##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the quarter ended September 30,
2005                    Commission File Number 000-51069



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LIFELINE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



|                                |  |                    
|------------------------------- |  | -------------------
|MASSACHUSETTS                   |  | 20-1591429         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | 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)



---



Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No ̈



Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes ̈No x



Number of shares outstanding of the issuers class of common stock, $0.02 par value per share, as of October 31, 2005: 14,138,270



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##### Table of Contents

LIFELINE SYSTEMS, INC.

INDEX



|                                                                                                                                 |  |      
|-------------------------------------------------------------------------------------------------------------------------------- |  | -----
|                                                                                                                                 |  | PAGE 
|                                                                                                                                 | 
|PART I. FINANCIAL INFORMATION                                                                                                    |  |      
|                                                                                                                                 | 
|ITEM 1. FINANCIAL STATEMENTS                                                                                                     |  |      
|                                                                                                                                 | 
|Consolidated Balance Sheets  September 30, 2005 (unaudited) and December 31, 2004                                               |  | 3    
|                                                                                                                                 | 
|Consolidated Statements of Income and Comprehensive Income (unaudited)  Three and nine months ended September 30, 2005 and 2004 |  | 4    
|                                                                                                                                 | 
|Consolidated Statements of Cash Flows (unaudited)  Nine months ended September 30, 2005 and 2004                                |  | 5    
|                                                                                                                                 | 
|Notes to Consolidated Financial Statements (unaudited)                                                                           |  | 6-14 
|                                                                                                                                 | 
|ITEM 2.                                                                                                                          |  |      
|                                                                                                                                 | 
|Managements Discussion and Analysis of Results of Operations and Financial Condition                                            |  | 15-27
|                                                                                                                                 | 
|ITEM 3.                                                                                                                          |  |      
|                                                                                                                                 | 
|Quantitative and Qualitative Disclosures about Market Risk                                                                       |  | 28   
|                                                                                                                                 | 
|ITEM 4.                                                                                                                          |  |      
|                                                                                                                                 | 
|Controls and Procedures                                                                                                          |  | 29   
|                                                                                                                                 | 
|PART II. OTHER INFORMATION                                                                                                       |  |      
|                                                                                                                                 | 
|ITEM 6.                                                                                                                          |  |      
|                                                                                                                                 | 
|Exhibits                                                                                                                         |  | 30   
|                                                                                                                                 | 
|SIGNATURES                                                                                                                       |  | 31   



2



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##### Table of Contents

LIFELINE SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)



|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                              |  | September 30,2005 |         |   | December 31,2004 |  
|                                                                                                                                                                                              |  | (Unaudited)       |         |   |                  |  
|ASSETS                                                                                                                                                                                        |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                     |  | $                 | 32,717  |   |                  | $ | 42,428  |  
|Short-term investments                                                                                                                                                                        |  |                   | 2,995   |   |                  |   | 5,000   |  
|Accounts receivable, net                                                                                                                                                                      |  |                   | 12,066  |   |                  |   | 12,209  |  
|Inventories                                                                                                                                                                                   |  |                   | 5,483   |   |                  |   | 4,546   |  
|Net investment in sales-type leases                                                                                                                                                           |  |                   | 1,701   |   |                  |   | 1,906   |  
|Prepaid expenses and other current assets                                                                                                                                                     |  |                   | 3,586   |   |                  |   | 2,369   |  
|Deferred income taxes                                                                                                                                                                         |  |                   | 1,092   |   |                  |   | 1,092   |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                          |  |                   | 59,640  |   |                  |   | 69,550  |  
|Long-term investments                                                                                                                                                                         |  |                   | 21,829  |   |                  |   |        |  
|Property and equipment, net                                                                                                                                                                   |  |                   | 33,270  |   |                  |   | 34,030  |  
|Goodwill                                                                                                                                                                                      |  |                   | 11,202  |   |                  |   | 8,821   |  
|Other intangible assets, net                                                                                                                                                                  |  |                   | 13,985  |   |                  |   | 12,838  |  
|Net investment in sales-type leases                                                                                                                                                           |  |                   | 2,417   |   |                  |   | 3,636   |  
|Other assets                                                                                                                                                                                  |  |                   | 95      |   |                  |   | 173     |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                  |  | $                 | 142,438 |   |                  | $ | 129,048 |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                              |  | $                 | 2,030   |   |                  | $ | 2,485   |  
|Accrued expenses                                                                                                                                                                              |  |                   | 5,121   |   |                  |   | 4,631   |  
|Accrued payroll and payroll taxes                                                                                                                                                             |  |                   | 5,866   |   |                  |   | 5,910   |  
|Accrued income taxes                                                                                                                                                                          |  |                   |        |   |                  |   | 3,714   |  
|Deferred revenues                                                                                                                                                                             |  |                   | 2,259   |   |                  |   | 2,150   |  
|Other current liabilities                                                                                                                                                                     |  |                   | 1,908   |   |                  |   | 2,604   |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                     |  |                   | 17,184  |   |                  |   | 21,494  |  
|                                                                                                                                                                                              |  |                  
|Deferred income taxes                                                                                                                                                                         |  |                   | 6,718   |   |                  |   | 6,511   |  
|Other non-current liabilities                                                                                                                                                                 |  |                   | 2,402   |   |                  |   | 3,302   |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                             |  |                   | 26,304  |   |                  |   | 31,307  |  
|Commitments and contingencies                                                                                                                                                                 |  |                   |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Common stock, $0.02 par value, 50,000,000 shares authorized, 14,132,570 shares issued and outstanding at September 30, 2005 and 13,832,630
shares issued and outstanding at December 31, 2004 |  |                   | 283     |   |                  |   | 277     |  
|Additional paid-in capital                                                                                                                                                                    |  |                   | 35,747  |   |                  |   | 30,657  |  
|Retained earnings                                                                                                                                                                             |  |                   | 79,377  |   |                  |   | 66,334  |  
|Unearned compensation                                                                                                                                                                         |  |                   | (358    | ) |                  |   | (471    | )
|Accumulated other comprehensive income                                                                                                                                                        |  |                   | 1,085   |   |                  |   | 944     |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                    |  |                   | 116,134 |   |                  |   | 97,741  |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                    |  | $                 | 142,438 |   |                  | $ | 129,048 |  
|                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  



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



3



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##### Table of Contents

LIFELINE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(In
thousands, except for per share data)

(Unaudited)



|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                              |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                              |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Revenues                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Services                                      |  | $                               | 30,365 |   |                                | $ | 26,232 |      |  | $ | 88,002  |   |  | $ | 76,207 |  
|Net product sales                             |  |                                 | 8,237  |   |                                |   | 6,674  |      |  |   | 22,362  |   |  |   | 18,678 |  
|Finance income                                |  |                                 | 42     |   |                                |   | 199    |      |  |   | 161     |   |  |   | 685    |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total revenues                                |  |                                 | 38,644 |   |                                |   | 33,105 |      |  |   | 110,525 |   |  |   | 95,570 |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Costs and expenses                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Cost of services                              |  |                                 | 13,398 |   |                                |   | 11,805 |      |  |   | 39,906  |   |  |   | 36,609 |  
|Cost of product sales                         |  |                                 | 2,990  |   |                                |   | 2,134  |      |  |   | 8,005   |   |  |   | 6,345  |  
|Selling, general and administrative           |  |                                 | 15,686 |   |                                |   | 13,540 |      |  |   | 45,122  |   |  |   | 37,982 |  
|Research and development                      |  |                                 | 505    |   |                                |   | 497    |      |  |   | 1,664   |   |  |   | 1,547  |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total costs and expenses                      |  |                                 | 32,579 |   |                                |   | 27,976 |      |  |   | 94,697  |   |  |   | 82,483 |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Income from operations                        |  |                                 | 6,065  |   |                                |   | 5,129  |      |  |   | 15,828  |   |  |   | 13,087 |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Other income (expense)                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Interest income                               |  |                                 | 325    |   |                                |   | 192    |      |  |   | 811     |   |  |   | 373    |  
|Interest expense                              |  |                                 | (5     | ) |                                |   | (5     | )    |  |   | (14     | ) |  |   | (16    | )
|Other income (expense)                        |  |                                 | (16    | ) |                                |   | 1      |      |  |   | (45     | ) |  |   | (14    | )
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total other income, net                       |  |                                 | 304    |   |                                |   | 188    |      |  |   | 752     |   |  |   | 343    |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Income before income taxes                    |  |                                 | 6,369  |   |                                |   | 5,317  |      |  |   | 16,580  |   |  |   | 13,430 |  
|Provision (benefit) for income taxes          |  |                                 | (4     | ) |                                |   | 2,089  |      |  |   | 3,537   |   |  |   | 5,415  |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net income                                    |  |                                 | 6,373  |   |                                |   | 3,228  |      |  |   | 13,043  |   |  |   | 8,015  |  
|                                              |  |                                 |        |  
|Other comprehensive income/(loss), net of tax |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Unrealized loss on investments                |  |                                 | (98    | ) |                                |   |       |      |  |   | (116    | ) |  |   |       |  
|Foreign currency translation adjustments      |  |                                 | 280    |   |                                |   | 191    |      |  |   | 202     |   |  |   | 109    |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive income                          |  | $                               | 6,555  |   |                                | $ | 3,419  |      |  | $ | 13,129  |   |  | $ | 8,124  |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net income per weighted average share:        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic                                         |  | $                               | 0.45   |   |                                | $ | 0.24   |      |  | $ | 0.94    |   |  | $ | 0.59   |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Diluted                                       |  | $                               | 0.43   |   |                                | $ | 0.23   |      |  | $ | 0.89    |   |  | $ | 0.57   |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                              |  |                                 |        |  
|Weighted average shares:                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic                                         |  |                                 | 14,035 |   |                                |   | 13,712 |      |  |   | 13,919  |   |  |   | 13,545 |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Diluted                                       |  |                                 | 14,724 |   |                                |   | 14,284 |      |  |   | 14,609  |   |  |   | 14,118 |  
|                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  



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



4



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##### Table of Contents

LIFELINE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine months endedSeptember 30, |        
|                                                                                  |  | 2005                           |         |   | 2004 |  
|Cash flows from operating activities:                                             |  |                                |         |   |      |   |         |  
|Net income                                                                        |  | $                              | 13,043  |   |      | $ | 8,015   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Loss on disposal of assets                                                        |  |                                | 133     |   |      |   |        |  
|Depreciation and amortization                                                     |  |                                | 9,803   |   |      |   | 9,698   |  
|Deferred income taxes                                                             |  |                                |        |   |      |   | (55     | )
|Tax benefit from exercise of employee stock options                               |  |                                | 1,811   |   |      |   | 1,166   |  
|Amortization of unearned compensation                                             |  |                                | 113     |   |      |   | 113     |  
|Amortization of premium on available-for-sale securities                          |  |                                | 4       |   |      |   |        |  
|Other                                                                             |  |                                |        |   |      |   | (164    | )
|Changes in operating assets and liabilities:                                      |  |                                |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                | 201     |   |      |   | (449    | )
|Inventories                                                                       |  |                                | (977    | ) |      |   | 1,476   |  
|Net investment in sales-type leases                                               |  |                                | 1,424   |   |      |   | 879     |  
|Prepaid expenses, other current assets and other assets                           |  |                                | (1,130  | ) |      |   | 3,458   |  
|Accrued payroll and payroll taxes                                                 |  |                                | (135    | ) |      |   | (183    | )
|Accounts payable, accrued expenses and other liabilities                          |  |                                | (1,629  | ) |      |   | (611    | )
|Accrued income taxes                                                              |  |                                | (5,528  | ) |      |   | 2,206   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                | 17,133  |   |      |   | 25,549  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                                |         |   |      |   |         |  
|Purchases of investments                                                          |  |                                | (25,016 | ) |      |   | (29,046 | )
|Sales and maturities of investments                                               |  |                                | 5,000   |   |      |   | 8,046   |  
|Additions to property and equipment                                               |  |                                | (7,253  | ) |      |   | (6,992  | )
|Business purchases and other                                                      |  |                                | (4,895  | ) |      |   | (6,872  | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                | (32,164 | ) |      |   | (34,864 | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                                |         |   |      |   |         |  
|Proceeds from stock options exercised                                             |  |                                | 5,096   |   |      |   | 3,237   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                                | 5,096   |   |      |   | 3,237   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Effect of foreign exchange on cash                                                |  |                                | 224     |   |      |   | 137     |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                                | (9,711  | ) |      |   | (5,941  | )
|Cash and cash equivalents at beginning of period                                  |  |                                | 42,428  |   |      |   | 21,356  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                              | 32,717  |   |      | $ | 15,415  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Non-cash activity:                                                                |  |                                |         |   |      |   |         |  
|Acquisition related obligations                                                   |  | $                              |        |   |      | $ | 672     |  



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



5



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##### Table of Contents

LIFELINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | The information furnished has been prepared from the accounts without audit. In the opinion of Lifeline Systems, Inc. (the Company or we), the accompanying
consolidated financial statements contain all adjustments necessary, consisting only of those of a normal recurring nature, to present fairly its consolidated financial position as of September 30, 2005, the consolidated statements of income
and comprehensive income for the three and nine months ended September 30, 2005 and 2004 and the consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These statements should be read in conjunction with the consolidated
financial statements and the related notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission, commonly referred to as the SEC, on March 11,
2005.



The results of operations for the nine-month period
ended September 30, 2005 are not necessarily indicative of the results expected for the full year.



Reclassification



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



|2. | 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, which approximates cost. The Company maintained approximately $22.9 million and $45.0 million at September 30, 2005 and December 31, 2004, respectively, of its cash and cash equivalents and investments with a single
institution. The Company has not experienced any losses associated with deposits at this institution.



|                                                |  |                               |       |                   |   |        |  |   |       
|----------------------------------------------- |  | ----------------------------- | ----- | ----------------- | - | ------ |  | - | ------
|(Dollars in thousands)                          |  | Maturity atSeptember 30, 2005 |       |                  
|                                                |  | Less thanone year             |       | More thanone year |   | Total 
|Type of Security                                |  |                               |       |                   |   |        |  |   |       
|U.S. Government and Agency Securities           |  | $                             | 2,995 |                   | $ | 10,901 |  | $ | 13,896
|Corporate Bonds                                 |  |                               |       |                   |   | 10,928 |  |   | 10,928
|                                                |  |                               |       |                   |   |        |  |   |       
|Total short-term and long-term investments      |  | $                             | 2,995 |                   | $ | 21,829 |  | $ | 24,824
|Cash and Cash Equivalents                       |  |                               |       |                   |   |        |  |   | 32,717
|                                                |  |                               |       |                   |   |        |  |   |       
|Total cash and cash equivalents and investments |  |                               |       |                   | $ | 57,541
|                                                |  |                               |       |                   |   |        |  |   |       



6



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(continued)



|2. | CASH AND CASH EQUIVALENTS, INVESTMENTS (continued)
|-- | --------------------------------------------------



As of September 30, 2005, the Company had a total fair value of approximately $24.8 million of securities with unrealized losses of approximately
$0.2 million. For investments in an unrealized loss position, the Company has the intent and ability to hold these investments until the full recovery of their carrying value. For anything other than a temporary decline in market value, the Company
would record an impairment charge. During the nine months ended September 30, 2005, the Company has not experienced such a situation.



|3. | Details of certain balance sheet captions are as follows:
|-- | ---------------------------------------------------------



|                                                |  |                   |         |   |                  |   |         |  
|----------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|(Dollars in thousands)                          |  | September 30,2005 |         |   | December 31,2004 |  
|Inventories:                                    |  |                   |         |   |                  |   |         |  
|Purchased parts and assemblies                  |  | $                 | 1,680   |   |                  | $ | 923     |  
|Work-in-process                                 |  |                   | 142     |   |                  |   | 177     |  
|Finished goods                                  |  |                   | 3,661   |   |                  |   | 3,446   |  
|                                                |  |                   |         |   |                  |   |         |  
|Total inventory                                 |  | $                 | 5,483   |   |                  | $ | 4,546   |  
|                                                |  |                   |         |   |                  |   |         |  
|Property and equipment:                         |  |                   |         |   |                  |   |         |  
|Equipment                                       |  | $                 | 38,070  |   |                  | $ | 34,760  |  
|Furniture and fixtures                          |  |                   | 4,743   |   |                  |   | 4,314   |  
|Equipment rented to customers                   |  |                   | 27,447  |   |                  |   | 24,946  |  
|Leasehold improvements                          |  |                   | 8,817   |   |                  |   | 8,718   |  
|Construction in progress                        |  |                   | 1,438   |   |                  |   | 1,313   |  
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 80,515  |   |                  |   | 74,051  |  
|Less: accumulated depreciation and amortization |  |                   | (47,245 | ) |                  |   | (40,021 | )
|                                                |  |                   |         |   |                  |   |         |  
|Total property and equipment, net               |  | $                 | 33,270  |   |                  | $ | 34,030  |  
|                                                |  |                   |         |   |                  |   |         |  



|4. | STOCKHOLDERS EQUITY
|-- | --------------------



The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure (SFAS 148). SFAS 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 148 and SFAS 123, the Company continues to apply the accounting provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations, with respect to the measurement of compensation cost for options granted under the Companys
stock-based employee compensation plans. No employee compensation expense has been recorded, as all options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(continued)



|4. | STOCKHOLDERS EQUITY (continued)
|-- | --------------------------------



In December 2004, the Financial Accounting Standards Board (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 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. The Company is currently completing its evaluation of the adoption of SFAS 123R and the impact that this statement will have on its results of operations. 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 three and nine months ended September 30, 2005 and 2004 as if the fair value based method had been applied to all
outstanding and unvested awards in each period.



|                                                                                                                 |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                 |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|(Dollars in thousands, except per share amounts)                                                                 |  | 2005                            |       |   | 2004                           |   |       | 2005 |  |   | 2004   |  
|Net income, as reported                                                                                          |  | $                               | 6,373 |   |                                | $ | 3,228 |      |  | $ | 13,043 |   |  | $ | 8,015  |  
|Add: stock-based employee compensation expense included in reported net income, net of related tax effects       |  |                                 | 32    |   |                                |   | 23    |      |  |   | 89     |   |  |   | 68     |  
|Deduct: total stock-based compensation expense determined under the fair value method for all awards, net of tax |  |                                 | (415  | ) |                                |   | (374  | )    |  |   | (1,425 | ) |  |   | (1,123 | )
|                                                                                                                 |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                             |  | $                               | 5,990 |   |                                | $ | 2,877 |      |  | $ | 11,707 |   |  | $ | 6,960  |  
|                                                                                                                 |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Earnings per share                                                                                               |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Basicas reported                                                                                                |  | $                               | 0.45  |   |                                | $ | 0.24  |      |  | $ | 0.94   |   |  | $ | 0.59   |  
|                                                                                                                 |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Basicpro forma                                                                                                  |  | $                               | 0.43  |   |                                | $ | 0.21  |      |  | $ | 0.84   |   |  | $ | 0.51   |  
|                                                                                                                 |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Dilutedas reported                                                                                              |  | $                               | 0.43  |   |                                | $ | 0.23  |      |  | $ | 0.89   |   |  | $ | 0.57   |  
|                                                                                                                 |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Dilutedpro forma                                                                                                |  | $                               | 0.41  |   |                                | $ | 0.20  |      |  | $ | 0.80   |   |  | $ | 0.49   |  
|                                                                                                                 |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  



For the three months
ended September 30, 2005, there were no options excluded from the computation of diluted net income per share. For the three months ended September 30, 2004,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(continued)



|4. | STOCKHOLDERS EQUITY (continued)
|-- | --------------------------------



options to purchase 1,200 shares at an average exercise price of $21.71 per share were not included in the computation of diluted net income per share, as
their effect would have been anti-dilutive. For the nine months ended September 30, 2005 and 2004, options to purchase 50,000 and 74,200 shares, respectively, at an average exercise price of $32.22 and $21.14, respectively, were not included in
the computation of diluted net income per share, as their effect would have been anti-dilutive.



Restricted Stock



In accordance with the terms of an 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.



Stock Appreciation Rights



On February 2, 2005, the Company granted its Chief Executive Officer a stock appreciation right based on 25,000 shares of the Companys common stock at an exercise price of $26.46 per share, which will be settled in the
Companys common stock. The stock appreciation right vests in 16 equal quarterly installments, commencing on May 2, 2005, and will expire on February 2, 2012.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(continued)



|5. | 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 Segment Data



Net revenues from customers are based on the location of the customer. Geographic information related to the results of operations for the periods ended September 30, 2005 and 2004 and the financial position as of September 30,
2005 and December 31, 2004 is presented as follows:



|                       |  |                                  |        |                                |      |   |        |  |   |         |   |  |   |       
|---------------------- |  | -------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                       |  | Three months ended September 30, |        | Nine months endedSeptember 30,
|(Dollars in thousands) |  | 2005                             |        |                                | 2004 |   | 2005   |  |   | 2004   
|Net Sales:             |  |                                  |        |                                |      |   |        |  |   |         |   |  |   |       
|United States          |  | $                                | 34,579 |                                |      | $ | 29,613 |  | $ | 98,621  |   |  | $ | 85,595
|Canada                 |  |                                  | 4,297  |                                |      |   | 3,492  |  |   | 12,833  |   |  |   | 9,975 
|Intersegment revenue   |  |                                  | (232   | )                              |      |   |       |  |   | (929    | ) |  |   |      
|                       |  |                                  |        |                                |      |   |        |  |   |         |   |  |   |       
|                       |  | $                                | 38,644 |                                |      | $ | 33,105 |  | $ | 110,525 |   |  | $ | 95,570
|                       |  |                                  |        |                                |      |   |        |  |   |         |   |  |   |       
|Net Income:            |  |                                  |        |                                |      |   |        |  |   |         |   |  |   |       
|United States          |  | $                                | 5,948  |                                |      | $ | 2,866  |  | $ | 11,979  |   |  | $ | 7,188 
|Canada                 |  |                                  | 425    |                                |      |   | 362    |  |   | 1,064   |   |  |   | 827   
|                       |  |                                  |        |                                |      |   |        |  |   |         |   |  |   |       
|                       |  | $                                | 6,373  |                                |      | $ | 3,228  |  | $ | 13,043  |   |  | $ | 8,015 
|                       |  |                                  |        |                                |      |   |        |  |   |         |   |  |   |       



|              |  |                    |         |                  |   |        
|------------- |  | ------------------ | ------- | ---------------- | - | -------
|              |  | September 30, 2005 |         | December 31,2004
|Total Assets: |  |                    |         |                  |   |        
|United States |  | $                  | 127,411 |                  | $ | 117,289
|Canada        |  |                    | 15,027  |                  |   | 11,759 
|              |  |                    |         |                  |   |        
|              |  | $                  | 142,438 |                  | $ | 129,048
|              |  |                    |         |                  |   |        



|6. | GOODWILL AND INTANGIBLES
|-- | ------------------------



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(continued)



|6. | GOODWILL AND INTANGIBLES (continued)
|-- | ------------------------------------



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 the 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 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(continued)



|6. | GOODWILL AND INTANGIBLES (continued)
|-- | ------------------------------------



The following table represents the type and value of the Companys intangible assets at September 30, 2005 and December 31, 2004:



|                                           |  |                     |        |                         |                   |        |                     |  |                         |        |  |    |        |  
|------------------------------------------ |  | ------------------- | ------ | ----------------------- | ----------------- | ------ | ------------------- |  | ----------------------- | ------ |  | -- | ------ | -
|                                           |  | September 30, 2005  |        |                         | December 31, 2004 |       
|(Dollars in thousands)                     |  | GrossCarryingAmount |        | AccumulatedAmortization |                   |        | GrossCarryingAmount |  | AccumulatedAmortization |       
|Goodwill                                   |  | $                   | 11,202 |                         | $                 | 0      |                     |  | $                       | 8,821  |  | $  | 0      |  
|                                           |  |                     |        |                         |                   |        |                     |  |                         |        |  |    |        |  
|Intangible assets subject to amortization: |  |                     |        |                         |                   |        |                     |  |                         |        |  |    |        |  
|Provider agreements                        |  | $                   | 7,629  |                         | ($                | 6,262  | )                   |  | $                       | 7,236  |  | ($ | 5,707  | )
|Referral sources                           |  |                     | 17,937 |                         |                   | (6,896 | )                   |  |                         | 14,103 |  |    | (5,860 | )
|Employment and non-competition agreements  |  |                     | 258    |                         |                   | (75    | )                   |  |                         | 127    |  |    | (38    | )
|Customer lists                             |  |                     | 1,732  |                         |                   | (473   | )                   |  |                         | 728    |  |    | (198   | )
|Other identifiable intangible assets (1)   |  |                     | 203    |                         |                   | (68    | )                   |  |                         | 2,480  |  |    | (33    | )
|                                           |  |                     |        |                         |                   |        |                     |  |                         |        |  |    |        |  
|Total other intangible assets              |  | $                   | 27,759 |                         | ($                | 13,774 | )                   |  | $                       | 24,674 |  | ($ | 11,836 | )
|                                           |  |                     |        |                         |                   |        |                     |  |                         |        |  |    |        |  



(1) The majority of
this amount at December 31, 2004 arose from the purchase of a supplier of wireless emergency call systems for the senior living industry and the purchase of service providers in Canada. The Company completed the purchase accounting associated
with these acquisitions during the nine months ended September 30, 2005.



As noted above, for the nine months ended September 30, 2005, the Company completed the purchase accounting for its acquisition of a supplier of wireless emergency call systems for the senior living industry. As
a result, it recorded approximately $1.0 million of non-amortizable goodwill and $0.6 million of amortizable intangible assets, the majority of which the Company will amortize over an estimated life of 7 years. The Company also completed the
purchase accounting for the acquisition of service providers in Canada which resulted in approximately $0.3 million of non-amortizable goodwill and approximately $1.1 million of amortizable intangible assets, the majority of which the Company will
amortize over an estimated life of 15 years.



For the nine
months ended September 30, 2005, the Company also completed the purchase accounting for the purchase of a service provider in the United States in 2005. As a result, it recorded approximately $27,000 of non-amortizable goodwill and
approximately $1.6 million of amortizable intangible assets, the majority of which the Company will amortize over an estimated life of 15 years.



In accordance with the Companys assessment of the fair value of assets acquired from its previous acquisitions, the Company recorded approximately
$0.6 million of additional goodwill during the



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(continued)



|6. | GOODWILL AND INTANGIBLES (continued)
|-- | ------------------------------------



third quarter of 2005 as a result of payments for certain earnout provisions associated with the agreements.



All of the Companys acquired intangible assets, other than goodwill,
are subject to amortization. Amortization expense for acquired intangible assets for the nine months ended September 30, 2005 and 2004 was approximately $1.9 million and $2.0 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
|2005                            |  | $2,387
|2006                            |  | 2,025 
|2007                            |  | 1,520 
|2008                            |  | 1,213 
|2009                            |  | 1,012 



|7. | PRODUCT WARRANTY
|-- | ----------------



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



Changes in product warranty obligations for the nine months ended
September 30, 2005 and for the year ended December 31, 2004 are as follows:



|                             |  |                   |      |   |                  |   |      |  
|---------------------------- |  | ----------------- | ---- | - | ---------------- | - | ---- | -
|(Dollars in thousands)       |  | September 30,2005 |      |   | December 31,2004 |  
|Balance, beginning of period |  | $                 | 201  |   |                  | $ | 208  |  
|Provision for warranty       |  |                   | 270  |   |                  |   | 305  |  
|Warranty utilized            |  |                   | (288 | ) |                  |   | (312 | )
|                             |  |                   |      |   |                  |   |      |  
|Balance, end of period       |  | $                 | 183  |   |                  | $ | 201  |  
|                             |  |                   |      |   |                  |   |      |  



|8. | 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(Unaudited)(continued)



|9. | NEWLY ISSUED ACCOUNTING STANDARDS (continued)
|-- | ---------------------------------------------



In December 2004, the FASB issued SFAS 123R. SFAS 123R is a revision of SFAS 123, supersedes APB 25 and amends FASB Statement No. 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 SAB 107. SAB 107 expresses views of the SEC regarding the interaction between SFAS123R 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 is currently completing its evaluation of the adoption of SFAS 123R and the impact that this statement will have on its results of operations. The Company will apply the principles of SAB 107 in
conjunction with its adoption of SFAS 123R.



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 is in the process of evaluating the impact of SFAS 151 and does not believe the adoption of the standard will have a material impact on the Company upon adoption in fiscal 2006.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|------- | -------------------------------------------------------------------------------------



This Quarterly Report on Form 10-Q 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 below under the caption Certain Factors That May Affect Future Results. 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 individuals with medical or age-related conditions, who wish to continue to live independently in their home. We were instrumental in pioneering the Personal Emergency Response Services (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 September 30, 2005, we monitored approximately 453,000 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 September 30, 2005 our senior living products were installed in approximately 1,200 senior living facilities in 40 states, which monitored approximately
100,000 residents using our monitoring platforms.



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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 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



Total revenues for the three and nine months ended September 30,
2005 were $38.6 million and $110.5 million, respectively, an increase of approximately 17% and 16%, respectively, from $33.1 million and $95.6 million for the same periods in 2004.



Services Revenue



Services revenue increased approximately 16% for the three months ended September 30, 2005 to $30.4 million from $26.2 million for the three months ended
September 30, 2004. For the nine months ended September 30, 2005, services revenue grew approximately 15% to $88.0 million from $76.2 million for the same period in 2004. The increase in our services revenue is mainly a result of the
growth of our monitored subscriber base by 10% to approximately 453,000 subscribers as of September 30, 2005 from approximately 411,000 subscribers as of September 30, 2004. Our service to approximately 1,000 subscribers was interrupted as
a result of the hurricanes that hit the Gulf Cost during the third quarter; however, we expect that these events will not 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, 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 for the three months ended September 30, 2005 increased 23% to $8.2 million from $6.7 million for the same period in
2004. Net product sales for the nine months ended September 30, 2005 increased approximately 20% to $22.4 million from $18.7 million for the nine



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##### Table of Contents

months ended September 30, 2004. The increase in both periods is primarily attributable to increased sales from our senior living division. 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.



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 44% for the three months ended September 30, 2005 from 45% for the three months ended September 30, 2004. For the nine months ended September 30, 2005, cost of services as a percentage of services revenue improved by
approximately 3% to 45% compared to 48% for the same period in 2004. On a dollar basis, cost of services increased by approximately $1.6 million and $3.3 million for the three and nine months ended September 30, 2005, respectively, compared
with the same periods in 2004 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 Company-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 for the
remainder of 2005.



Cost of Product Sales



For each of the three and nine months ended September 30, 2005, cost of product sales
as a percentage of net product sales was approximately 36% as compared to 32% and 34%, respectively, for the same periods in 2004. The increased cost percentages for the three and nine month periods ended September 30, 2005 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 in the first nine months of 2005 as compared the first nine months of 2004.



Selling, General and Administrative Expenses



Selling, general and administrative (SG&A) expenses, as a percentage of total revenues, were approximately 41% for each of the three and nine months ended September 30, 2005 as compared to 41% and 40%, respectively, for
the three and nine months ended September 30, 2004. SG&A expenses increased approximately $2.1 million and $7.1 million for the three and nine months ended September 30, 2005, respectively, as we continued to invest in our senior
living initiative, including approximately $1.2 million of incremental operational costs associated with our June 2004



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acquisition. We also incurred approximately $2.4 million of increased expenditures associated with our business and marketing initiatives, including the
ongoing investment in our health care direct marketing campaign, e-commerce and other marketing and channel development programs. We also experienced higher corporate-related expenses as a result of the growth of our business. We expect that
SG&A expenses as a percentage of total revenues will range between 40% and 41% of total revenues for the year ending December 31, 2005 as we continue with our business initiatives.



Research and Development



Research and development expenses were between 1% and 2% of total revenues for each of the
three and nine months ended September 30, 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 for the remainder of 2005.



Taxes



Our effective tax rate was (.06)% and 21.3% for the three and nine months ended
September 30, 2005, respectively, compared to 39.3% and 40.3% for the three and nine months ended September 30, 2004, respectively. The effective tax rate for the three months ended September 30, 2005 was affected by an approximate
$2.4 million dollar 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. For the nine months ended September 30,
2005, the effective tax rate was also affected by a previously disclosed $0.4 million favorable tax settlement in the first quarter of 2005 and our holding company reorganization, which we completed in December 2004. We expect our normalized
effective tax rate to range from 38% to 39% in 2005.



LIQUIDITY AND CAPITAL
RESOURCES



During the nine months ended September 30, 2005, our
portfolio of cash and cash equivalents decreased approximately $9.7 million to $32.7 million from $42.4 million at December 31, 2004. A significant portion of 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 portfolio of cash and cash equivalents and investments grew by approximately $10.1 million in total as a result of an increase in cash provided by operating
activities of approximately $17.1 million, which mainly reflected 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
(DSO) from 34 days for the nine months ended September 30, 2004 to 30 days for the nine months ended September 30, 2005, and the benefit of our outsourced leasing program. In addition to proceeds provided by operating activities, proceeds
from stock option exercises of $5.1 million contributed to the increase. This increase, however, was partially offset by net payments of $7.1 million for income tax obligations, net of the tax benefit on employee stock options exercised, and
approximately $1.6 million of payments primarily as a result of the timing of expenditures related to our business and marketing initiatives.



During the nine months ended September 30, 2005, we incurred expenditures of approximately $7.3 million for purchases of property and equipment in the ordinary
course of business, including approximately $3.4 million for Companyowned equipment provided to customers and subscribers under our OneSource and Product and Service Fee (PSF) offerings. We also spent a total of



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approximately $4.9 million for business acquisitions during the first nine months of 2005, which included the acquisition of a small regional service
provider, OneSource businesses and provider agreements for our Lifeline Monitoring Services(LMS) and PSF offerings.



We have a $30.0 million credit facility with Citizens Bank of Massachusetts that expires in July 2007. As of September 30, 2005, we did not have any debt outstanding
under this facility.



The following table summarizes our contractual
obligations as of September 30, 2005 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:



(Dollars in thousands)



|                             |  |      |     |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      
|---------------------------- |  | ---- | --- | ---- | - | ----- |  | ---- | ----- | ---- | - | -------------- |  | - | ----- |  | - | -----
|                             |  | 2005 |     | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Thereafter (1)
|Contractual Obligations (2): |  |      |     |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      
|Operating leases             |  | $    | 455 |      | $ | 1,810 |  | $    | 1,710 |      | $ | 1,618          |  | $ | 1,688 |  | $ | 6,139
|                             |  |      |     |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      
|Total Obligations            |  | $    | 455 |      | $ | 1,810 |  | $    | 1,710 |      | $ | 1,618          |  | $ | 1,688 |  | $ | 6,139
|                             |  |      |     |      |   |       |  |      |       |      |   |                |  |   |       |  |   |      

|(1) | The majority of this amount represents contractual obligations on 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 September 30, 2005, or certain
earnout provisions for some of our acquisitions.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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. We may also consider alternative financing vehicles, including potential equity issuances.



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



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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 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 nine months
ended September 30, 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 nine
months ended September 30, 2005, we completed the purchase accounting for previous acquisitions of a supplier of wireless emergency call systems for the senior living industry



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and service providers in both the U.S. and Canada. As a result, we recorded approximately $1.3 million of non-amortizable goodwill and $3.3 million of
amortizable intangible assets, the majority of which will be amortized between seven and 15 years.



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.



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 will be 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, which approximates cost. 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



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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
nine-months ended September 30, 2005.



Taxes



We record liabilities for income tax contingencies based on our best estimate of the
underlying exposures. For the nine months ended September 30, 2005 we recorded an approximate $2.8 million dollar 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.



NEWLY ISSUED
ACCOUNTING STANDARDS



On June 1, 2005, the FASB issued SFAS 154, a
replacement of APB No. 20 and FASB Statement No. 3. 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 SFAS 123R. SFAS 123R is a revision of SFAS 123, supersedes
APB 25 and amends FASB Statement No. 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 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 are currently completing our evaluation of the adoption of SFAS 123R and the impact that this statement will have on our results of operations. We will apply
the principles of SAB 107 in conjunction with our adoption of SFAS 123R.



In
November 2004, the FASB issued 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 are in the process of evaluating the impact of SFAS 151 and do not
believe the adoption of the standard will have a material impact on us upon adoption in fiscal 2006.



CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS



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



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



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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% and 12% of our total revenues for the three and nine-months ended September 30, 2005, respectively, 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 new, non-telephony-based communications may be limited by the availability of such
communications technologies in



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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 September 30, 2005, approximately 9% of our centrally-monitored subscribers were billed under state Medicaid contracts,
representing approximately 8% of our total revenue for the quarter 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 Federal Communication Commission, or FCC,
and the Food and Drug Administration, or 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 the Health Insurance Portability and Accountability
Act of 1996, or 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 requirements through their contracts with us. The HIPAA regulations



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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;
|- |  | ------------------------------------------------



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



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| |  | 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 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.



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|ITEM 3. | 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 September 30, 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 September 30, 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 $0.2 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 September 30, 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 September 30, 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 4. | 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 September 30, 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 September 30, 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.



No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fiscal quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

|PART II. | OTHER INFORMATION
|-------- | -----------------



|ITEM 6. | EXHIBITS
|------- | --------



The Exhibits that are filed with this Report are set forth in the Exhibit Index, which appears on page 32 hereof.





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##### Table of Contents

LIFELINE SYSTEMS, INC.



SIGNATURES



Pursuant to the
requirements of the Securities and 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.                  
|                 |  | 
|November 4, 2005 |  |  |  | /s/ Ronald Feinstein                    
|Date             |  |  |  | Ronald Feinstein                        
|                 |  |  |  | Chief Executive Officer and President   
|                 |  | 
|November 4, 2005 |  |  |  | /s/ Mark G. Beucler                     
|Date             |  |  |  | Mark G. Beucler                         
|                 |  |  |  | Vice President, Finance, Chief Financial
|                 |  |  |  | Officer and Treasurer                   





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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                      
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                              
|            | 
|10.1        |  | Stock Appreciation Right Agreement evidencing the grant by the Registrant to Ronald Feinstein on February 2, 2005 (Incorporated by reference to the Registrants Current Report on Form
8-K filed on August 18, 2005)
|            | 
|31.1        |  | Certification of Principal Executive Officer required by Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002               
|            | 
|31.2        |  | Certification of Principal Financial Officer required by Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002               
|            | 
|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                                        



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