related products based upon historical return rates and repair costs at the time of the sale. A significant increase in product return rates could have a material adverse effect on our results of operations. Based on our experience, we have
historically adequately provided for our warranty accrual.

Net investment in sales-type leases

We considered the requirements of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS 140), when considering the accounting treatment associated with the assignment of approximately $4.0 million and $1.5 million of our lease-portfolio net investment to a third party in December
2004 and 2003, respectively. Paragraph 9 of SFAS 140 outlines the conditions that are required to be met for specific accounting treatment to be applied to this assignment. We concluded that the appropriate accounting treatment was for the net
investment of the assigned portfolio to remain on our books with an offsetting liability which is being amortized over the remaining terms of the leases. We also recorded deferred finance income on the assignment that will be recognized as part of
finance income as the leases expire.

Short-term and long-term investments

Our investments are deemed to be available for sale. They are recorded at fair value. If a decline in fair value below the amortized cost basis is deemed other than temporary, as a result of us evaluating market
conditions, trends of earnings and other key measures, the cost basis of the individual security would be written down to fair value as a new cost basis and the amount of the impairment would be included in our results of operations as a realized
loss. We have not experienced such a situation during the year ended December 31, 2005.

Taxes

We record liabilities for income tax contingencies based on our best estimate of the underlying exposures. For the year ended December 31, 2005, we recorded an
approximate $2.9 million reduction of accrued tax liabilities related to the expiration of certain statutes of limitations on previous tax positions and favorable adjustments as a result of tax settlements.



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NEWLY ISSUED ACCOUNTING STANDARDS

On June 1, 2005, the Financial Accounting Standards Board (FASB) issued Statement No. 154, Accounting Changes and Error Corrections
(SFAS 154), a replacement of APB No. 20, Accounting Changes (APB No. 20), and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all
voluntary changes in accounting principle and changes the requirements for accounting for and reporting of a change in accounting principle to be applied retrospectively with all prior period financial statements presented on the new accounting
principle. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

In December
2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS 123, supersedes APB No. 25, and amends FASB Statement
No. 95, Statement of Cash Flows. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123R must be
adopted by the first fiscal year beginning after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payments (SAB 107). SAB 107 expresses views of the SEC regarding the
interaction between SFAS 123R and certain SEC rules and regulations and provides the SECs views regarding the valuation of share-based compensation arrangements for public companies. We have completed our evaluation of the adoption of SFAS
123R and have determined the impact that this statement will have on our results of operations for the year ending December 31, 2006 to be approximately $2.4 million. We will apply the principles of SAB 107 in conjunction with our adoption of
SFAS 123R in 2006.

In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs, an Amendment of ARB No. 43 Chapter 4
(SFAS 151). SFAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight and rehandling be
recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. We do not believe the adoption of the standard will have a material impact on our
results of operations upon adoption in fiscal 2006.



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|ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

We have
considered the provisions of Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about
Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. We had no holdings of derivative financial or commodity-based instruments or other market risk sensitive instruments
entered into for trading purposes at December 31, 2005. We believe that we currently have no material exposure to interest rate and foreign currency exchange rate risks in our instruments entered into for other than trading purposes.

Interest rates

At December 31, 2005, our
short-term and long-term investments consisted primarily of obligations of the U.S. Government and its agencies and corporate bonds. We maintain an investment policy which ensures the safety and preservation of our invested funds by limiting default
risk, market risk and reinvestment risk. These securities are subject to interest rate risk and may decline in value when interest rates change. If a 1% change occurred in the value of our portfolio, the impact on our financial statements would be
approximately $0.3 million.

Our balance sheet may from time to time include an outstanding balance associated with a revolving credit facility that is
subject to interest rate risk. We have the ability to obtain a revolving credit loan with an interest rate based on LIBOR or a revolving credit loan with an interest rate based on the lenders prime interest rate. As a result of these factors,
at any given time, a change in interest rates could result in either an increase or decrease in our interest expense. As of December 31, 2005, we did not have any outstanding balances associated with our credit facility and, therefore, our
consolidated financial position, results of operations and cash flows would not be affected by near-term changes in interest rates.

Foreign currency
exchange rates

Our earnings are affected by fluctuations in the value of the U.S. dollar as compared to the Canadian dollar as a result of the sale of
our products and services in Canada and translation adjustments associated with the conversion of our Canadian subsidiarys currency into the reporting currency (U.S. dollar). As such, our exposure to changes in Canadian exchange rates could
impact our consolidated financial position, results of operations and cash flows. We performed a sensitivity analysis as of December 31, 2005 to assess the potential effect of a 10% increase or decrease in Canadian foreign exchange rates and
concluded that short-term changes in Canadian exchange rates would not materially affect our consolidated financial position, results of operations or cash flows. Our sensitivity analysis of the effects of changes in foreign currency exchange rates
in such magnitude did not factor in a potential change in sales levels or local prices for our services/products as a result of the currency fluctuations or otherwise.



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|ITEM 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

Managements Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based
on this assessment and those criteria, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2005.

Managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears in this Annual Report on Form 10-K.



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Index to Consolidated Financial Statements and Schedule

The following consolidated financial statements of Lifeline and its
subsidiaries required to be included in Item 8 are listed below:



|                                                                                                                |  |      
|--------------------------------------------------------------------------------------------------------------- |  | -----
|Report of Independent Registered Public Accounting Firm                                                         |  | 32-33
|                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                    |  | 34   
|                                                                                                                | 
|Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003 |  | 35   
|                                                                                                                | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2004 and 2003            |  | 36   
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                      |  | 37   
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | 38-61

The following financial statement schedule of Lifeline is filed herewith on the page listed below:



|                                                                                                     |  |   
|---------------------------------------------------------------------------------------------------- |  | --
|Schedule II  Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003 |  | 83

All other schedules are omitted because they are not applicable, not required, or because the required information
is included in the financial statements or notes thereto.



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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Lifeline Systems, Inc.

We have completed integrated audits of Lifeline Systems, Inc.s 2005 and 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Lifeline Systems, Inc. and its subsidiaries (the
Company) at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion,
managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



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A companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



|                              
|------------------------------
|/s/ PricewaterhouseCoopers LLP
|                              
|                              
|Boston, Massachusetts         
|March 15, 2006                



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LIFELINE SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

(Dollars in thousands, except par value)



|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                             |  | 2005 |         |   | 2004 |  
|ASSETS                                                                                                                                                                                       |  |      |         |   |      |   |         |  
|Current assets:                                                                                                                                                                              |  |      |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                    |  | $    | 31,245  |   |      | $ | 42,428  |  
|Short-term investments                                                                                                                                                                       |  |      | 7,972   |   |      |   | 5,000   |  
|Accounts receivable, net of allowance for doubtful accounts of $478 in 2005 and $621 in 2004                                                                                                 |  |      | 13,108  |   |      |   | 12,209  |  
|Inventories                                                                                                                                                                                  |  |      | 5,717   |   |      |   | 4,546   |  
|Net investment in sales-type leases                                                                                                                                                          |  |      | 1,572   |   |      |   | 1,906   |  
|Prepaid expenses and other current assets                                                                                                                                                    |  |      | 3,733   |   |      |   | 2,369   |  
|Deferred income taxes                                                                                                                                                                        |  |      | 837     |   |      |   | 1,092   |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total current assets                                                                                                                                                                         |  |      | 64,184  |   |      |   | 69,550  |  
|Long-term investments                                                                                                                                                                        |  |      | 20,781  |   |      |   |        |  
|Property and equipment, net                                                                                                                                                                  |  |      | 35,393  |   |      |   | 34,030  |  
|Net investment in sales-type leases                                                                                                                                                          |  |      | 2,022   |   |      |   | 3,636   |  
|Goodwill                                                                                                                                                                                     |  |      | 11,217  |   |      |   | 8,821   |  
|Other intangible assets, net                                                                                                                                                                 |  |      | 18,126  |   |      |   | 12,838  |  
|Other assets                                                                                                                                                                                 |  |      | 99      |   |      |   | 173     |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total assets                                                                                                                                                                                 |  | $    | 151,822 |   |      | $ | 129,048 |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|                                                                                                                                                                                             |  |     
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                         |  |      |         |   |      |   |         |  
|Current liabilities:                                                                                                                                                                         |  |      |         |   |      |   |         |  
|Accounts payable                                                                                                                                                                             |  | $    | 5,076   |   |      | $ | 2,485   |  
|Accrued expenses                                                                                                                                                                             |  |      | 4,145   |   |      |   | 4,631   |  
|Accrued payroll and payroll taxes                                                                                                                                                            |  |      | 7,239   |   |      |   | 5,910   |  
|Accrued income taxes                                                                                                                                                                         |  |      | 448     |   |      |   | 3,714   |  
|Deferred revenues                                                                                                                                                                            |  |      | 2,374   |   |      |   | 2,150   |  
|Other current liabilities                                                                                                                                                                    |  |      | 2,673   |   |      |   | 2,604   |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total current liabilities                                                                                                                                                                    |  |      | 21,955  |   |      |   | 21,494  |  
|Deferred income taxes                                                                                                                                                                        |  |      | 5,819   |   |      |   | 6,511   |  
|Other non-current liabilities                                                                                                                                                                |  |      | 2,055   |   |      |   | 3,302   |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                                                            |  |      | 29,829  |   |      |   | 31,307  |  
|Commitments and contingencies                                                                                                                                                                |  |      |         |   |      |   |         |  
|                                                                                                                                                                                             |  |     
|Stockholders equity:                                                                                                                                                                        |  |      |         |   |      |   |         |  
|Common stock, $0.02 par value, 50,000,000 shares authorized, 14,225,336 shares issued and outstanding at December 31, 2005 and 13,832,630
shares issued and outstanding at December 31, 2004 |  |      | 285     |   |      |   | 277     |  
|Additional paid-in capital                                                                                                                                                                   |  |      | 38,619  |   |      |   | 30,657  |  
|Retained earnings                                                                                                                                                                            |  |      | 84,571  |   |      |   | 66,334  |  
|Unearned compensation                                                                                                                                                                        |  |      | (2,469  | ) |      |   | (471    | )
|Accumulated other comprehensive income                                                                                                                                                       |  |      | 987     |   |      |   | 944     |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                                                   |  |      | 121,993 |   |      |   | 97,741  |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                   |  | $    | 151,822 |   |      | $ | 129,048 |  
|                                                                                                                                                                                             |  |      |         |   |      |   |         |  

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



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LIFELINE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

For the
years ended December 31, 2005, 2004 and 2003

(In thousands, except for per share data)



|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Revenues                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Services                                 |  | $    | 119,618 |   |      | $ | 103,176 |      |  | $ | 90,698  |  
|Net product sales                        |  |      | 31,328  |   |      |   | 26,500  |      |  |   | 24,167  |  
|Finance income                           |  |      | 206     |   |      |   | 873     |      |  |   | 1,294   |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Total revenues                           |  |      | 151,152 |   |      |   | 130,549 |      |  |   | 116,159 |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Costs and expenses                       |  |      |         |   |      |   |         |      |  |   |         |  
|Cost of services                         |  |      | 54,035  |   |      |   | 49,150  |      |  |   | 47,391  |  
|Cost of product sales                    |  |      | 11,382  |   |      |   | 9,321   |      |  |   | 7,882   |  
|Selling, general, and administrative     |  |      | 59,769  |   |      |   | 50,866  |      |  |   | 42,900  |  
|Research and development                 |  |      | 2,441   |   |      |   | 2,114   |      |  |   | 1,816   |  
|Other non-recurring item (Note J)        |  |      |        |   |      |   |        |      |  |   | (700    | )
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Total costs and expenses                 |  |      | 127,627 |   |      |   | 111,451 |      |  |   | 99,289  |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Income from operations                   |  |      | 23,525  |   |      |   | 19,098  |      |  |   | 16,870  |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Other income (expense)                   |  |      |         |   |      |   |         |      |  |   |         |  
|Interest income                          |  |      | 1,315   |   |      |   | 546     |      |  |   | 181     |  
|Interest expense                         |  |      | (14     | ) |      |   | (29     | )    |  |   | (43     | )
|Other income (expense)                   |  |      | (163    | ) |      |   | (60     | )    |  |   | 90      |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Total other income, net                  |  |      | 1,138   |   |      |   | 457     |      |  |   | 228     |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Income before income taxes               |  |      | 24,663  |   |      |   | 19,555  |      |  |   | 17,098  |  
|Provision for income taxes               |  |      | 6,426   |   |      |   | 7,056   |      |  |   | 6,839   |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                               |  |      | 18,237  |   |      |   | 12,499  |      |  |   | 10,259  |  
|Other comprehensive income, net of tax   |  |      |         |   |      |   |         |      |  |   |         |  
|Unrealized loss on investments           |  |      | (189    | ) |      |   |        |      |  |   |        |  
|Foreign currency translation adjustments |  |      | 220     |   |      |   | 314     |      |  |   | 408     |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Comprehensive income                     |  | $    | 18,268  |   |      | $ | 12,813  |      |  | $ | 10,667  |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Net income per weighted average share:   |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                    |  | $    | 1.31    |   |      | $ | 0.92    |      |  | $ | 0.78    |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted                                  |  | $    | 1.24    |   |      | $ | 0.88    |      |  | $ | 0.76    |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Weighted average shares:                 |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                    |  |      | 13,934  |   |      |   | 13,585  |      |  |   | 13,126  |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted                                  |  |      | 14,652  |   |      |   | 14,160  |      |  |   | 13,539  |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  

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



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LIFELINE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the years ended December 31, 2005, 2004 and 2003

(Dollars in thousands)



|                                                           |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  |        |  |         
|---------------------------------------------------------- |  | ------------ |  | ------------------------- |  | ---------------- |  | -------------------- | ------ | -------------- | ------ | ------------------------------------- |  | ------------------------ |  | ------ |  | --------
|                                                           |  | Common Stock |  | Additional Paid-InCapital |  | RetainedEarnings |  | UnearnedCompensation |        | Treasury Stock |        | Accum
OtherComprehensiveIncome/(Loss) |  | TotalStockholdersEquity
|                                                           |  | Shares       |  | Amount                    |  |                  |  |                      | Shares |                | Amount |                                       | 
|BALANCE, December 31, 2002                                 |  | 12,960,276   |  | $142                      |  | $23,869          |  | $43,576              |        |                |        | 1,242,178                             |  | $(4,556)                 |  | $(238) |  | $62,793 
|Exercise of stock options, including tax benefit of $2,932 |  | 323,892      |  | 2                         |  | 4,837            |  |                      |        |                |        |                                       |  |                          |  |        |  | 4,839   
|Issuance of restricted stock                               |  | 72,000       |  | 1                         |  | 753              |  |                      |        | $(754)         |        |                                       |  |                          |  |        |  |        
|Amortization of unearned compensation                      |  |              |  |                           |  |                  |  |                      |        | 132            |        |                                       |  |                          |  |        |  | 132     
|Issuance of stock under employee stock purchase plan       |  | 51,926       |  | 1                         |  | 510              |  |                      |        |                |        |                                       |  |                          |  |        |  | 511     
|Two-for-one stock split                                    |  |              |  | 122                       |  | (4,678)          |  |                      |        |                |        | (1,242,178)                           |  | 4,556                    |  |        |  |        
|Foreign currency translation adjustment                    |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  | 692    |  | 692     
|Net income                                                 |  |              |  |                           |  |                  |  | 10,259               |        |                |        |                                       |  |                          |  |        |  | 10,259  
|                                                           |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  |        |  |         
|BALANCE, December 31, 2003                                 |  | 13,408,094   |  | 268                       |  | 25,291           |  | 53,835               |        | (622)          |        |                                      |  |                         |  | 454    |  | 79,226  
|Exercise of stock options, including tax benefit of $1,232 |  | 373,025      |  | 8                         |  | 4,348            |  |                      |        |                |        |                                       |  |                          |  |        |  | 4,356   
|Amortization of unearned compensation                      |  |              |  |                           |  |                  |  |                      |        | 151            |        |                                       |  |                          |  |        |  | 151     
|Issuance of stock under employee stock purchase plan       |  | 51,511       |  | 1                         |  | 845              |  |                      |        |                |        |                                       |  |                          |  |        |  | 846     
|Foreign currency translation adjustment                    |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  | 490    |  | 490     
|Other                                                      |  |              |  |                           |  | 173              |  |                      |        |                |        |                                       |  |                          |  |        |  | 173     
|Net income                                                 |  |              |  |                           |  |                  |  | 12,499               |        |                |        |                                       |  |                          |  |        |  | 12,499  
|                                                           |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  |        |  |         
|BALANCE, December 31, 2004                                 |  | 13,832,630   |  | 277                       |  | 30,657           |  | 66,334               |        | (471)          |        |                                      |  |                         |  | 944    |  | 97,741  
|Exercise of stock options                                  |  | 300,755      |  | 6                         |  | 2,876            |  |                      |        |                |        |                                       |  |                          |  |        |  | 2,882   
|Issuance of restricted stock                               |  | 60,000       |  | 1                         |  | 2,184            |  |                      |        | (2,185)        |        |                                       |  |                          |  |        |  |        
|Amortization of unearned compensation                      |  |              |  |                           |  |                  |  |                      |        | 187            |        |                                       |  |                          |  |        |  | 187     
|Tax benefit of stock options exercised                     |  |              |  |                           |  | 2,073            |  |                      |        |                |        |                                       |  |                          |  |        |  | 2,073   
|Issuance of stock under employee stock purchase plan       |  | 31,951       |  | 1                         |  | 829              |  |                      |        |                |        |                                       |  |                          |  |        |  | 830     
|Foreign currency translation adjustment                    |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  | 299    |  | 299     
|Net unrealized gain/(loss) on investments                  |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  | (256)  |  | (256)   
|Net income                                                 |  |              |  |                           |  |                  |  | 18,237               |        |                |        |                                       |  |                          |  |        |  | 18,237  
|                                                           |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  |        |  |         
|BALANCE, December 31, 2005                                 |  | 14,225,336   |  | $285                      |  | $38,619          |  | $84,571              |        | $(2,469)       |        |                                      |  | $                       |  | $987   |  | $121,993
|                                                           |  |              |  |                           |  |                  |  |                      |        |                |        |                                       |  |                          |  |        |  |         

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



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##### Table of Contents

LIFELINE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2005, 2004 and 2003

(Dollars in thousands)



|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Cash flows from operating activities:                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $    | 18,237  |   |      | $ | 12,499  |      |  | $ | 10,259  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Loss on disposal of assets                                                        |  |      | 204     |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                     |  |      | 13,327  |   |      |   | 12,808  |      |  |   | 11,645  |  
|Provision for bad debts                                                           |  |      | 393     |   |      |   | 436     |      |  |   | 348     |  
|Tax benefit from exercises of employee stock options                              |  |      | 2,073   |   |      |   | 1,232   |      |  |   |        |  
|Deferred income tax provision (benefit)                                           |  |      | (644    | ) |      |   | (410    | )    |  |   | 179     |  
|Amortization of unearned compensation                                             |  |      | 187     |   |      |   | 151     |      |  |   | 132     |  
|Amortization of premium on available-for-sale securities                          |  |      | 6       |   |      |   |        |      |  |   |        |  
|Changes in operating assets and liabilities, net of businesses acquired:          |  |      |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                               |  |      | (505    | ) |      |   | (994    | )    |  |   | (373    | )
|Inventories                                                                       |  |      | (857    | ) |      |   | 1,486   |      |  |   | (94     | )
|Net investment in sales-type leases                                               |  |      | 1,948   |   |      |   | 1,180   |      |  |   | (68     | )
|Prepaid expenses, other current assets and other assets                           |  |      | (1,279  | ) |      |   | 993     |      |  |   | (1,211  | )
|Prepaid income taxes                                                              |  |      |        |   |      |   | 1,708   |      |  |   | (1,470  | )
|Income taxes payable                                                              |  |      | (3,256  | ) |      |   | 3,696   |      |  |   | 1,241   |  
|Accounts payable, accrued expenses and other liabilities                          |  |      | (471    | ) |      |   | 1,197   |      |  |   | 156     |  
|Accrued payroll and payroll taxes                                                 |  |      | 1,197   |   |      |   | 333     |      |  |   | 957     |  
|Accrued restructuring and other non-recurring charges                             |  |      |        |   |      |   |        |      |  |   | (310    | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |      | 30,560  |   |      |   | 36,315  |      |  |   | 21,391  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Purchases of investments                                                          |  |      | (29,016 | ) |      |   | (29,046 | )    |  |   |        |  
|Sales and maturities of investments                                               |  |      | 5,000   |   |      |   | 24,046  |      |  |   |        |  
|Additions to property and equipment                                               |  |      | (12,291 | ) |      |   | (9,856  | )    |  |   | (11,183 | )
|Business purchases and other                                                      |  |      | (9,327  | ) |      |   | (8,899  | )    |  |   | (4,138  | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                             |  |      | (45,634 | ) |      |   | (23,755 | )    |  |   | (15,321 | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Principal payments under long-term obligations                                    |  |      |        |   |      |   | (5      | )    |  |   | (96     | )
|Proceeds from lease portfolio assignment                                          |  |      |        |   |      |   | 4,049   |      |  |   | 1,624   |  
|Proceeds from stock options exercised, employee stock purchase plan and other     |  |      | 3,712   |   |      |   | 4,143   |      |  |   | 2,418   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                         |  |      | 3,712   |   |      |   | 8,187   |      |  |   | 3,946   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net (decrease)/increase in cash and cash equivalents                              |  |      | (11,362 | ) |      |   | 20,747  |      |  |   | 10,016  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Effect of foreign exchange on cash                                                |  |      | 179     |   |      |   | 325     |      |  |   | 275     |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at beginning of year                                    |  |      | 42,428  |   |      |   | 21,356  |      |  |   | 11,065  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $    | 31,245  |   |      | $ | 42,428  |      |  | $ | 21,356  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Non-cash activity:                                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Acquisition related charges                                                       |  | $    | 912     |   |      | $ | 503     |      |  | $ |        |  
|Restricted stock                                                                  |  |      | 2,185   |   |      |   |        |      |  |   | 754     |  

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



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

Lifeline Systems, Inc. (the
Company) provides 24-hour personal emergency response monitoring services and related products to subscribers, primarily elderly or disabled individuals with medical or age-related conditions, who wish to continue to live independently
in their home. The Companys personal emergency response services (PERS) products and services consist principally of a home communicator connected to the telephone and a wireless personal help button which, when activated,
initiates an automated digital telephone signal to one of the Companys centralized monitoring facilities. The Companys monitoring technology platform retrieves the subscribers record from its centralized database and routes the
call to one of the Companys monitoring professionals. These monitoring professionals follow a prescribed response protocol to quickly assess the nature of the call through immediate two-way, voice-to-voice communication and provide a prompt,
appropriate response in a respectful and compassionate manner. This response may consist of contacting local ambulance, police or fire services or family, friends and neighbors.

In 2003, the Company established its senior living division to provide complementary PERS products to assisted living and other senior living facilities as a replacement for, or upgrade from, existing emergency call
systems, which typically do not allow for immediate two-way, voice-to-voice communication. The Companys senior living products include a personal help button, home communicator and monitoring platform with preloaded, customized monitoring
software for use by the facility.

PERS products and services are provided through the Companys customers, primarily consisting of community
hospitals and other health care providers. These customers typically offer the Companys services to their patients and clients through a co-branded program that demonstrates their affiliation with the Company. The Company also markets its
services through Lifeline OneSource(OneSource),its direct-to-subscriber, full-service PERS offering. Senior living products are marketed and sold directly to senior living facilities.

The Company generates services revenue through recurring monthly fees by billing subscribers or their families who receive the Companys OneSource offering, or by
billing customers that outsource their monitoring activities to the Company.In addition, the Company generates revenue through product sales in connection with its other PERS service offerings, as well as product sales to senior living
facilities. The Companys PERS offerings are generally private pay offerings, although in some cases it receives reimbursement from government-funded health care programs, such as Medicaid, which it administers through its
government services division.

The Company offers four service offerings. OneSource is the Companys full-service offering that provides subscribers
with monitoring and the use of a Company-owned home communicator for a single monthly fee. The Company manages the day-to-day administrative tasks of the service, including managing referrals, sales and marketing efforts, subscriber inquiries,
subscriber enrollment, service installation and billing and collections. Under the Companys Lifeline Monitoring Services (LMS) offering, the Company provides its customers monitoring services for their subscribers
through the Companys centralized monitoring facilities, and the customers typically retain all other responsibilities for the operation of the Lifeline program.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------



The customer typically purchases home communicators and personal help buttons from the Company, which it then rents
to subscribers. The Company charges the customer a monthly per-subscriber fee for the monitoring service, which is then passed on by the customer to the subscriber. Under the Companys Lifeline Product and Service Fee (PSF)
offering, the Company provides all of the services associated with the LMS offering; however, the home communicator and personal help button are rented, rather than sold, to the customer in exchange for a monthly fee. Finally, under the
Companys Lifeline Site Monitoring offering, the Company sells monitoring platforms, personal help buttons and home communicators to its customers who choose to monitor their own subscribers locally, rather than through the
Companys centralized monitoring facilities.

Principles of Consolidation

The consolidated financial statements include the accounts of Lifeline Systems, Inc. and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents, Investments

The Company considers all
securities purchased with a maturity of three months or less at the date of acquisition to be cash equivalents. They are carried at fair value, which approximates cost. The Companys investments are deemed to be available for sale. Short-term
investments consist primarily of obligations of the U.S. Government and its agencies with maturities at date of acquisition beyond three months and less than one year. Long-term investments consist primarily of obligations of the U.S. Government and
its agencies and corporate bonds with maturities at date of acquisition beyond one year and less than three years. Investments are carried at fair value. The Company maintained approximately $21.5 million and $45.0 million at December 31, 2005
and 2004, respectively, of its cash and cash equivalents with a single institution. The Company has not experienced any losses associated with deposits at this institution.



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------



Cash and Cash Equivalents, Investments (continued)



|                                                |  |                    |        |                    |   |        |  |      |        |      |   |      |  |   |        |  |   |       
|----------------------------------------------- |  | ------------------ | ------ | ------------------ | - | ------ |  | ---- | ------ | ---- | - | ---- |  | - | ------ |  | - | ------
|(Dollars in thousands)                          |  | Maturity           |        |                    |   |       
|Type of Security                                |  | Less than one year |        | More than one year |   | Total 
|                                                |  | 2005               |        | 2004               |   | 2005   |  | 2004 |        | 2005 |   | 2004
|Certificate of Deposit                          |  | $                  |       |                    | $ | 5,000  |  | $    |       |      | $ |     |  | $ |       |  | $ | 5,000 
|U.S. Government and Agency Securities           |  |                    | 7,972  |                    |   |       |  |      | 9,896  |      |   |     |  |   | 17,868 |  |   |      
|Corporate Bonds                                 |  |                    |       |                    |   |       |  |      | 10,885 |      |   |     |  |   | 10,885 |  |   |      
|                                                |  |                    |        |                    |   |        |  |      |        |      |   |      |  |   |        |  |   |       
|Total short-term and long-term investments      |  |                    | 7,972  |                    |   | 5,000  |  |      | 20,781 |      |   |     |  |   | 28,753 |  |   | 5,000 
|Cash and Cash Equivalents                       |  |                    | 31,245 |                    |   | 42,428 |  |      |       |      |   |     |  |   | 31,245 |  |   | 42,428
|                                                |  |                    |        |                    |   |        |  |      |        |      |   |      |  |   |        |  |   |       
|Total cash and cash equivalents and investments |  | $                  | 39,217 |                    | $ | 47,428 |  | $    | 20,781 |      | $ |     |  | $ | 59,998 |  | $ | 47,428
|                                                |  |                    |        |                    |   |        |  |      |        |      |   |      |  |   |        |  |   |       

Inventories

Inventories are stated at the lower of cost or market, as determined by the first-in, first-out method.

Property and Equipment

Property and equipment are carried at cost, net of accumulated depreciation. Depreciation and amortization on property and equipment is computed principally by the
straight-line method over the useful lives of the assets. Depreciation on leasehold improvements is computed principally by the straight-line method over the lesser of the lease term or the estimated useful lives of the improvements.



|                                |  |              
|------------------------------- |  | -------------
|Equipment                       |  | 3 to 10 years
|Furniture and fixtures          |  | 7 years      
|Equipment provided to customers |  | 5 years      
|Leasehold improvements          |  | 5 to 15 years

When assets are sold or retired, the related cost and accumulated depreciation are removed from the accounts and
any resulting gain or loss is credited or charged to other income. Expenditures for maintenance and repairs are charged to expense as incurred; betterments are capitalized.

Equipment Provided to Customers

In accordance with its OneSource offering, the Company provides subscribers with
home communicators as part of a unified service offering in which the Company bills the subscriber on a monthly basis for the monitoring and business support service and records service revenue in the period earned. In accordance with its PSF
offering, the Company provides all of the services associated with the LMS offering; however, the home communicator and personal help button are rented, rather than sold, to the customer in exchange for a monthly fee.



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Equipment
Provided to Customers (continued)



The cost of the home communicator provided to the subscriber and to the customer in both offerings is recorded as an
asset on the Companys balance sheet and depreciation is computed by the straight-line method over an estimated useful life of 5 years.

Goodwill
and Other Intangible Assets

The Company generates intangible assets generally through two types of transactions - preferred provider agreements and
business combinations.

In a preferred provider agreement, the Company pays a fee to a customer in return for preferred provider status. These fees are
amortized either as a reduction of services revenue (when payment is made in cash or receivables are forgiven) or as part of cost of services (when free product is given) over the term of the agreement, which is typically five years.

For transactions that qualify as business combinations, there are several intangible assets typically recorded. One of the intangible assets recorded relates to the
existing subscribers of the acquired business, which is amortized over the estimated term of the subscribers remaining service. Other intangible assets relate to non-competition agreements and employment agreements, which are typically
amortized over the term of the respective agreement.

The Company also records intangible assets related to the business referral sources and other
business relationships which are amortized over the estimated useful life. Any excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.

The Company acts as its only reporting unit of its business. As a result, all acquisitions are fully integrated and absorbed into the Company. In accordance with the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Company is required to assess the impairment of goodwill on an annual basis or, along with other
amortizable intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Step one of the goodwill and other intangible assets impairment test is to compare the fair value of the reporting
unit with its carrying amount. The fair value of a reporting unit is the amount that a willing party would pay to buy or sell the unit, other than in a forced or liquidation sale. The carrying amount of a reporting unit is total assets, including
goodwill and other intangible assets, minus total liabilities. If the fair value is below the carrying value, the Company would proceed to the next step, which is to measure the amount of the impairment loss. Any such impairment loss would be
recognized in the Companys results of operations in the period in which the impairment loss arose.

In measuring whether goodwill or other intangible
assets are impaired, the Company uses an estimate of its future undiscounted net cash flows of the business over the estimated remaining life. If the Companys expectation of future undiscounted net cash flows indicates an impairment, the
Company would write down the appropriate assets to their estimated realizable values based on discounted cash flows. In estimating expected future cash flows for determining whether an asset is impaired, assets are grouped at the lowest level for
which there is identifiable



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Goodwill and
Other Intangible Assets (continued)



cash flows that are largely independent of the cash flows of other groups of assets. Under this approach, the Company specifically tests the Goodwill and the
Other Intangible Assets asset groups when testing for impairment. The Company did not recognize an impairment loss for the year ended December 31, 2005.

Impairment of Long-lived Assets

The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. It uses an
estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether assets are recoverable. Based on the Companys expectation of future undiscounted net cash flows, an
impairment loss would be recorded by writing down the assets to their estimated realizable values.

Product Warranty

The Companys products are generally under warranty against defects in material and workmanship.

Changes in product warranty obligations for the years ended December 31, 2005 and 2004 are as follows:



|                           |  |                |      |   |      |   |      |  
|-------------------------- |  | -------------- | ---- | - | ---- | - | ---- | -
|                           |  | December 31,   |     
|                           |  | 2005           |      |   | 2004 |  
|                           |  | (in thousands) |     
|Balance, beginning of year |  | $              | 201  |   |      | $ | 208  |  
|Provision for warranty     |  |                | 361  |   |      |   | 305  |  
|Warranty utilized          |  |                | (356 | ) |      |   | (312 | )
|                           |  |                |      |   |      |   |      |  
|Balance, end of year       |  | $              | 206  |   |      | $ | 201  |  
|                           |  |                |      |   |      |   |      |  

Revenue Recognition

The Company records monitoring service revenue in the month service is provided under its OneSource, PSF and LMS service offerings. Under the OneSource and PSF offerings, the monitoring service can be cancelled without penalty at any time
by the subscriber or customer and no product revenue is recognized because the subscriber or customer does not acquire title to any product. However, customers who choose the LMS service offering purchase the home communicators from the Company,
which the customer then provides to its subscribers. In this instance, the Company records product revenue upon shipment, as title to the equipment passes to the customer at that time.

Under the LMS and PSF service offerings, the Company charges the customer a nominal fee for one-time administrative set up and data entry of new subscribers. Under the OneSource



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Revenue
Recognition (continued)



service offering, the Company charges subscribers a nominal fee for installation of the personal response devices, including a one-time administrative set up
fee for data entry of the new subscribers. Since incremental direct costs related to the installation and administrative tasks associated with new subscribers exceed installation and one-time administrative set-up revenue, the Company expenses these
costs in the period incurred. The Company reviews its installation and one-time administrative set-up revenue quarterly and has not experienced situations where this revenue exceeds incremental direct costs.

The Company also records deferred revenue related to situations where it contracts with its customers to provide installation services for the Companys personal
response products (i.e., senior living customers). Rather than record product revenue upon shipment, the Company defers its product revenue until the installation of the equipment is complete. The Company also records deferred revenue related to
billings to customers for annual service contracts for which revenue has not been recognized because the service has not yet been provided. Service contract revenues are recognized ratably over the contractual period.

While the Company does not have a specific right of return policy, it does record a provision for an estimated amount of future returns based on historical experience.
Such returns have historically been immaterial to the Companys total product revenue.

Foreign Currency Translation

The financial statements of the Companys subsidiary outside the United States are measured using the local currency as the functional currency. Assets and
liabilities of this subsidiary are translated at the rates of exchange at the balance sheet date. The resulting translation adjustments are included in accumulated other comprehensive income/(loss), which is a separate component of
stockholders equity. Income and expense items are translated at average monthly rates of exchange. Gains and losses from foreign currency transactions of this subsidiary are included in net income.

Income Taxes

The Company accounts for income taxes under a liability
approach. Under this approach, deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse.

Net Income Per Common Share

Net income per basic common share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period, excluding restricted stock contingently
issuable. Net income per diluted common share is computed based on the weighted-average number of common and dilutive common equivalent shares outstanding during each period. Common equivalent shares consist of stock options, stock appreciation
rights and restricted stock awards calculated in accordance with SFAS No. 128, Earnings per Share(SFAS 128).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Net Income Per
Common Share (continued)



For grants of restricted stock, unearned compensation equivalent to the fair value of the shares at the date of grant
is recorded as a separate component of stockholders equity and subsequently amortized to compensation expense over the vesting period.

At
December 31, 2005, the Company has stock-based employee compensation plans, which are described more fully in Note E.

In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS 123, supersedes APB 25, and amends FASB Statement No. 95,
Statement of Cash Flows (SFAS 95). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123R must
be adopted by the first fiscal year beginning after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payments (SAB 107). SAB 107 expresses views of the SEC regarding the
interaction between SFAS 123R and certain SEC rules and regulations and provides the SECs views regarding the valuation of share-based compensation arrangements for public companies. The Company has completed its evaluation of the adoption of
SFAS 123R and has determined the impact that this statement will have on its results of operations for the year ending December 31, 2006 to be approximately $2.4 million. The Company will apply the principles of SAB 107 in conjunction with its
adoption of SFAS 123R.

The following table illustrates the effect on net income and earnings per share for the years ended December 31, 2005, 2004
and 2003 as if the fair value based method had been applied to all outstanding and unvested awards in each period.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Net Income Per
Common Share (continued)



|                                                                                                                                  |  |                                 |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                  |  | For the year ended December 31, |       
|(Dollars in thousands)                                                                                                            |  | 2005                            |        |   | 2004 |   |        | 2003 | 
|Net income, as reported                                                                                                           |  | $                               | 18,237 |   |      | $ | 12,499 |      |  | $ | 10,259 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                        |  |                                 | 153    |   |      |   | 97     |      |  |   | 79     |  
|Deduct: total stock-based compensation expense determined under the fair value method for all awards, net of related tax
benefits |  |                                 | (2,260 | ) |      |   | (1,726 | )    |  |   | (1,419 | )
|                                                                                                                                  |  |                                 |        |   |      |   |        |      |  |   |        |  
|Pro forma net income                                                                                                              |  | $                               | 16,130 |   |      | $ | 10,870 |      |  | $ | 8,919  |  
|                                                                                                                                  |  |                                 |        |   |      |   |        |      |  |   |        |  
|Earnings per share                                                                                                                |  |                                 |        |   |      |   |        |      |  |   |        |  
|Basic - as reported                                                                                                               |  | $                               | 1.31   |   |      | $ | 0.92   |      |  | $ | 0.78   |  
|                                                                                                                                  |  |                                 |        |   |      |   |        |      |  |   |        |  
|Basic - pro forma                                                                                                                 |  | $                               | 1.16   |   |      | $ | 0.80   |      |  | $ | 0.68   |  
|                                                                                                                                  |  |                                 |        |   |      |   |        |      |  |   |        |  
|Diluted - as reported                                                                                                             |  | $                               | 1.24   |   |      | $ | 0.88   |      |  | $ | 0.76   |  
|                                                                                                                                  |  |                                 |        |   |      |   |        |      |  |   |        |  
|Diluted - pro forma                                                                                                               |  | $                               | 1.08   |   |      | $ | 0.77   |      |  | $ | 0.66   |  
|                                                                                                                                  |  |                                 |        |   |      |   |        |      |  |   |        |  

Industry Segments

The Company operates in one industry segment. Its operations consist of providing personal response services associated with its products. The Company maintains sales, marketing and monitoring operations in both the United States and
Canada. Foreign revenues from Canada comprised approximately 11% of the Companys total revenues in 2005 and tangible assets in Canada represent less than 10% of the Companys total assets as of December 31, 2005.

Concentration of Credit Risk

Financial instruments, which
potentially subject the Company to concentration of credit risk, include cash and cash equivalents, short-term and long-term investments and trade receivables. The Company provides its services to its customers, consisting primarily of hospitals and
other health care institutions, as well as to subscribers. The Company performs ongoing credit evaluations of its customers and, in the case of sales-type leases the leased equipment serves as collateral in the transactions. The Company has
established guidelines relative to credit ratings, diversification and maturities that maintain safety and liquidity.

Newly Issued Accounting Standards

On June 1, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (SFAS 154), a
replacement of APB No. 20, Accounting Changes (APB No. 20), and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in
accounting principle and changes the requirements for accounting for and reporting of a change in accounting principle to be applied retrospectively with all prior period financial statements presented on the new accounting principle. SFAS 154 is
effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Newly Issued
Accounting Standards (continued)



In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs, an Amendment of ARB No. 43
Chapter 4 (SFAS 151). SFAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight and
rehandling be recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. The Company does not believe the adoption of the standard will have a
material impact on its results of operations upon adoption in fiscal 2006.

Reclassifications

Certain 2004 amounts have been reclassified to conform to 2005 presentation.



|B. | INVENTORIES
|-- | -----------

Inventories consist of the following:



|                               |  |              |       |      |   |      
|------------------------------ |  | ------------ | ----- | ---- | - | -----
|                               |  | December 31,
|(Dollars in thousands)         |  | 2005         |       | 2004
|Purchased parts and assemblies |  | $            | 1,493 |      | $ | 923  
|Work in progress               |  |              | 209   |      |   | 177  
|Finished goods                 |  |              | 4,015 |      |   | 3,446
|                               |  |              |       |      |   |      
|Total inventories              |  | $            | 5,717 |      | $ | 4,546
|                               |  |              |       |      |   |      



|C. | PROPERTY AND EQUIPMENT
|-- | ----------------------

Property and equipment consists of the following:



|                                  |  |              |         |   |      |   |         |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                  |  | December 31, |        
|(Dollars in thousands)            |  | 2005         |         |   | 2004 |  
|Equipment                         |  | $            | 35,251  |   |      | $ | 34,760  |  
|Furniture and fixtures            |  |              | 4,853   |   |      |   | 4,314   |  
|Equipment provided to customers   |  |              | 28,415  |   |      |   | 24,946  |  
|Leasehold improvements            |  |              | 9,006   |   |      |   | 8,718   |  
|Construction in progress          |  |              | 3,391   |   |      |   | 1,313   |  
|                                  |  |              |         |   |      |   |         |  
|                                  |  |              | 80,916  |   |      |   | 74,051  |  
|Less: accumulated depreciation    |  |              | (45,523 | ) |      |   | (40,021 | )
|                                  |  |              |         |   |      |   |         |  
|Total property and equipment, net |  | $            | 35,393  |   |      | $ | 34,030  |  
|                                  |  |              |         |   |      |   |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|C. | PROPERTY AND EQUIPMENT (continued)
|-- | ----------------------------------



During 2005 and 2004, the Company removed from its books approximately $5.7 million and $2.2 million, respectively,
of equipment provided to customers, computer related equipment, telephone equipment and manufacturing equipment which is no longer in use. The Company recorded a loss on disposal of $0.2 million and $0 as of December 31, 2005 and 2004,
respectively. Accumulated depreciation amounted to $16.8 million and $13.3 million on equipment provided to customers at December 31, 2005 and 2004, respectively. In total, depreciation expense amounted to $10.8 million, $10.1 million and $9.2
million for the years ended December 31, 2005, 2004 and 2003, respectively.



|D. | LEASING ARRANGEMENTS
|-- | --------------------

As Lessor

The Company maintained an internally financed and operated leasing program whereby it leased its personal response products to customers principally under sales-type
leases.As sales-type leases, the lease payments to be received over the term of the leases were recorded as a receivable at the inception of the new lease. Finance income attributable to the lease contracts was initially recorded as unearned
income and subsequently recognized as income under the interest method over the term of the leases. The lease contracts were generally for five-year terms, and the residual value of the leased equipment was considered to be nominal at the end of the
lease period.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|D. | LEASING ARRANGEMENTS (continued)
|-- | --------------------------------



The components of the net investment in sales-type leases are as follows:



|                                                       |  |              |       |      |   |      
|------------------------------------------------------ |  | ------------ | ----- | ---- | - | -----
|                                                       |  | December 31,
|(Dollars in thousands)                                 |  | 2005         |       | 2004
|Minimum lease payments receivable                      |  | $            | 4,127 |      | $ | 6,529
|Less: Unearned interest                                |  |              | 513   |      |   | 967  
|Allowance for doubtful accounts                        |  |              | 20    |      |   | 20   
|                                                       |  |              |       |      |   |      
|Net investment in sales-type leases                    |  |              | 3,594 |      |   | 5,542
|Less: Current portion                                  |  |              | 1,572 |      |   | 1,906
|                                                       |  |              |       |      |   |      
|Long-term portion, net investment in sales-type leases |  | $            | 2,022 |      | $ | 3,636
|                                                       |  |              |       |      |   |      

Future minimum lease payments due under non-cancellable sales-type leases at December 31, 2005 are as
follows:



|                                    |  |   |      
|----------------------------------- |  | - | -----
|(Dollars in thousands)              |  |  
|2006                                |  | $ | 1,907
|2007                                |  |   | 1,271
|2008                                |  |   | 764  
|2009                                |  |   | 185  
|2010                                |  |   |     
|                                    |  |   |      
|Total future minimum lease payments |  | $ | 4,127
|                                    |  |   |      

In December 2003, the Company entered into a program agreement with a third party to underwrite equipment leases
for its senior living initiative and its PERS equipment business. In the initial transaction under this agreement, the Company assigned approximately $1.5 million of its net investment of its existing lease portfolio to the third party for
approximately $1.6 million in cash.

In December 2004, the Company entered into a second agreement to assign its remaining $4.0 million lease-portfolio net
investment to the aforementioned third party for approximately $4.0 million in cash. The net investment of the assigned portfolios remains with the Company and is included in the components of net investment in sales-type leases in the above table.
The net investment will be amortized over the remaining terms of the leases, as paid. The Company also recorded an offsetting liability, in which the current portion of approximately $1.5 million is included in other current liabilities and the
long-term portion of approximately $2.0 million is included in other long-term liabilities on the Companys balance sheet. The Company also recorded deferred finance income of approximately $226,000 on the assignments, of which $89,000 remains
at December 31, 2005 and which will be recognized as part of finance income as the leases expire. The Company recorded the current portion of the deferred finance income in other current liabilities and the long-term portion in other long-term
liabilities on its balance sheet.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|D. | LEASING ARRANGEMENTS (continued)
|-- | --------------------------------



As Lessee

The
Company is party to a fifteen-year non-cancellable operating lease for its corporate headquarters in Framingham, Massachusetts. Average annual base rental payments under the lease approximate $941,000.

In November 2004, the Company entered into an amendment to its October 2002 ten-year non-cancellable operating lease to increase its occupancy to 35,000 square feet of a
second facility in Framingham, Massachusetts for its second U.S. monitoring facility. Average annual base rental payments under the lease approximate $251,000.

These leases include scheduled base rent increases over the term of the leases. The total amount of base rent payments is being charged to expense on the straight-line method over the terms of the leases. The Company has recorded a deferred
credit to reflect the excess of rent expense over cash payments upon the commencement of the leases. In addition, the Company pays a monthly allocation of each buildings operating expenses and real estate taxes. The Company has two renewal
options of five years for each lease.

The Company also has several operating lease arrangements for facilities in other locations to support its field and
Canadian operations that expire through 2012. In addition, the Company has several operating lease arrangements for office equipment.

Future minimum lease
payments under operating leases with initial or remaining terms of one year or more are as follows for the years ending December 31:



|                             |  |                  |       
|---------------------------- |  | ---------------- | ------
|(Dollars in thousands)       |  | Operating Leases
|2006                         |  | $                | 1,815 
|2007                         |  |                  | 1,718 
|2008                         |  |                  | 1,588 
|2009                         |  |                  | 1,618 
|2010                         |  |                  | 1,612 
|Thereafter                   |  |                  | 4,317 
|                             |  |                  |       
|Total minimum lease payments |  | $                | 12,668
|                             |  |                  |       

Total rent expense under all operating leases was $1.7 million for each of the years ended December 31, 2005,
2004 and 2003.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|E. | STOCKHOLDERS EQUITY
|-- | --------------------



Net Income Per Common Share

In accordance with SFAS 128, the Company presents basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares
outstanding for the period, excluding restricted stock contingently issuable. Diluted EPS reflects the potential dilution that could occur if securities convertible into common stock or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. A reconciliation of basic EPS to diluted EPS and dual presentation on the face of the statement of income are also required.

Calculation of per share earnings is as follows:



|                                                      |  |      |        |      |   |        |  |   |       
|----------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|(In thousands except per share figures)               |  | 2005 |        | 2004 |   | 2003  
|Basic:                                                |  |      |        |      |   |        |  |   |       
|Net income                                            |  | $    | 18,237 |      | $ | 12,499 |  | $ | 10,259
|Weighted average common shares outstanding            |  |      | 13,934 |      |   | 13,585 |  |   | 13,126
|Net income per share, basic                           |  | $    | 1.31   |      | $ | 0.92   |  | $ | 0.78  
|                                                      |  |      |        |      |   |        |  |   |       
|Diluted:                                              |  |      |        |      |   |        |  |   |       
|Net income for calculating diluted earnings per share |  | $    | 18,237 |      | $ | 12,499 |  | $ | 10,259
|Weighted average common shares outstanding            |  |      | 13,934 |      |   | 13,585 |  |   | 13,126
|Common stock equivalents                              |  |      | 718    |      |   | 575    |  |   | 413   
|                                                      |  |      |        |      |   |        |  |   |       
|Total weighted average shares                         |  |      | 14,652 |      |   | 14,160 |  |   | 13,539
|Net income per share, diluted                         |  | $    | 1.24   |      | $ | 0.88   |  | $ | 0.76  
|                                                      |  |      |        |      |   |        |  |   |       

For the years ended December 31, 2005, 2004 and 2003, options to purchase 55,000, 1,200 and 23,000 shares,
respectively, at an average exercise price of $32.26, $22.72 and $15.14 respectively, have not been included in the computation of diluted net income per share, as their effect would have been anti-dilutive.

Stock-Based Compensation Plans

The Company has adopted the
disclosure requirements of SFAS 123. For the year ended December 31, 2005, the Company continued to recognize compensation costs using the intrinsic value based method described in APB 25 and FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation.

In July 2000, the Companys shareholders approved the 2000 Stock Incentive Plan (the
2000 Plan). In May 2003, the Companys shareholders approved an amendment to the 2000 Plan to, among other things, increase the number of shares issuable under the 2000 Plan and to increase the term of the 2000 Plan from five to ten
years. In December 2005, the Board of Directors of the Company approved an amendment to change the vesting schedule for grants made to non-employee directors under the 2000 Plan. The 2000 Plan provides that officers and key



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|E. | STOCKHOLDERS EQUITY (continued)
|-- | --------------------------------



employees may be granted either nonstatutory or incentive stock options for the purchase of the Companys common stock at the fair market value on the
date of grant. The 2000 Plan also permits the issuance of restricted stock and stock appreciation rights. The employee options granted generally become exercisable in three equal annual installments beginning on the first anniversary of the date of
grant. Additionally, the 2000 Plan provides for an automatic annual grant to non-employee directors. The non-employee director options granted prior to January 10, 2006 become exercisable in three equal annual installments with the first
installment exercisable on the date of grant and an additional one-third becoming exercisable on each of the next two anniversary dates and expire ten years from the date of grant. The non-employee director options granted on January 10, 2006
become exercisable in 16 quarterly installments beginning three months from the date of grant and expire seven years from the date of grant.

In February
2000, the Board of Directors of the Company approved the 2000 Employee Stock Option Plan (the 2000 Employee Option Plan). This plan was authorized primarily to enable the Company to grant options to non-executive employees in 2000 as
part of its annual stock option program pending shareholder consideration of a new plan. No shareholder approval was sought for the 2000 Employee Option Plan.

The 1991 and 1994 Stock Option Plans provided for similar grants to officers and employees. The employee options granted pursuant to these plans generally became exercisable at a rate of 20% per year and expire ten years from the date
of grant.

On April 4, 2001, the Board of Directors of the Company voted to terminate the 1991 and 1994 Stock Option Plans and the 2000 Employee
Option Plan. Under the terms of the 2000 Plan, if any stock option grant under any of the aforementioned terminated plans of the Company expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole
or in part or results in any common stock not being issued, unused common stock covered by such stock option grant shall again be available for the grant of a stock option under the 2000 Plan.

At December 31, 2005, shares available for future grants under all option plans were 377,745. Under the 2000 Plan, the number of shares issuable is automatically
increased every January 1 by an amount equal to the least of (i) 500,000 shares of common stock, (ii) 2.5% of the outstanding shares on such date or (iii) an amount determined by the Companys Board of Directors. In
addition, the aggregate number of shares available for the grant of options to non-employee directors is automatically increased every January 1 by the number necessary to cause the total number of shares then available for non-employee
directors to be restored to 90,000.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|E. | STOCKHOLDERS EQUITY (continued)
|-- | --------------------------------



The following table summarizes all stock option plan activity for the years ended December 31:



|                                                                                    |  |           |   |      |                       |       |        |           |   |                       |   |        |  |           |                       |  |   |      
|----------------------------------------------------------------------------------- |  | --------- | - | ---- | --------------------- | ----- | ------ | --------- | - | --------------------- | - | ------ |  | --------- | --------------------- |  | - | -----
|                                                                                    |  | 2005      |   | 2004 |                       | 2003 
|                                                                                    |  | Shares    |   |      | Wgtd. Avg.Exer. Price |       | Shares |           |   | Wgtd. Avg.Exer. Price |   | Shares |  |           | Wgtd. Avg.Exer. Price
|Outstanding at beginning of year                                                    |  | 1,751,904 |   |      | $                     | 11.38 |        | 1,865,362 |   |                       | $ | 9.47   |  | 1,844,800 |                       |  | $ | 8.55 
|Granted                                                                             |  | 353,700   |   |      |                       | 27.18 |        | 283,100   |   |                       |   | 20.25  |  | 393,480   |                       |  |   | 10.94
|Exercised                                                                           |  | (300,755  | ) |      |                       | 9.58  |        | (373,025  | ) |                       |   | 8.37   |  | (323,892  | )                     |  |   | 5.89 
|Cancelled or lapsed                                                                 |  | (14,900   | ) |      |                       | 20.02 |        | (23,533   | ) |                       |   | 14.70  |  | (49,026   | )                     |  |   | 10.06
|                                                                                    |  |           |   |      |                       |       |        |           |   |                       |   |        |  |           |                       |  |   |      
|Outstanding at end of year                                                          |  | 1,789,949 |   |      | $                     | 14.72 |        | 1,751,904 |   |                       | $ | 11.38  |  | 1,865,362 |                       |  | $ | 9.47 
|                                                                                    |  |           |   |      |                       |       |        |           |   |                       |   |        |  |           |                       |  |   |      
|Options exercisable at year end                                                     |  | 1,160,680 |   |      | $                     | 11.11 |        | 1,116,675 |   |                       | $ | 9.45   |  | 1,100,684 |                       |  | $ | 8.61 
|Weighted average fair value of options granted at fair market value during the year |  |           |   |      | $                     | 11.10 |        |           |   |                       | $ | 9.66   |  |           |                       |  | $ | 5.89 

The effect of applying SFAS 123 for the purpose of providing pro forma disclosure as noted in Note A above may not
be indicative of the effects on reported net income and net income per share for future years because the Company may grant more or fewer awards than in the past and these awards may have different features.

For the purpose of providing pro forma disclosures, the fair values of stock options granted were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2005, 2004 and 2003, respectively: a weighted average risk-free interest rate of 3.8%, 4.1% and 3.8%; a weighted average expected life of 6 years, 8 years and 7 years; expected volatility of
37% in 2005 and 2004 and 38% in 2003; and no expected dividends.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|E. | STOCKHOLDERS EQUITY (continued)
|-- | --------------------------------



The following table summarizes information about stock options outstanding at December 31, 2005:



|                         |  |                               |  |                                           |  |                                |       |                               |           |                                |   |      
|------------------------ |  | ----------------------------- |  | ----------------------------------------- |  | ------------------------------ | ----- | ----------------------------- | --------- | ------------------------------ | - | -----
|Options Outstanding      |  | Options Exercisable          
|Range of Exercise Prices |  | Number Outstandingat 12/31/05 |  | Weighted AverageRemainingContractual Life |  | Weighted AverageExercise Price |       | Number Exercisable at12/31/05 |           | Weighted AverageExercise Price
|$2.50 - $  6.50          |  | 70,162                        |  | 3.9                                       |  | $                              | 4.89  |                               | 70,162    |                                | $ | 4.89 
|6.51 -     7.25          |  | 220,251                       |  | 4.9                                       |  |                                | 6.79  |                               | 220,251   |                                |   | 6.79 
|7.26 -   11.50           |  | 462,773                       |  | 5.8                                       |  |                                | 10.10 |                               | 317,881   |                                |   | 9.92 
|11.51 -   17.50          |  | 438,464                       |  | 4.9                                       |  |                                | 12.13 |                               | 426,130   |                                |   | 12.09
|17.51 -   32.71          |  | 598,299                       |  | 7.3                                       |  |                                | 24.26 |                               | 126,256   |                                |   | 21.74
|                         |  |                               |  |                                           |  |                                |       |                               |           |                                |   |      
|$2.50 - $32.71           |  | 1,789,949                     |  | 5.9                                       |  | $                              | 14.72 |                               | 1,160,680 |                                | $ | 11.11
|                         |  |                               |  |                                           |  |                                |       |                               |           |                                |   |      

In May 2005, the shareholders of the Company approved the 2005 Employee Stock Purchase Plan (the 2005
ESPP) whereby eligible employees may invest up to 15% of their base salary in shares of the Companys common stock. The purchase price of the shares is 95% of the fair market value of the stock on the date of purchase. Under the 2005
ESPP, 200,000 shares of common stock are available for purchase over ten offering periods through May 2010, of which approximately 193,394 shares remain available as of December 31, 2005. Shares purchased under the 2005 ESPP totaled 6,606 in
2005. The weighted-average grant-date fair value of the shares purchased under the 2005 ESPP was $38.91.

In July 2000, the shareholders of the Company
approved the 2000 Employee Stock Purchase Plan (2000 ESPP) whereby eligible employees could invest up to 15% of their base salary in shares of the Companys common stock. The purchase price of the shares was 85% of the fair market
value of the stock on either the commencement date or the date of purchase, whichever was lower. Under the 2000 ESPP, 400,000 shares of common stock were available for purchase over ten offering periods through May 2005, of which approximately
138,892 shares remained when the 2000 ESPP was terminated in May 2005. Shares purchased under the 2000 ESPP totaled 25,329, 51,511 and 51,926 in 2005, 2004 and 2003, respectively. The weighted-average grant-date fair value of shares purchased under
the 2000 ESPP was $29.50, $20.66 and $12.40 in 2005, 2004 and 2003, respectively.

For the purpose of providing pro forma disclosures, the fair values of
shares purchased were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for purchases in 2005, 2004 and 2003, respectively: a risk free interest rate of 3.15%, 1.64% and 1.03%; an expected
life of 6 months in each year; expected volatility of 35%, 37% and 38%; and no expected dividends.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|E. | STOCKHOLDERS EQUITY (continued)
|-- | --------------------------------



Restricted Stock

On December 7, 2005, the Compensation Committee of the Board of Directors (the Compensation Committee) of the Company approved an amendment (the Amendment) to the employment agreement between the Company and its
Chief Executive Officer. In accordance with the terms of the Amendment, the Company issued 60,000 shares of restricted stock to its Chief Executive Officer, effective December 7, 2005, in consideration of future services, 20,000 shares of which
will vest on each of May 1, 2009, May 1, 2010 and May 1, 2011. The fair market value of these shares was recorded as unearned compensation expense within Stockholders Equity and is being expensed as part of selling, general
and administrative expenses from the date of issuance over the vesting period.

In accordance with the terms of the original employment agreement between
the Company and its Chief Executive Officer, the Company issued 72,000 shares of restricted stock to its Chief Executive Officer, effective February 13, 2003, in consideration of future services. The shares are subject to vesting at the rate of
one-third of such shares at the end of the 36thmonth following the date of grant, one third at the end of the
48thmonth following the date of grant and one-third at the end of the 60thmonth following the date of grant. The fair market value of these shares was recorded as unearned compensation expense within Stockholders
Equity and is being expensed as part of selling, general and administrative expenses from the date of issuance over the vesting period.

The Company held a
special meeting of shareholders on December 8, 2004 to approve an agreement and plan of share exchange for purposes of creating a holding company structure. Prior to the share exchange between the Company and Lifeline Systems Company effected
on December 9, 2004 (the Share Exchange), the Company entered into a Rights Agreement, effective as of November 19, 2004, with Registrar and Transfer Company, as rights agent (the Rights Agreement). In connection
with the Rights Agreement, the Board of Directors of the Company declared a dividend of one preferred stock purchase right (each purchase right, a Right) for each outstanding share of Company common stock held of record as of the close
of business on December 7, 2004. As a result, each share of Company common stock distributed in the connection with the Share Exchange on December 9, 2004 included an associated Right. Each Right, when exercisable, entitles the registered
holder to purchase from the Company a unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock, $0.01 par value per share, at a per unit purchase price of $100, subject to adjustment upon the occurrence of
events specified in the Rights Agreement. The Rights Agreement replaced a comparable agreement to which the Company was a party prior to the Share Exchange.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|F. | INCOME TAXES
|-- | ------------



The components of income before income taxes consists of the following:



|                       |  |                                  |        |      |   |        |  |   |       
|---------------------- |  | -------------------------------- | ------ | ---- | - | ------ |  | - | ------
|                       |  | For the years ended December 31,
|(Dollars in thousands) |  | 2005                             |        | 2004 |   | 2003  
|Domestic               |  | $                                | 21,618 |      | $ | 17,053 |  | $ | 15,145
|Foreign                |  |                                  | 3,045  |      |   | 2,502  |  |   | 1,953 
|                       |  |                                  |        |      |   |        |  |   |       
|                       |  | $                                | 24,663 |      | $ | 19,555 |  | $ | 17,098
|                       |  |                                  |        |      |   |        |  |   |       

The provision (benefit) for income taxes was computed as follows:



|                           |  |                                  |       |   |      |   |       |      |  |   |      
|-------------------------- |  | -------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | -----
|                           |  | For the years ended December 31,
|(Dollars in thousands)     |  | 2005                             |       |   | 2004 |   |       | 2003
|Federal income taxes:      |  |                                  |       |   |      |   |       |      |  |   |      
|Current                    |  | $                                | 4,707 |   |      | $ | 6,035 |      |  | $ | 4,850
|Deferred                   |  |                                  | (609  | ) |      |   | (152  | )    |  |   | 127  
|                           |  |                                  |       |   |      |   |       |      |  |   |      
|                           |  |                                  | 4,098 |   |      |   | 5,883 |      |  |   | 4,977
|                           |  |                                  |       |   |      |   |       |      |  |   |      
|State income taxes:        |  |                                  |       |   |      |   |       |      |  |   |      
|Current                    |  |                                  | 1,253 |   |      |   | 767   |      |  |   | 1,331
|Deferred                   |  |                                  | (44   | ) |      |   | (258  | )    |  |   | 52   
|                           |  |                                  |       |   |      |   |       |      |  |   |      
|                           |  |                                  | 1,209 |   |      |   | 509   |      |  |   | 1,383
|                           |  |                                  |       |   |      |   |       |      |  |   |      
|Foreign income taxes       |  |                                  | 1,119 |   |      |   | 664   |      |  |   | 479  
|                           |  |                                  |       |   |      |   |       |      |  |   |      
|Provision for income taxes |  | $                                | 6,426 |   |      | $ | 7,056 |      |  | $ | 6,839
|                           |  |                                  |       |   |      |   |       |      |  |   |      



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|F. | INCOME TAXES (continued)
|-- | ------------------------



Deferred tax assets (liabilities) are comprised of the following significant items at December 31:



|                                              |  |      |        |   |      |    |        |  
|--------------------------------------------- |  | ---- | ------ | - | ---- | -- | ------ | -
|(Dollars in thousands)                        |  | 2005 |        |   | 2004 |   
|Current deferred tax assets:                  |  |      |        |   |      |    |        |  
|Inventory and warranty reserves               |  | $    | 550    |   |      | $  | 603    |  
|Accounts receivable reserves                  |  |      | 245    |   |      |    | 256    |  
|Deferred compensation                         |  |      | 24     |   |      |    |       |  
|Deferred revenue                              |  |      | 7      |   |      |    |       |  
|Accrued vacation and other reserves           |  |      | 11     |   |      |    | 233    |  
|                                              |  |      |        |   |      |    |        |  
|Net current deferred tax asset                |  |      | 837    |   |      |    | 1,092  |  
|                                              |  |      |        |   |      |    |        |  
|Noncurrent deferred tax assets (liabilities): |  |      |        |   |      |    |        |  
|Sales type leases                             |  |      | (518   | ) |      |    | (1,340 | )
|Depreciation                                  |  |      | (6,232 | ) |      |    | (6,336 | )
|Amortization                                  |  |      | 931    |   |      |    | 1,165  |  
|                                              |  |      |        |   |      |    |        |  
|Net noncurrent deferred tax liability         |  |      | (5,819 | ) |      |    | (6,511 | )
|                                              |  |      |        |   |      |    |        |  
|Net deferred tax liability                    |  | ($   | 4,982  | ) |      | ($ | 5,419  | )
|                                              |  |      |        |   |      |    |        |  

The differences between the statutory U.S. federal income tax rate and the Companys effective tax rate are
as follows:



|                                            |  |                                  |        |   |      |   |       |      |  |   |      
|------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ----- | ---- |  | - | -----
|                                            |  | For the years ended December 31,
|(Dollars in thousands)                      |  | 2005                             |        |   | 2004 |   |       | 2003
|Provision at statutory rate                 |  | $                                | 8,632  |   |      | $ | 6,844 |      |  | $ | 5,984
|State income tax, net of federal tax effect |  |                                  | 786    |   |      |   | 322   |      |  |   | 780  
|Discrete items                              |  |                                  | (2,865 | ) |      |   |      |      |  |   |     
|Foreign rate differences                    |  |                                  | 54     |   |      |   | 42    |      |  |   | 32   
|Other, net                                  |  |                                  | (181   | ) |      |   | (152  | )    |  |   | 43   
|                                            |  |                                  |        |   |      |   |       |      |  |   |      
|Provision for income taxes                  |  | $                                | 6,426  |   |      | $ | 7,056 |      |  | $ | 6,839
|                                            |  |                                  |        |   |      |   |       |      |  |   |      

The Company recorded an approximate $2.9 million reduction of accrued tax liabilities related to the expiration of
certain statutes of limitations on previous tax positions and favorable adjustments as a result of tax settlements.

On October 22, 2004, President
Bush signed the American Jobs Creation Act of 2004 into law, which did not have a material impact on the Companys financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|G. | EMPLOYEE BENEFIT PLAN
|-- | ---------------------



The Company has a 401(k) defined contribution savings plan covering substantially all of its employees. The
Companys contributions, which are included in selling, general and administrative expenses, were $0.8 million, $0.7 million and $0.6 million for the years ended December 31, 2005, 2004 and 2003, respectively.



|H. | SUPPLEMENTAL CASH FLOW INFORMATION
|-- | ----------------------------------

Cash paid for income taxes amounted to
$9.3 million, $2.3 million and $7.2 million during 2005, 2004 and 2003, respectively. Interest paid was $14,000, $29,000 and $44,000 during 2005, 2004 and 2003, respectively.



|I. | GOODWILL AND INTANGIBLES
|-- | ------------------------

During the year ended December 31, 2005,
the Company acquired a regional service provider and a supplier of emergency call systems for the senior living industry for an aggregate amount of approximately $4.7 million. The Company completed the purchase price allocation for the regional
service provider during 2005 and, accordingly, it recorded approximately $27,000 of goodwill and $1.7 million of other intangible assets, the majority of which the Company will amortize over an estimated life of 15 years. The Company is currently in
the process of obtaining information in order to finalize the purchase accounting associated with the purchase of the supplier of emergency call systems for the senior living industry. The Company expects to complete the purchase price allocation
during the first quarter of 2006.

In addition, in accordance with the Companys assessment of the fair value of assets acquired from its previous
acquisitions, the Company recorded approximately $1.1 million of additional goodwill as a result of a payment for certain earnout provisions associated with the agreements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

I. GOODWILL AND INTANGIBLES (continued)



The following table represents the type and value of the Companys intangible assets at December 31, 2005
and December 31, 2004:



|                                           |  |                      |        |                         |                   |         |                      |  |                         |        |  |    |         |  
|------------------------------------------ |  | -------------------- | ------ | ----------------------- | ----------------- | ------- | -------------------- |  | ----------------------- | ------ |  | -- | ------- | -
|                                           |  | December 31, 2005    |        |                         | December 31, 2004 |        
|(Dollars in thousands)                     |  | Gross CarryingAmount |        | AccumulatedAmortization |                   |         | Gross CarryingAmount |  | AccumulatedAmortization |       
|Goodwill                                   |  | $                    | 11,217 |                         | $                 | 0       |                      |  | $                       | 8,821  |  | $  | 0       |  
|                                           |  |                      |        |                         |                   |         |                      |  |                         |        |  |    |         |  
|Intangible assets subject to amortization: |  |                      |        |                         |                   |         |                      |  |                         |        |  |    |         |  
|Provider agreements                        |  |                      | 8,815  |                         |                   | (6,419  | )                    |  |                         | 7,236  |  |    | (5,707  | )
|Referral sources                           |  |                      | 18,583 |                         |                   | (7,207  | )                    |  |                         | 14,103 |  |    | (5,860  | )
|Employment and non-competition agreements  |  |                      | 258    |                         |                   | (88     | )                    |  |                         | 127    |  |    | (38     | )
|Customer lists and subscribers             |  |                      | 1,732  |                         |                   | (643    | )                    |  |                         | 728    |  |    | (198    | )
|Other identifiable intangible assets (1)   |  |                      | 3,186  |                         |                   | (91     | )                    |  |                         | 2,480  |  |    | (33     | )
|                                           |  |                      |        |                         |                   |         |                      |  |                         |        |  |    |         |  
|Total intangible assets                    |  |                      | 32,574 |                         |                   | (14,448 | )                    |  |                         | 24,674 |  |    | (11,836 | )
|                                           |  |                      |        |                         |                   |         |                      |  |                         |        |  |    |         |  
|Total goodwill and intangible assets       |  | $                    | 43,791 |                         | ($                | 14,448  | )                    |  | $                       | 33,495 |  | ($ | 11,836  | )
|                                           |  |                      |        |                         |                   |         |                      |  |                         |        |  |    |         |  



|(1) | The majority of this amount in 2005 relates to the purchase of a supplier of emergency call systems for the senior living industry. The Company has not yet finalized the purchase
accounting associated with this acquisition. The Company completed the purchase accounting associated with the 2004 amount in other identifiable intangible assets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All of the Companys acquired intangible assets, other than goodwill, are subject to amortization. Amortization expense for acquired intangible assets for the years ended December 31, 2005, 2004 and 2003 was
approximately $2.6 million, $2.7 million and $2.5 million, respectively.

Estimated amortization expense for intangible assets over the next five years is
as follows (dollars in thousands):



|                                |  |  |  |  |  |        |      
|------------------------------- |  |  |  |  |  | ------ | -----
|Fiscal Year Ending December 31, |  |  |  |  |  | Amount
|2006                            |  |  |  |  |  | $      | 2,505
|2007                            |  |  |  |  |  |        | 2,146
|2008                            |  |  |  |  |  |        | 1,645
|2009                            |  |  |  |  |  |        | 1,440
|2010                            |  |  |  |  |  |        | 1,200



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|J. | OTHER NON-RECURRING ITEM
|-- | ------------------------



On May 1, 2003, the Company reached an agreement with one of its former vendors related to the Companys
previously announced matter related to erroneous low-battery signals. The vendor paid the Company $0.7 million in exchange for a mutual release of claims, and the Company recorded this settlement as an other non-recurring item. The payment
reimburses the Company for some of the costs it incurred in addressing this matter.



|K. | LONG TERM DEBT
|-- | --------------

In July 2004, the Company entered into an amendment to its
revolving credit agreement dated August 2002 to increase the credit facility to $30.0 million. The amendment has two components, the first of which is the ability to obtain a revolving credit loan with an interest rate based on the London Interbank
Offered Rate (LIBOR). The second component is the ability to obtain a revolving credit loan with an interest rate based on the lenders prime interest rate. The Company has the option to elect to convert any outstanding revolving
credit loan to a revolving credit loan of the other type. The agreement contains several covenants, including the Company maintaining certain levels of financial performance. These financial covenants include a requirement for a current ratio of at
least 1.5 to 1.0 and an operating cash flow to total debt service ratio of no less than 1.75 to 1.0.

In addition, there are certain negative covenants
that include restrictions on the disposition of the Companys assets, restrictions on the Companys capacity to obtain additional debt financing and restrictions on its investment portfolio. The agreement also requires the Company to pay a
commitment fee of one-eighth of one percent (1/8%) per annum on the unused amount of the first $15.0 million of the credit facility if the aggregate principal amount of all outstanding revolving credit loans plus outstanding letters of credit
does not exceed $15.0 million or one-eight of one percent (1/8%) per annum on the unused amount of the entire credit facility if the aggregate principal amount of all outstanding revolving credit loans plus outstanding letters of credit exceeds
$15.0 million.

This revolving credit agreement matures in July 2007 and, as of December 31, 2005, there was no debt outstanding under this agreement.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|L. | SEGMENT INFORMATION
|-- | -------------------



The Company operates in one industry segment. Its operations consist of providing personal response services
associated with its products. The Company maintains sales, marketing and monitoring operations in both the United States and Canada.

Geographic Data

Net revenues to external customers are based on the location of the customer. Geographic information as of December 31, 2005, 2004 and 2003
and for the years then ended is presented as follows:



|                       |  |      |         |      |   |         |  |   |        
|---------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|(Dollars in thousands) |  | 2005 |         | 2004 |   | 2003   
|Net Sales:             |  |      |         |      |   |         |  |   |        
|United States          |  | $    | 133,906 |      | $ | 116,640 |  | $ | 104,716
|Canada                 |  |      | 17,246  |      |   | 13,909  |  |   | 11,443 
|                       |  |      |         |      |   |         |  |   |        
|                       |  | $    | 151,152 |      | $ | 130,549 |  | $ | 116,159
|                       |  |      |         |      |   |         |  |   |        
|Net Income:            |  |      |         |      |   |         |  |   |        
|United States          |  | $    | 16,311  |      | $ | 10,660  |  | $ | 8,785  
|Canada                 |  |      | 1,926   |      |   | 1,839   |  |   | 1,474  
|                       |  |      |         |      |   |         |  |   |        
|                       |  | $    | 18,237  |      | $ | 12,499  |  | $ | 10,259 
|                       |  |      |         |      |   |         |  |   |        
|Total Assets:          |  |      |         |      |   |         |  |   |        
|United States          |  | $    | 136,059 |      | $ | 117,289 |  | $ | 93,238 
|Canada                 |  |      | 15,763  |      |   | 11,759  |  |   | 8,229  
|                       |  |      |         |      |   |         |  |   |        
|                       |  | $    | 151,822 |      | $ | 129,048 |  | $ | 101,467
|                       |  |      |         |      |   |         |  |   |        



|M. | CONTINGENCIES
|-- | -------------

The Company is subject to complaints, claims and litigation
that arise in the normal course of business. Management is not aware of any significant claims that would have a material adverse effect on the financial position or operations of the Company.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|N. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|-- | -------------------------------------------



The following is a summary of the unaudited quarterly results of operations for the fiscal years ended
December 31, 2005 and December 31, 2004:



|                                              |  |                               |  |                           |        |           |   |        |  |   |        |  |   |        |  |   |        
|--------------------------------------------- |  | ----------------------------- |  | ------------------------- | ------ | --------- | - | ------ |  | - | ------ |  | - | ------ |  | - | -------
|                                              |  |                               |  | Quarter Ended (Unaudited) |        | Full Year
|(Dollars in thousands, except per share data) |  | Mar 31                        |  | Jun 30                    |        | Sep 30    |   | Dec 31 | 
|2005                                          |  | Total revenues                |  | $                         | 34,989 |           | $ | 36,892 |  | $ | 38,644 |  | $ | 40,627 |  | $ | 151,152
|                                              |  | Gross profit                  |  |                           | 19,490 |           |   | 20,868 |  |   | 22,256 |  |   | 23,121 |  |   | 85,735 
|                                              |  | Net income                    |  |                           | 3,267  |           |   | 3,403  |  |   | 6,373  |  |   | 5,194  |  |   | 18,237 
|                                              |  | Net income per share, diluted |  | $                         | 0.23   |           | $ | 0.23   |  | $ | 0.43   |  | $ | 0.35   |  | $ | 1.24   
|                                              |  |                               |  |                           |        |          
|2004                                          |  | Total revenues                |  | $                         | 30,950 |           | $ | 31,515 |  | $ | 33,105 |  | $ | 34,979 |  | $ | 130,549
|                                              |  | Gross profit                  |  |                           | 16,258 |           |   | 17,192 |  |   | 19,166 |  |   | 19,462 |  |   | 72,078 
|                                              |  | Net income                    |  |                           | 2,186  |           |   | 2,601  |  |   | 3,228  |  |   | 4,484  |  |   | 12,499 
|                                              |  | Net income per share, diluted |  | $                         | 0.16   |           | $ | 0.18   |  | $ | 0.23   |  | $ | 0.31   |  | $ | 0.88   



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|ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None



|ITEM 9A. | Controls and Procedures
|-------- | -----------------------

Our management, with the participation of
our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2005, our chief executive officer and chief financial
officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Managements report
on our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and the independent registered public accounting firms related audit report are included in Item 8 of this Annual Report
on Form 10-K and are incorporated herein by reference.

No change in our internal control over financial reporting occurred during the fiscal quarter ended
December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|ITEM 9B. | Other Information
|-------- | -----------------

None



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PART III



|ITEM 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------

The following table lists the members of our Board of Directors:



|                                 |  |     |  |               |  |                      |  |                                      
|-------------------------------- |  | --- |  | ------------- |  | -------------------- |  | -------------------------------------
|Name                             |  | Age |  | DirectorSince |  | Expirationof Term(1) |  | Other Offices Held                   
|L. Dennis Shapiro (2)(3)(5)      |  | 72  |  | 1978          |  | 2008                 |  | Chairman of the Board                
|Ronald Feinstein                 |  | 59  |  | 1985          |  | 2006                 |  | President and Chief Executive Officer
|Everett N. Baldwin (2)(5)        |  | 73  |  | 1991          |  | 2008                 |  |                                     
|S. Ward Casscells, III, M.D. (5) |  | 53  |  | 2002          |  | 2007                 |  |                                     
|Ellen Feingold (3)(4)(5)         |  | 75  |  | 2003          |  | 2006                 |  |                                     
|Joseph E. Kasputys (3)(4)(5)     |  | 69  |  | 1985          |  | 2006                 |  |                                     
|Carolyn C. Roberts (2)(5)        |  | 66  |  | 1994          |  | 2007                 |  |                                     
|Gordon C. Vineyard, M.D. (2)(5)  |  | 69  |  | 1985          |  | 2007                 |  |                                     

---

|(1) | Our Board of Directors is divided into three classes, each having a three-year term of office. The term of one class expires each year. Directors hold office until the Annual
Meeting of Shareholders held during the year noted and until their respective successors have been elected and qualified.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Member of the Audit Committee.
|--- | ------------------------------



|(3) | Member of the Compensation Committee.
|--- | -------------------------------------



|(4) | Member of the Stock Option Plans Committee.
|--- | -------------------------------------------



|(5) | Member of the Nominating and Corporate Governance Committee.
|--- | ------------------------------------------------------------

The
following table lists our executive officers:



|                    |  |     |  |                                                                        
|------------------- |  | --- |  | -----------------------------------------------------------------------
|Name                |  | Age |  | Title                                                                  
|Ronald Feinstein    |  | 59  |  | President, Chief Executive Officer and Director                        
|Ellen R. Berezin    |  | 56  |  | Vice President, Human Resources                                        
|Mark G. Beucler     |  | 40  |  | Vice President, Finance, Chief Financial Officer and Treasurer         
|Edward M. Bolesky   |  | 59  |  | Senior Vice President, Customer Care                                   
|Richard M. Reich    |  | 58  |  | Senior Vice President and Chief Information Officer                    
|Donald G. Strange   |  | 59  |  | Senior Vice President, Sales                                           
|Leonard E. Wechsler |  | 48  |  | President, Lifeline Systems Canada and Vice President, Lifeline Systems

There are no family relationships between or among any of our officers or directors.



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Mr. Shapiro has been our chairman of the board since 1978 and was our chief executive officer and treasurer
from 1978 through December 1988.

Mr. Feinstein has been our president and chief executive officer since January 1993. From August 1992 to
January 1993, Mr. Feinstein served as our executive vice president and chief operating officer.

Mr. Baldwin served as president and chief
executive officer of Welch Foods, Inc. from August 1982 to August 1995, and as a director of Welch Foods from August 1982 to December 1995. Mr. Baldwin retired from Welch Foods in 1995.

Dr. Casscells has served as vice president for biotechnology and a professor of public health at the University of Texas Health Science Center at Houston
since 2001 and 2002, respectively, and has held the John Edward Tyson Distinguished Professorship of Medicine since 2000. From 1993 to 2001, he was the specialist in cardiovascular medicine and chief of cardiology at the University of Texas.

Ms. Feingold has been president of Boston-based Jewish Community Housing for the Elderly since 1981. Ms. Feingold has served in a number
of appointed and elected positions, most recently appointed as co-chair of the U.S. Commission on Affordable Housing and Health Facility Needs for Seniors in the 21st Century.

Mr. Kasputys founded and has been chairman, president and chief executive officer of Global Insight, Inc. since March 2001. Through its acquired companies, Global Insight provides economic and financial
information and forecasts to clients in government, finance and industry. Prior to that, Mr. Kasputys was chairman of Thomson Financial, a two billion dollar division of The Thomson Corporation, from September 2000 to December 2000. He was
chairman, president and chief executive officer of Primark Corporation, an international company traded on the NYSE primarily engaged in the information industry, from June 1987 to September 2000, when Primark Corporation was acquired by The Thomson
Corporation.

Ms. Roberts has served as president of Connors/Roberts Associates, a health care management consulting firm, since June 2004,
where she also served as secretary and treasurer from July 2000 to June 2004. In addition, Ms. Roberts has served as chief executive officer emerita of Copley Health Systems, Inc., a health services provider, since October 2000, where she also
served as president and chief executive officer from 1982 to October 2000. Ms. Roberts has served as a Health Policy Advisor for Senator James Jeffords of Vermont and a consultant to the Joint Commission for Health Care Accreditation on whose
Board of Commissioners she served from 1996 through 2002, during which time she also served on the board of directors of Joint Commission Resources and Joint Commission International. Ms. Roberts served on the board of trustees of the American
Hospital Association from 1990 to 1997, was chair of the Board in 1994 and, from 1991 to 1996, was a member of its executive committee.

Dr. Vineyard retired from active medical practice in March 2000 and currently serves as president and chairman of the Board of Massachusetts Health Data Consortium. He served as the surgeon-in-chief of Harvard Vanguard Medical
Associates and director of Surgical Specialties and Radiology from 1991 to May 1999 when he became interim chief executive officer. Dr. Vineyard was chief of surgery of Harvard Vanguard Medical Associates from 1980 to 1991. He was also
associate clinical professor of surgery at the Harvard Medical School.



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Ms. Berezin joined us in March 2001 as vice president, human resources. From July 1997 to March 2001,
Ms. Berezin worked at Harvard Vanguard Medical Associates, a physician group practice based in Massachusetts, where she served as vice president, human resources. From November 1995 to June 1997, Ms. Berezin was vice president of
Healthsource Massachusetts, a New Hampshire-based HMO.

Mr. Beucler joined us as vice president, finance and corporate controller in April 2002
and became vice president, finance, chief financial officer and treasurer in May 2003. Before joining us, Mr. Beucler served as senior vice president, corporate controller for Thomson Financial. He joined Thomson Financial in 2000 when The
Thomson Corporation, the parent company of Thomson Financial, acquired Primark Corporation, a publicly held NYSE-listed company where he served as corporate controller since January 1998 and as director of finance from 1997 to January 1998. From
1995 through 1997, Mr. Beucler was with The Gillette Company. Mr. Beucler is a certified public accountant and previously was an audit manager at Deloitte and Touche.

Mr. Bolesky has been senior vice president, customer care since joining us in May 2002. Prior to joining us, Mr. Bolesky worked for 20 years at New England Business Service, Inc., or NEBS, an
international direct marketing and manufacturing organization serving small business customers with printed checks and forms, personalized apparel, retail and shipping supplies and payroll services. Mr. Bolesky held a variety of positions at
NEBS, most recently as senior vice president/president-NEBS direct marketing.

Mr. Reich has been our senior vice president, chief information
officer since June 2000. He became vice president, chief information officer in September 1999. He had been vice president, technology and advanced services since August 1994. From June 1990 to August 1994, Mr. Reich had served as vice
president, product planning and development. He had held the position of vice president, engineering when he joined us in April 1986.

Mr. Strange has been our senior vice president, sales since June 2000. He was vice president, sales and marketing from December 1996 to June 2000. He joined us in February 1993 as vice president, sales.

Mr. Wechsler has been president of Lifeline Systems Canada and vice president of Lifeline since September 2000. He joined us in July 1996 as president of
Lifeline Systems Canada when we purchased CareTel, Inc. CareTel provided monitoring services similar to those that we offer.



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Audit Committee

The
members of our Audit Committee are Messrs. Baldwin (chairman) and Shapiro, Dr. Vineyard and Ms. Roberts. The Board of Directors has determined that each of the members of the Audit Committee is independent as defined by the rules of the
Nasdaq Stock Market.The Board of Directors has also determined that Mr. Baldwin is an audit committee
financial expert as defined in Item 401(h) of Regulation S-K.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the directors, executive officers and the holders of more than 10% of our common stock to file with the SEC initial
reports of ownership of our common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and 10% shareholders are required by SEC regulations to furnish us with copies of
all Section 16(a) forms they file. Except as reported below, based solely on a review of our records and written representations by the persons required to file these reports, all filing requirements of Section 16(a) were satisfied with
respect to our most recent fiscal year.

On December 13, 2005, Ronald Feinstein, our president and chief executive officer, filed a Form 4 reporting
the acquisition of 60,000 shares of our common stock that occurred on December 7, 2005. The acquisition related to the grant by our Board of Directors of 60,000 shares of restricted stock pursuant to our 2000 Stock Incentive Plan. The
transaction reported on this Form 4 was the only transaction by Mr. Feinstein that was not reported on a timely basis during the fiscal year ended December 31, 2005.

On January 20, 2006, Ellen Feingold, a member of our Board of Directors, filed a Form 5 reporting the acquisition of 150 shares of our common stock that occurred on November 15, 2005. The
transaction reported on this Form 5 was the only transaction by Ms. Feingold that was not reported on a timely basis during the fiscal year ended December 31, 2005.

Code of Ethics

We have adopted a code of ethics that applies to all employees, including our principal executive
officer, principal financial officer and principal accounting officer. We undertake to provide a copy of our code of ethics to any person without charge, upon request to us, c/o Chief Financial Officer, 111 Lawrence Street, Framingham, Massachusetts
01702. We intend to disclose waivers and amendments of provisions of the code, if any, for our principal executive officer, principal financial officer and principal accounting officer that relates to any element of the code of ethics definition
enumerated in applicable SEC rules by posting such information, if any, on our Internet website, www.lifelinesys.com.



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|ITEM 11. | Executive Compensation
|-------- | ----------------------

Executive Compensation

Summary Compensation

The following table sets forth certain
information concerning the compensation for each of the last three fiscal years of our Chief Executive Officer and our four other most highly compensated executive officers during the fiscal year ended December 31, 2005 who were serving as
executive officers at December 31, 2005 (the Named Executive Officers).

SUMMARY COMPENSATION TABLE



|                                       |  |                     |  |        |                        |       |   |         |                       |  |   |                                               |     |                           |        |  |   |      
|-------------------------------------- |  | ------------------- |  | ------ | ---------------------- | ----- | - | ------- | --------------------- |  | - | --------------------------------------------- | --- | ------------------------- | ------ |  | - | -----
|                                       |  | Annual Compensation |  |        | Long Term Compensation |       |  
|Name and Principal Position            |  | Year                |  | Salary |                        | Bonus |   |         | RestrictedStockAwards |  |   | Number ofSecuritiesUnderlyingOptions/SARs (1) |     | All OtherCompensation (2)
|Ronald Feinstein                       |  | 2005                |  | $      | 376,667                |       | $ | 495,421 | (3)                   |  | $ | 2,193,600                                     | (4) |                           | 25,000 |  | $ | 3,000
|President and Chief                    |  | 2004                |  | $      | 356,666                |       | $ | 407,558 | (3)                   |  |   |                                              |     |                           |       |  | $ | 3,000
|Executive Officer                      |  | 2003                |  | $      | 335,833                |       | $ | 421,600 | (3)                   |  | $ | 1,854,720                                     | (5) |                           | 90,000 |  | $ | 2,700
|                                       |  |                     |  |        |                        |      
|Richard M. Reich                       |  | 2005                |  | $      | 211,167                |       | $ | 132,435 | (3)                   |  |   |                                              |     |                           | 14,500 |  | $ | 3,000
|Senior Vice                            |  | 2004                |  | $      | 203,166                |       | $ | 110,780 | (3)                   |  |   |                                              |     |                           | 16,000 |  | $ | 3,000
|President and Chief                    |  | 2003                |  | $      | 195,116                |       | $ | 117,245 | (3)                   |  |   |                                              |     |                           | 16,000 |  | $ | 2,700
|Information Officer                    |  |                     |  |        |                        |       |   |         |                       |  |   |                                               |     |                           |        |  |   |      
|                                       |  |                     |  |        |                        |      
|Edward M. Bolesky                      |  | 2005                |  | $      | 194,667                |       | $ | 120,192 | (3)                   |  |   |                                              |     |                           | 14,500 |  | $ | 3,000
|Senior Vice President,                 |  | 2004                |  | $      | 186,666                |       | $ | 103,722 | (3)                   |  |   |                                              |     |                           | 16,000 |  | $ | 3,000
|Customer Care                          |  | 2003                |  | $      | 179,167                |       | $ | 107,400 | (3)                   |  |   |                                              |     |                           | 16,000 |  | $ | 2,700
|                                       |  |                     |  |        |                        |      
|Donald G. Strange                      |  | 2005                |  | $      | 188,917                |       | $ | 119,036 | (3)                   |  |   |                                              |     |                           | 14,500 |  | $ | 3,000
|Senior Vice President,                 |  | 2004                |  | $      | 177,417                |       | $ | 94,910  | (3)                   |  |   |                                              |     |                           | 16,000 |  | $ | 3,000
|Sales                                  |  | 2003                |  | $      | 170,833                |       | $ | 100,907 | (3)                   |  |   |                                              |     |                           | 16,000 |  | $ | 2,700
|                                       |  |                     |  |        |                        |      
|Leonard E. Wechsler                    |  | 2005                |  | $      | 183,944                |       | $ | 426,704 | (6)                   |  |   |                                              |     |                           | 14,500 |  | $ | 3,469
|President, Lifeline                    |  | 2004                |  | $      | 162,825                |       | $ | 146,239 | (6)                   |  |   |                                              |     |                           | 16,000 |  | $ | 3,234
|Systems Canada and                     |  | 2003                |  | $      | 144,026                |       | $ | 158,695 | (6)                   |  |   |                                              |     |                           |       |  | $ | 3,007
|Vice President, Lifeline Systems, Inc. |  |                     |  |        |                        |       |   |         |                       |  |   |                                               |     |                           |        |  |   |      



|(1) | Represents the grant of stock options or stock appreciation rights to purchase common stock.
|--- | --------------------------------------------------------------------------------------------



|(2) | Represents our contributions on the executive officers behalf to our 401(k) plan (or a Canadian registered retirement savings plan in the case of Mr. Wechsler). For
Mr. Wechsler, such amounts have been converted from Canadian dollars to U.S. dollars based on the average exchange rate in effect during the applicable year.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Represents amounts paid under our Officer Incentive Plan.
|--- | ---------------------------------------------------------



|(4) | On December 7, 2005, we granted 60,000 shares of restricted stock to Mr. Feinstein pursuant to an amendment to his employment agreement. The dollar amount listed assumes a
per share price of $36.56, the closing price of our common stock on December 30, 2005. The restricted stock vests at the rate of one-third of such shares on each of May 1, 2009, May 1, 2010 and May 1, 2011. If we declare any
dividends, Mr. Feinstein will receive those dividends paid on the restricted stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(5) | On February 13, 2003, we granted 72,000 shares of restricted stock to Mr. Feinstein pursuant to his employment agreement. The dollar amount listed assumes a per share
price of $25.76, the closing price of our common stock on December 31, 2004. The restricted stock vests at the rate of one-third of such shares on each of March 1, 2006, March 1, 2007 and March 1, 2008. If we declare any
dividends, Mr. Feinstein will receive those dividends paid on the restricted stock.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Represents amounts paid in accordance with Mr. Wechslers employment agreement. Such amounts have been converted from Canadian dollars to U.S. dollars based on the average
exchange rate in effect during the applicable year.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Option/SAR Grants

The following table sets forth certain information concerning grants of stock options and stock appreciation rights (SARs) made during the
fiscal year ended December 31, 2005 to each of our Named Executive Officers.

OPTION/SAR GRANTS IN LAST FISCAL YEAR



|                    |  |                                                          |     |                                                                                                |                                                                   |   |  |                                    |       |                 |         |    |   |         |  |   |        
|------------------- |  | -------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | - |  | ---------------------------------- | ----- | --------------- | ------- | -- | - | ------- |  | - | -------
|                    |  | Individual Grants                                        |     | Potential RealizableValue at AssumedAnnual Rates of StockPrice Appreciation forOption Term
(1)
|Name                |  | Number of Securities Underlying Options/SARs Granted (2) |     |                                                                                                | Percent of Total Options/SARs Granted
To Employees in Fiscal Year |   |  | Exercise or Base Price (per
share) |       | Expiration Date |         | 5% |   | 10%    
|Ronald Feinstein    |  | 25,000                                                   | (3) |                                                                                                | 7.09                                                              | % |  | $                                  | 26.46 |                 | 2/02/12 |    | $ | 269,297 |  | $ | 627,576
|Richard M. Reich    |  | 14,500                                                   | (4) |                                                                                                | 4.11                                                              | % |  | $                                  | 26.46 |                 | 2/02/12 |    | $ | 156,192 |  | $ | 363,994
|Edward M. Bolesky   |  | 14,500                                                   | (4) |                                                                                                | 4.11                                                              | % |  | $                                  | 26.46 |                 | 2/02/12 |    | $ | 156,192 |  | $ | 363,994
|Donald G. Strange   |  | 14,500                                                   | (4) |                                                                                                | 4.11                                                              | % |  | $                                  | 26.46 |                 | 2/02/12 |    | $ | 156,192 |  | $ | 363,994
|Leonard E. Wechsler |  | 14,500                                                   | (4) |                                                                                                | 4.11                                                              | % |  | $                                  | 26.46 |                 | 2/02/12 |    | $ | 156,192 |  | $ | 363,994



|(1) | Amounts represent hypothetical gains that could be achieved for the respective options or SARs if exercised at the end of the option or SAR term. These gains are based on assumed
rates of stock appreciation of 5% and 10% compounded annually from the date the respective options or SARs were granted to their expiration date. Actual gains, if any, on stock option or SAR exercises will depend on the future performance of our
common stock and the date on which the options or SARs are exercised.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Under the terms of our 2000 Stock Incentive Plan, our Stock Option Plans Committee retains discretion, subject to limits set forth in the plan, to modify the terms of outstanding
options or SARs. The options and SARs were granted for a term of seven years, subject to earlier termination in certain events related to termination of employment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Exercisable in 16 quarterly installments beginning on May 2, 2005.
|--- | ------------------------------------------------------------------



|(4) | Exercisable in installments beginning one year after the date of grant, with one-third of the shares covered thereby becoming exercisable at that time and an additional one-third of
the shares covered thereby becoming exercisable on each of the next two anniversaries of the date of grant.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Option/SAR Exercises and Year-End Values

The following table sets forth certain information concerning each exercise of stock options or SARs during the fiscal year ended December 31, 2005
by each of our Named Executive Officers and the number and value of unexercised options or SARs held by each of our Named Executive Officers on December 31, 2005.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND

FISCAL YEAR-END OPTION VALUES



|                    |  |                                      |  |                           |         |                                                                           |         |                                                                      |         |  |   |           |  |   |          
|------------------- |  | ------------------------------------ |  | ------------------------- | ------- | ------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------- | ------- |  | - | --------- |  | - | ---------
|                    |  | Number ofShares Acquired on Exercise |  | Value Realized            |         | Number of SecuritiesUnderlying
UnexercisedOptions/SARs at Fiscal Year-End |         | Value of UnexercisedIn-the-Money
Options/SARs at Fiscal Year-End (1)
|Name                |  |                                      |  | Exercisable/Unexercisable |         | Exercisable/Unexercisable                                                
|Ronald Feinstein    |  |                                     |  |                           |        |                                                                           | 290,107 |                                                                      | 110,313 |  | $ | 7,854,298 |  | $ | 2,534,058
|Richard M. Reich    |  | 29,000                               |  | $                         | 723,151 |                                                                           | 84,823  |                                                                      | 30,499  |  | $ | 2,164,018 |  | $ | 457,205  
|Edward M. Bolesky   |  | 15,000                               |  | $                         | 249,057 |                                                                           | 51,001  |                                                                      | 30,499  |  | $ | 1,160,500 |  | $ | 457,205  
|Donald G. Strange   |  | 32,700                               |  | $                         | 687,766 |                                                                           | 42,563  |                                                                      | 30,499  |  | $ | 1,004,199 |  | $ | 457,205  
|Leonard E. Wechsler |  |                                     |  |                           |        |                                                                           | 32,334  |                                                                      | 25,166  |  | $ | 775,366   |  | $ | 319,494  



|(1) | Based on the fair market value of the Common Stock on December 30, 2005, which was $36.39, less the option exercise price.
|--- | --------------------------------------------------------------------------------------------------------------------------

Executive Employment Agreements

Feinstein Employment Agreement
with Philips Electronics North America Corporation

In connection with the execution of the Merger Agreement, on January 18, 2006, Philips
Electronics North America Corporation, a wholly owned subsidiary of Philips (PENAC), entered into an employment agreement with Mr. Feinstein which will become effective on the effective date of the Merger (the Start
Date). Pursuant to the employment agreement, Mr. Feinstein will serve as our Chief Executive Officer and as Executive Vice President of Philips Domestic Appliances and Personal Care for a term of five years beginning on the Start Date.
Mr. Feinstein has agreed to remain with us through the consummation of the Merger, at which time the employment agreement we previously entered into with Mr. Feinstein, which is described below, will terminate and be superceded by this
employment agreement with PENAC.

Pursuant to the employment agreement, PENAC will pay Mr. Feinstein an annual base salary of at least $430,000. The
employment agreement also provides for Mr. Feinstein to receive (i) an annual cash bonus determined in accordance with PENACs bonus policies, with a target bonus payment of at least 60% of Mr. Feinsteins base salary, which
we refer to as the target bonus, (ii) a cash performance bonus for each of the 2006 and 2007 fiscal years based on our achievement of certain target levels of earnings before interest and taxes and certain retention goals, with a target bonus
payment of $400,000 per year (the Cash Performance Bonus), and (iii) a cash retention bonus of $600,000 if Mr. Feinstein remains employed by PENAC through the third anniversary of the Start Date and meets certain other
specified retention goals (the Cash Retention Bonus). In addition, Mr. Feinstein will be awarded 18,000 shares of restricted stock of Philips, which will vest in three equal installments on the first, second and third anniversaries
of the date of grant, and a stock option to purchase 54,000 shares of common stock of Philips, which will vest on the third anniversary of the date of grant.



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If Mr. Feinsteins employment is terminated without cause (as defined in the new employment
agreement) during the term of the employment agreement, he will receive the following benefits: (i) his base salary for the remainder of the term of the employment agreement, or six months if greater, (ii) a prorated target bonus based on
the portion of the year worked during the fiscal year in which termination occurs, (iii) if termination occurs prior to the end of PENACs 2006 fiscal year, $800,000 in respect of the 2006 and 2007 Cash Performance Bonus, (iv) if
termination occurs prior to the end of PENACs 2007 fiscal year, $400,000 in respect of the 2007 Cash Performance Bonus, (v) the unpaid amount of the Cash Retention Bonus, (vi) if termination occurs prior to the third anniversary of
the Start Date, $150,000, and (vii) reimbursement for COBRA premiums for up to eighteen months. Mr. Feinstein has agreed not to compete with PENAC in the field of consumer health and wellness or to solicit any of PENACs employees or
clients during the 24-month period following the termination of his employment.

Feinstein Employment Agreement with Lifeline

On May 1, 2003, we entered into an employment agreement with Mr. Feinstein for the position of our President and Chief Executive Officer, which was amended on
January 6, 2006. The term of the agreement ends on May 1, 2011, with annual extensions thereafter; however, this agreement will be superceded on the effective date of the Merger by the agreement described above. Pursuant to the amendment
to the agreement, on March 1, 2006, Mr. Feinsteins annual base salary will increase from $380,000 to $410,000, subject to annual review. In addition, Mr. Feinstein is eligible to receive a bonus equal to 60% of his base salary
if we achieve the annual profit performance plan goals adopted by our Board of Directors. If we fail to meet or exceed such goals, Mr. Feinstein is eligible to receive a bonus of less than or greater than 60% of his base salary, respectively.
In connection with entering into the employment agreement, in 2003, we granted Mr. Feinstein 72,000 shares of restricted stock and a non-statutory stock option to purchase 90,000 shares of our common stock. Both the restricted stock and the
stock options are subject to vesting at the rate of one-third of such shares on the third anniversary of the date of grant, one-third on the fourth anniversary of the date of grant and one-third on the fifth anniversary of the date of grant. In
addition, in connection with entering into the amendment to the employment agreement, we granted Mr. Feinstein an additional 60,000 shares of restricted stock, which will vest at the rate of one-third of such shares on each of May 1,
2009, May 1, 2010 and May 1, 2011.

Under the terms of the employment agreement, upon a change of control of us, Mr. Feinsteins
unvested stock options would vest in full. Unvested restricted stock held by Mr. Feinstein would vest upon a change of control only if the change of control share price is greater than the share price of the restricted stock at the time it was
granted to Mr. Feinstein. In the event that Mr. Feinstein is terminated without cause, Mr. Feinstein would be entitled to two years base salary, based on his salary in effect as of the date of termination, plus two years
annual cash bonus, based on the average of the two prior years. Mr. Feinstein would also receive benefits, such as medical and dental insurance, for a twenty-four month period following the date of termination. In the event of termination
without cause, all of Mr. Feinsteins then unvested stock options would vest, but only those shares of restricted stock that would vest within the twelve-month period following the date of termination would become vested.



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Wechsler Employment Agreement with Lifeline

Pursuant to the terms of an employment agreement, effective as of January 1, 2000, between Leonard E. Wechsler and Lifeline Systems Canada, Inc., a subsidiary of ours (Lifeline Canada),
Mr. Wechsler became President of Lifeline Canada. Pursuant to the terms of Mr. Wechslers employment agreement, Mr. Wechsler is eligible to receive an annual performance bonus in accordance with the terms set forth in his
employment agreement. In addition, Mr. Wechsler is eligible to receive an annual cash bonus based on his achievement of objectives set by our Chief Executive Officer and Mr. Wechsler at the beginning of the year. Mr. Wechsler is also
eligible to receive a long-term performance bonus based on three-year revenue and income goals covering the term of the agreement. Mr. Wechslers employment agreement was amended on January 1, 2003. Mr. Wechslers agreement
contains change of control provisions that provide for a lump sum payment to him if, within two years of a change of control of Lifeline Canada, Mr. Wechslers employment is terminated without cause by Lifeline Canada or its successor or
Mr. Wechsler terminates his employment for certain reasons. These change of control provisions survive the expiration of the agreement so long as Mr. Wechsler is employed by Lifeline Canada.

Change of Control Agreements

Each of our executive officers, other
than Messrs. Feinstein and Wechsler, has entered into an agreement with Lifeline that provides that, if within 12 months of a change of control of Lifeline, such officers employment is terminated without cause or the officer terminates his or
her employment with Lifeline due to a significant change in responsibilities or condition of employment, then such officer would be entitled to receive a payment equal to one years base salary then being paid to him or her.

Compensation of Directors

For the fiscal year ended
December 31, 2005, each of our directors who was not also an employee received (i) an annual retainer of $12,000, (ii) a fee equal to $1,000 for each meeting of the Board of Directors that the non-employee director attended (either in
person or by telephone), and (iii) $500 for each committee meeting that the non-employee director attended (either in person or by telephone), although no additional fee was paid for attendance at a committee meeting that was on the same day as
a meeting of the Board of Directors. The Chairman of the Board also received an annual fee of $12,500 and the Chairmen of the Audit and Compensation Committees also each received an annual fee of $3,500.

In addition, our 2000 Stock Incentive Plan provides that, on the sixth business day of each calendar year, each non-employee director will receive a stock option to
purchase 10,000 shares of our common stock at an exercise price equal to the fair market value of our common stock on the date of grant. Grants made prior to January 10, 2006 vest as to one-third of the underlying shares on the date of grant,
and vest as to an additional one-third of the underlying shares on each of the first two anniversaries of the date of grant. The grants made on January 10, 2006 and all future grants vest in sixteen quarterly installments beginning on the
three-month anniversary of the date of grant.

We also reimburse our non-employee directors for reasonable out-of-pocket expenses incurred in attending
Board or committee meetings.



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Compensation Committee Interlocks and Insider Participation

The members of our Compensation Committee for the fiscal year ended December 31, 2005 were Messrs. Kasputys and Shapiro and Ms. Feingold. No member of our
Compensation Committee was at any time during the fiscal year ended December 31, 2005 an officer or employee of us or any of our subsidiaries, nor has any member of our Compensation Committee had any relationship with us requiring disclosure
under Item 404 of Regulation S-K under the Exchange Act. Mr. Shapiro was our Chief Executive Officer and Treasurer from 1978 through December 1988.

None of our executive officers has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director of or member of
our Compensation Committee.



|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

Security Ownership of Management and Certain Beneficial Owners

The following table sets forth certain information,
as of February 15, 2006, unless otherwise indicated, with respect to the beneficial ownership of our common stock by (i) each person known by us to beneficially own more than 5% of the outstanding shares of our common stock, (ii) each
of our directors, (iii) each of our named executive officers, and (iv) all of our current directors and executive officers as a group. The number of shares of common stock beneficially owned by each 5% shareholder, director or executive
officer is determined under Section 13 of the Exchange Act and the rules promulgated thereunder by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. The inclusion herein of any shares of
common stock deemed beneficially owned does not constitute an admission that the named shareholders are direct or indirect beneficial owners of such shares. Unless otherwise indicated, each person has sole voting and investment power with respect to
the shares listed. For each named shareholder and for all directors and executive officers as a group, the share amounts include those shares as to which such person had a right to acquire beneficial ownership by exercising stock options or SARs as
of February 15, 2006, or within 60 days following that date as follows: Mr. Baldwin, 7,291 shares; Mr. Bolesky, 66,501 shares; Dr. Casscells, 33,692 shares; Ms. Feingold, 27,292 shares; Mr. Feinstein, 321,670 shares;
Mr. Kasputys, 65,292 shares; Mr. Reich, 100,323 shares; Ms. Roberts, 65,292 shares; Mr. Shapiro, 55,292 shares; Mr. Strange, 58,063 shares; Dr. Vineyard, 65,292 shares; Mr. Wechsler, 42,501 shares; and all
directors and executive officers as a group, 1,009,136 shares. The share amounts also include shares beneficially owned by certain executive officers through participation in our 401(k) plan, as to which shares such person exercises sole investment
and voting power.



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The address of each of the directors and executive officers listed below is c/o Lifeline Systems, Inc., 111 Lawrence
Street, Framingham, MA 01702.



|                                                                           |  |                                          |  |                                       
|-------------------------------------------------------------------------- |  | ---------------------------------------- |  | --------------------------------------
|Name and Address ofBeneficial Owner                                        |  | Shares of Common StockBeneficially Owned |  | Percent of CommonStock Outstanding (1)
|                                                                           |  |                                         
|Pequot Capital Management, Inc. (2) 500 Nyala Farm Road Westport, CT 06880 |  | 1,529,250                                |  | 10.7%                                 
|                                                                           |  |                                         
|L. Dennis Shapiro (3)                                                      |  | 1,239,580                                |  | 8.7%                                  
|                                                                           |  |                                         
|T. Rowe Price Associates, Inc. (4) 100 E. Pratt Street Baltimore, MD 21202 |  | 938,520                                  |  | 6.6%                                  
|                                                                           |  |                                         
|Ronald Feinstein                                                           |  | 485,705                                  |  | 3.3%                                  
|                                                                           |  |                                         
|Richard M. Reich (5)                                                       |  | 125,770                                  |  | *                                     
|                                                                           |  |                                         
|Joseph E. Kasputys                                                         |  | 128,592                                  |  | *                                     
|                                                                           |  |                                         
|Donald G. Strange                                                          |  | 64,819                                   |  | *                                     
|                                                                           |  |                                         
|Gordon C. Vineyard, M.D.                                                   |  | 82,894                                   |  | *                                     
|                                                                           |  |                                         
|Leonard E. Wechsler                                                        |  | 46,261                                   |  | *                                     
|                                                                           |  |                                         
|Carolyn C. Roberts                                                         |  | 66,292                                   |  | *                                     
|                                                                           |  |                                         
|Everett N. Baldwin (6)                                                     |  | 59,292                                   |  | *                                     
|                                                                           |  |                                         
|Edward M. Bolesky                                                          |  | 71,004                                   |  | *                                     
|                                                                           |  |                                         
|S. Ward Casscells, III, M.D.                                               |  | 33,692                                   |  | *                                     
|                                                                           |  |                                         
|Ellen Feingold                                                             |  | 27,442                                   |  | *                                     
|                                                                           |  |                                         
|All directors and executive officers as a group (14 persons) (7)           |  | 2,536,410                                |  | 16.6%                                 



|* | Less than 1% of the outstanding stock
|- | -------------------------------------



|(1) | Number of shares deemed outstanding includes 14,232,398 shares outstanding as of February 15, 2006, plus any shares subject to options or SARs held by the named person or
entity that are currently exercisable or exercisable within 60 days after February 15, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents holdings as of December 31, 2005 based on a Form 13F filed with the SEC on February 14, 2006.
|--- | --------------------------------------------------------------------------------------------------------



|(3) | Includes the following shares, as to all of which Mr. Shapiro disclaims beneficial ownership: 71,624 shares held by Mr. Shapiros wife and 491,714 shares held in
various trusts of which Mr. Shapiro and/or his wife are trustees.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents holdings as of December 31, 2005 based on an amendment to Schedule 13G filed with the SEC on February 14, 2006. These securities are owned by
various individual and institutional investors, which T. Rowe Price Associates, Inc. (Price Associates) serves as investment advisor with power to direct investments and/or sole
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | power to vote the securities. For purposes of the reporting requirements of the Exchange Act, Price Associates is deemed to be a beneficial owner of such
securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Includes 15,668 shares owned by Mr. Reich jointly with his wife.
|--- | ----------------------------------------------------------------



|(6) | Includes 52,001 shares held by the Everett N. Baldwin Revocable Trust of 1997.
|--- | ------------------------------------------------------------------------------



|(7) | Includes 27,863 shares beneficially owned by such persons through our 401(k) plan as to which such persons possess sole investment and voting power.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

If our shareholders approve the Merger at the special meeting of shareholders to be held on March 21, 2006 and the Merger is consummated, we would become an
indirect, wholly owned subsidiary of Philips and we would cease to be a publicly traded company.

Securities Authorized for Issuance Under Equity
Compensation Plans

The following table provides information about the securities authorized for issuance under our equity compensation plans as of
December 31, 2005:

Equity Compensation Plan Information



|                                                               |  |                                                                                           |  |                                                                         |       |                                                                                                                                           |         |    
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------------- | ------- | ---
|                                                               |  | (a)                                                                                       |  | (b)                                                                     |       | (c)                                                                                                                                       |        
|Plan category                                                  |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants
andrights(1) |  | Weighted-average exerciseprice ofoutstandingoptions, warrantsand rights |       | Number of securitiesremaining available forfuture issuance
underequity compensation plans(excluding securitiesreflected in column (a))(1) |        
|Equity compensation plans approved by security holders         |  | 1,716,351                                                                                 |  | $                                                                       | 15.13 |                                                                                                                                           | 571,139 | (2)
|Equity compensation plans not approved by security holders (3) |  | 73,598                                                                                    |  | $                                                                       | 5.04  |                                                                                                                                           |        |    
|Total                                                          |  | 1,789,949                                                                                 |  | $                                                                       | 14.72 |                                                                                                                                           | 571,139 | (2)



|(1) | In addition to being available for future issuance upon exercise of options that may be granted after December 31, 2005, shares issuable under the 2000 Stock Incentive Plan may
instead be issued in the form of restricted stock, unrestricted stock, SARs, performance shares or other equity-based awards.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes 193,394 shares issuable under our 2005 Employee Stock Purchase Plan, including shares issuable in connection with the current offering period, which ends
on May 31, 2006. The number of shares issuable in connection with any offering period is not determinable until the last day of the offering period, but we estimate that approximately 7,300 shares of Common Stock will be issuable in connection
with the current offering period. This estimate is based on (a) initial employee participation, (b) the amounts withheld from each employees first paycheck during the offering period and (c) the price of the Common Stock on the
first day of the offering period. Also includes 377,745 shares available for issuance under the 2000 Stock Incentive Plan. Under the
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 2000 Stock Incentive Plan, the number of shares issuable is automatically increased every January 1 by an amount equal to the least of (i) 500,000
shares of Common Stock, (ii) 2.5% of the outstanding shares on such date or (iii) an amount determined by our Board of Directors. In addition, the aggregate number of shares available for the grant of options to non-employee directors is
automatically increased every January 1 by the number necessary to cause the total number of shares then available for non-employee directors to be restored to 90,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Our 2000 Employee Stock Option Plan, which was terminated on April 4, 2001, is the only plan that we administer that was not approved by our shareholders.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------

None



|ITEM 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

The following is a summary
of the fees billed to us by PricewaterhouseCoopers LLP for professional services rendered for the fiscal years ended December 31, 2005 and 2004:



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|Fee Category       |  | 2005 |         | 2004
|Audit Fees         |  | $    | 480,999 |      | $ | 629,458
|Audit-Related Fees |  | $    |        |      | $ |       
|Tax Fees           |  | $    | 127,120 |      | $ | 323,477
|All Other Fees     |  | $    |        |      | $ |       
|                   |  |      |         |      |   |        
|Total Fees         |  | $    | 608,119 |      | $ | 952,935

Audit Fees. Consists of fees billed for professional services rendered for the audit of our
financial statements and the reviews of the financial statements included in each of our Quarterly Reports on Form 10-Q during the fiscal years indicated above. In addition, for the fiscal year ended December 31, 2004, includes an additional
$57,573 for audit fees for filings with the SEC.

Audit-Related Fees. No services were provided by PricewaterhouseCoopers LLP
in this category for the fiscal years ended December 31, 2005 and December 31, 2004.

Tax Fees. Consists of fees
billed for professional services for tax compliance, tax consultations and tax planning. For the fiscal year ended December 31, 2005, the following fees were billed by PricewaterhouseCoopers LLP in this category: $57,120 for services related to
tax consulting and tax planning and $70,000 as tax fees related to one of the Companys business acquisitions. For the fiscal year ended December 31, 2004, the following fees were billed by PricewaterhouseCoopers LLP in this category:
$9,500 for services related to tax compliance, $153,740 for services related to tax consulting and tax planning and $160,237 as tax fees related to one of our business acquisitions.

All Other Fees. No services were provided by PricewaterhouseCoopers LLP in this category for the fiscal years ended December 31,
2005 and December 31, 2004.



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Audit Committee Policy on Pre-Approval of Services of Independent Registered Public Accounting Firm

Our Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent
registered public accounting firm. This policy generally provides that we will not engage our independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by our Audit
Committee or the engagement is entered into pursuant to one of the pre-approval procedures described below.

From time to time, our Audit Committee may
pre-approve specified types of services that are expected to be provided to us by our independent registered public accounting firm during the next twelve months. Any such pre-approval must be detailed as to the particular service or type of
services to be provided and must also generally be subject to a maximum dollar amount.

Our Audit Committee has also delegated to the chairman of the Audit
Committee the authority to approve any audit or non-audit services to be provided to us by our independent registered public accounting firm. Any approval of services by the chairman of our Audit Committee pursuant to this delegated authority must
be reported on at the next meeting of the Audit Committee.

During the fiscal year ended December 31, 2005, no services were provided to us by
PricewaterhouseCoopers LLP or any other accounting firm other than in accordance with the pre-approval policies and procedures described above.

PART IV



|ITEM 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

Financial Statements

The following consolidated financial statements of Lifeline Systems, Inc. and the report of independent auditors relating thereto, are set forth in
Item 8 of this Annual Report on Form 10-K on the pages indicated.



|                                                                                                                |  |      
|--------------------------------------------------------------------------------------------------------------- |  | -----
|                                                                                                                |  | Pages
|                                                                                                                | 
|Report of Independent Registered Public Accounting Firm                                                         |  | 32-33
|                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                    |  | 34   
|                                                                                                                | 
|Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003 |  | 35   
|                                                                                                                | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2004 and 2003            |  | 36   
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                      |  | 37   
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | 38-61



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Financial Statement Schedule

The following financial statement schedule of Lifeline Systems, Inc. is filed herewith on the page indicated below.



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003 |  | 83  

All other schedules are omitted because they are not applicable, not required, or because the required information
is included in the financial statements or notes thereto.

Exhibits

The Exhibits which are filed with this Annual Report on Form 10-K or which are incorporated herein by reference are set forth in the Exhibit Index, which appears on pages 79 through 82 hereof.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|               |  |  |  |                        |  |                                      
|-------------- |  |  |  | ---------------------- |  | -------------------------------------
|               |  |  |  | LIFELINE SYSTEMS, INC.
|               |  |  | 
|March 15, 2006 |  |  |  | By:                    |  | /s/ Ronald Feinstein                 
|Date           |  |  |  |                        |  | Ronald Feinstein                     
|               |  |  |  |                        |  | Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                          |  |                                                                                                                               |  |               
|----------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                 |  | Capacity                                                                                                                      |  | Date          
|                                          |  |                                                                                                                              
|/s/ L. Dennis Shapiro L. Dennis
Shapiro   |  | Chairman of the Board                                                                                                         |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ Ronald Feinstein Ronald
Feinstein     |  | Chief Executive Officer, President and Director (Principal Executive Officer)                                                 |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ Mark G. Beucler Mark G.
Beucler       |  | Vice President, Finance, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ Everett N. Baldwin Everett N.
Baldwin |  | Director                                                                                                                      |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ Joseph E. Kasputys Joseph E.
Kasputys |  | Director                                                                                                                      |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ Carolyn C. Roberts Carolyn C.
Roberts |  | Director                                                                                                                      |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ Gordon C. Vineyard Gordon C.
Vineyard |  | Director                                                                                                                      |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ S. Ward Casscells S. Ward
Casscells   |  | Director                                                                                                                      |  | March 15, 2006
|                                          |  |                                                                                                                              
|/s/ Ellen Feingold Ellen
Feingold         |  | Director                                                                                                                      |  | March 15, 2006



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EXHIBIT INDEX

The following exhibits are, as indicated below, either filed herewith or have previously been filed with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities and Exchange Act of 1934 and are referred to
and incorporated herein by reference to such filings.



|            |  |                                                                                                                      |  |                                                     
|----------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                              |  | SEC Document Reference                              
|Exhibit 3.  |  | Articles of Incorporation and Bylaws                                                                                 |  |                                                     
|            |  |                                                                                                                     
|3.1         |  | Restated Articles of Organization of the Registrant, as amended                                                      |  | 10-Q for the quarter ended June 30, 2005 Exhibit 3.1
|            |  |                                                                                                                     
|3.2         |  | Amended and Restated Bylaws of the Registrant, as amended                                                            |  | 10-Q for the quarter ended June 30, 2005 Exhibit 3.2
|            |  |                                                                                                                     
|Exhibit 4.  |  | Instruments Defining the Rights of Security Holders                                                                  |  |                                                     
|            |  |                                                                                                                     
|4.1         |  | Specimen Stock Certificate                                                                                           |  | 2004 10-K Exhibit 4.1                               
|            |  |                                                                                                                     
|4.2         |  | Rights Agreement between the Registrant and Registrar and Transfer Company, as Rights Agent, dated November 19, 2004 |  | Form 8-A/A filed December 10, 2004 Exhibit 4        
|            |  |                                                                                                                     
|Exhibit 10. |  | Material Contracts                                                                                                   |  |                                                     
|            |  |                                                                                                                     
|10.01+      |  | Medical Expense Reimbursement Plan                                                                                   |  | Form S-1 (File No. 2-84060) Exhibit 10.21           
|            |  |                                                                                                                     
|10.02+      |  | 1991 Stock Option Plan                                                                                               |  | 1990 10-K Exhibit 10.37                             
|            |  |                                                                                                                     
|10.03+      |  | Amendment No. 1 to the Registrants 1991 Stock Option Plan                                                           |  | 1996 10-K Exhibit 10.41                             
|            |  |                                                                                                                     
|10.04       |  | Form of Nonstatutory Stock Option Agreement for the Registrants 1991 Stock Option Plan                              |  | 1992 10-K Exhibit 10.32                             
|            |  |                                                                                                                     
|10.05       |  | Form of Special Nonstatutory Stock Option Agreement for the Registrants 1991 Stock Option Plan                      |  | 1992 10-K Exhibit 10.33                             
|            |  |                                                                                                                     
|10.06+      |  | 1994 Stock Option Plan                                                                                               |  | 1994 10-K Exhibit 10.48                             
|            |  |                                                                                                                     
|10.07+      |  | Amendment No. 1 to the Registrants 1994 Stock Option Plan                                                           |  | 1996 10-K Exhibit 10.42                             
|            |  |                                                                                                                     
|10.08       |  | Form of Nonstatutory Stock Option Agreement for the Registrants 1994 Stock Option Plan                              |  | 1994 10-K Exhibit 10.49                             
|            |  |                                                                                                                     
|10.09       |  | Form of Special Nonstatutory Stock Option Agreement for the Registrants 1994 Stock Option Plan                      |  | 1994 10-K Exhibit 10.50                             



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|            |  |                                                                                                                                    |  |                                                           
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                            |  | SEC Document Reference                                    
|Exhibit 10. |  | Material Contracts (cont.)                                                                                                         |  |                                                           
|            |  |                                                                                                                                   
|10.10+      |  | 2000 Stock Incentive Plan, as amended                                                                                              |  | 8-K dated December 7, 2005                                
|            |  |                                                                                                                                   
|10.11       |  | Form of Nonstatutory Stock Option Agreement for the Registrants 2000 Stock Incentive Plan                                         |  | 10-Q for the quarter ended September 30, 2004 Exhibit 10.1
|            |  |                                                                                                                                   
|10.12       |  | Form of Incentive Stock Option Agreement for the Registrants 2000 Stock Incentive Plan                                            |  | 10-Q for the quarter ended September 30, 2004 Exhibit 10.2
|            |  |                                                                                                                                   
|10.13       |  | Form of Non-Employee Director Nonstatutory Stock Option Agreement for the Registrants 2000 Stock Incentive Plan                   |  | 10-Q for the quarter ended September 30, 2004 Exhibit 10.3
|            |  |                                                                                                                                   
|10.14+      |  | 2000 Employee Stock Option Plan                                                                                                    |  | 10-Q for the quarter ended June 30, 2000 Exhibit 10.73    
|            |  |                                                                                                                                   
|10.15+      |  | 2005 Employee Stock Purchase Plan                                                                                                  |  | 8-K dated May 18, 2005                                    
|            |  |                                                                                                                                   
|10.16       |  | Lease Agreement between the Registrant and Bishop/Clark Associates Limited Partnership dated November 11,1997                      |  | 1997 10-K Exhibit 10.44                                   
|            |  |                                                                                                                                   
|10.17       |  | First Amendment to Lease Agreement between the Registrant and Bishop/Clark Associates Limited Partnership dated June 30, 1998      |  | 10-Q for the quarter ended June 30, 1998 Exhibit 10.52    
|            |  |                                                                                                                                   
|10.18       |  | Second Amendment to Lease Agreement between the Registrant and Bishop/Clark Associates Limited Partnership dated November 18, 1999 |  | 1999 10-K Exhibit 10.67                                   
|            |  |                                                                                                                                   
|10.19       |  | Lease Agreement between the Registrant and Clarks Hill, LLC dated June 21, 2002                                                   |  | 10-Q for the quarter ended June 30, 2002 Exhibit 10.04    
|            |  |                                                                                                                                   
|10.20       |  | Notice of Lease Amendment between the Registrant and Clarks Hill, LLC dated March 12, 2004                                        |  | 10-Q for the quarter ended June 30, 2004 Exhibit 10.2     
|            |  |                                                                                                                                   
|10.21+      |  | Restricted Stock Agreement between the Registrant and Ronald Feinstein dated February 12, 2003                                     |  | 10-Q for the quarter ended March 31, 2003 Exhibit 10.1    
|            |  |                                                                                                                                   
|10.22+      |  | Nonstatutory Stock Option Agreement between the Registrant and Ronald Feinstein dated February 13, 2003                            |  | 10-Q for the quarter ended March 31, 2003 Exhibit 10.2    
|            |  |                                                                                                                                   
|10.23+      |  | Employment and Noncompetition Agreement between the Registrant and Ronald Feinstein dated May 1, 2003                              |  | 10-K for the year ended December 31, 2003                 



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|            |  |                                                                                                                                                       |  |                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                               |  | SEC Document Reference                                    
|Exhibit 10. |  | Material Contracts (cont.)                                                                                                                            |  |                                                           
|            |  |                                                                                                                                                      
|10.24+      |  | First Amendment to Employment and Noncompetition Agreement between the Registrant and Ronald Feinstein dated January 6, 2006                          |  | 8-K dated January 6, 2006                                 
|            |  |                                                                                                                                                      
|10.25+      |  | Stock Appreciation Right Agreement evidencing the grant by the Registrant to Ronald Feinstein on February 2, 2005                                     |  | 8-K dated August 18, 2005                                 
|            |  |                                                                                                                                                      
|10.26+      |  | Restricted Stock Agreement evidencing the grant by the Registrant to Ronald Feinstein on December 7, 2005.                                            |  | 8-K dated January 6, 2006                                 
|            |  |                                                                                                                                                      
|10.27+      |  | Employment Agreement between Leonard Wechsler and Lifeline Systems Canada, Inc. dated March 3, 2003                                                   |  | 2002 10-K Exhibit 10.35                                   
|            |  |                                                                                                                                                      
|10.28+      |  | Form of Change of Control Agreement between the Registrant and each of Richard Reich, Donald Strange and Dennis Hurley                                |  | 1997 10-K Exhibit 10.49                                   
|            |  |                                                                                                                                                      
|10.29+      |  | Form of Change of Control Agreement between the Registrant and each of Ellen Berezin, Mark Beucler and Edward Bolesky                                 |  | 2004 10-K Exhibit 10.26                                   
|            |  |                                                                                                                                                      
|10.30       |  | Tax Increment Financing Agreement between the Registrant, the Town of Framingham and Bishop 108 Associated limited Partnership dated October 25, 2000 |  | 2000 10-K Exhibit 10.74                                   
|            |  |                                                                                                                                                      
|10.31       |  | Revolving Credit Agreement between the Registrant and Citizens Bank of Massachusetts dated August 28, 2002                                            |  | 10-Q for the quarter ended September 30, 2002 Exhibit 10.1
|            |  |                                                                                                                                                      
|10.32       |  | First Amendment to Revolving Credit Agreement dated February 1, 2004                                                                                  |  | 10-Q for the quarter ended September 30, 2004 Exhibit 10.3
|            |  |                                                                                                                                                      
|10.33       |  | Second Amendment to Revolving Credit Agreement dated July 15, 2004                                                                                    |  | 10-Q for the quarter ended June 30, 2004 Exhibit 10.1     
|            |  |                                                                                                                                                      
|10.34       |  | Third Amendment to Revolving Credit Agreement, Joinder, Limited Consent and Waiver dated December 9, 2004                                             |  | 2004 10-K Exhibit 10.31                                   
|            |  |                                                                                                                                                      
|10.35       |  | Asset Purchase Agreement between the Registrant and March Networks Corporation dated July 16, 2003                                                    |  | 10-Q for the quarter ended September 30, 2003 Exhibit 10.1
|            |  |                                                                                                                                                      
|*10.36      |  | Purchase and Sale Agreement dated November 19, 2003 between the                                                                                       |  | 2004 10-K Exhibit 10.37                                   



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##### Table of Contents

|            |  |                                                                                                                                                                                                        |  |                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                |  | SEC Document Reference    
|Exhibit 10. |  | Material Contracts (cont.)                                                                                                                                                                             |  |                           
|            |  |                                                                                                                                                                                                       
|            |  | Registrant and De Lage Landen Financial Services                                                                                                                                                       |  |                           
|            |  |                                                                                                                                                                                                       
|10.37       |  | Agreement and Plan of Share Exchange dated October 25, 2004                                                                                                                                            |  | 8-K dated October 25, 2004
|            |  |                                                                                                                                                                                                       
|10.38       |  | Agreement and Plan of Merger, dated as of January 18, 2006, among the Registrant, Koninklijke Philips Electroncs, N.V. and DAP Merger Sub, Inc.                                                        |  | 8-K dated January 19, 2006
|            |  |                                                                                                                                                                                                       
|*10.39+     |  | 2005 Officer Incentive Plan                                                                                                                                                                            |  | 2004 10-K Exhibit 10.34   
|            |  |                                                                                                                                                                                                       
|*10.40+     |  | 2006 Officer Incentive Plan                                                                                                                                                                            |  | Filed herewith            
|            |  |                                                                                                                                                                                                       
|10.41+      |  | Compensatory Arrangements with Executive Officers                                                                                                                                                      |  | Filed herewith            
|            |  |                                                                                                                                                                                                       
|10.42+      |  | Compensatory Arrangements with Non-Employee Directors                                                                                                                                                  |  | Filed herewith            
|            |  |                                                                                                                                                                                                       
|Exhibit 21. |  | Subsidiaries                                                                                                                                                                                           |  |                           
|            |  |                                                                                                                                                                                                       
|21.1        |  | Subsidiaries of the Registrant                                                                                                                                                                         |  | filed herewith            
|            |  |                                                                                                                                                                                                       
|Exhibit 23. |  | Consents of Experts and Counsel                                                                                                                                                                        |  |                           
|            |  |                                                                                                                                                                                                       
|23.1        |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                  |  | filed herewith            
|            |  |                                                                                                                                                                                                       
|Exhibit 31. |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                |  |                           
|            |  |                                                                                                                                                                                                       
|31.1        |  | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |  | filed herewith            
|            |  |                                                                                                                                                                                                       
|31.2        |  | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |  | filed herewith            
|            |  |                                                                                                                                                                                                       
|Exhibit 32. |  | Section 1350 Certifications                                                                                                                                                                            |  |                           
|            |  |                                                                                                                                                                                                       
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                          |  | filed herewith            



|* | Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|+ | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



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##### Table of Contents

LIFELINE SYSTEMS, INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

For the years ended December 31, 2005, 2004 and 2003

(Dollars in thousands)



|                                         |  |                              |     |                                      |   |               |  |                       |     |  |   |    
|---------------------------------------- |  | ---------------------------- | --- | ------------------------------------ | - | ------------- |  | --------------------- | --- |  | - | ---
|Description                              |  | Balance at Beginning of Year |     | Additions Charged to Costs
&Expenses |   | Deductions(1) |  | Balance at End ofYear
|2005 Allowance for doubtful receivables: |  |                              |     |                                      |   |               |  |                       |     |  |   |    
|Trade accounts receivable                |  | $                            | 621 |                                      | $ | 397           |  | $                     | 540 |  | $ | 478
|Lease receivables                        |  |                              | 20  |                                      |   |              |  |                       |    |  |   | 20 
|                                         |  |                              |     |                                      |   |               |  |                       |     |  |   |    
|Total                                    |  | $                            | 641 |                                      | $ | 397           |  | $                     | 540 |  | $ | 498
|                                         |  |                              |     |                                     
|2004 Allowance for doubtful receivables: |  |                              |     |                                      |   |               |  |                       |     |  |   |    
|Trade accounts receivable                |  | $                            | 470 |                                      | $ | 436           |  | $                     | 285 |  | $ | 621
|Lease receivables                        |  |                              | 358 |                                      |   |              |  |                       | 338 |  |   | 20 
|                                         |  |                              |     |                                      |   |               |  |                       |     |  |   |    
|Total                                    |  | $                            | 828 |                                      | $ | 436           |  | $                     | 623 |  | $ | 641
|                                         |  |                              |     |                                     
|2003 Allowance for doubtful receivables: |  |                              |     |                                      |   |               |  |                       |     |  |   |    
|Trade accounts receivable                |  | $                            | 329 |                                      | $ | 348           |  | $                     | 207 |  | $ | 470
|Lease receivables                        |  |                              | 134 |                                      |   | 224           |  |                       |    |  |   | 358
|                                         |  |                              |     |                                      |   |               |  |                       |     |  |   |    
|Total                                    |  | $                            | 463 |                                      | $ | 572           |  | $                     | 207 |  | $ | 828



|(1) | Uncollectible accounts and adjustments.
|--- | ---------------------------------------



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