<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2001             Commission File Number 0-13617

                             LIFELINE SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

             MASSACHUSETTS                               04-2537528
    (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)

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

                          Common stock $0.02 par value
                          ----------------------------
                                (Title of Class)

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


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]


As of February 28, 2002, 6,346,950 shares of the Registrant's Common Stock were
outstanding and the aggregate market value as of such date of such Common Stock
held by non-affiliates of the Registrant was approximately $128,000,000.

                               ------------------

Exhibit index is located on pages 49 through 52 of this Report.

<PAGE>

                                     PART I

ITEM 1. Business

     General

         Lifeline Systems, Inc. (the "Company") provides 24-hour personal
     response monitoring services to its subscribers, primarily elderly
     individuals with medical or age-related conditions as well as physically
     challenged individuals. These subscribers communicate with the Company
     through products it designs and markets, consisting principally of a
     communicator which connects to the telephone line in the subscriber's home
     and a personal help button, which is worn or carried by the individual
     subscriber and which, when activated, initiates a telephone call from the
     subscriber's communicator to the Company's central monitoring facilities.
     The Company believes it is a major provider of these services since it was
     monitoring approximately 345,000 subscribers as of December 31, 2001 and
     estimates it serves, along with its customers, approximately 400,000
     subscribers in a North American personal emergency response services market
     estimated by the Company to serve over 600,000 subscribers as of December
     31, 2001.

     Business Developments

         In April 2001, the Company acquired certain assets formerly owned by
     SOS Industries, Inc. a personal response service provider based in New
     Smyrna Beach, Florida with subscribers located in 37 states. The purchase
     price was $3.8 million. The acquisition was accounted for as a purchase
     transaction, and the resulting goodwill was amortized over an estimated
     life of 10 years through December 31, 2001. In accordance with Statement of
     Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
     Intangible Assets," the Company discontinued the amortization of this
     acquisition effective January 1, 2002 and will perform an annual review of
     impairment.

         The Company anticipates that, beginning in the second quarter of 2002,
     it will once again support a manufacturing site at its corporate location
     to assemble its personal response equipment and will end its outsourcing
     arrangement with Ademco. The Company believes that the decision to support
     a manufacturing assembly process for its equipment will result in better
     cost containment and will maintain cost of sales at a relatively consistent
     percentage of product sales.

     Industry Segments

         The Company operates in one industry segment. Its operations consist of
     providing personal response services associated with those products it
     designs and markets. Foreign revenues, from Canada, comprised less than 10%
     of the Company's total revenues in 2001, and tangible assets in foreign
     countries represent less than 10% of the Company's total assets as of
     December 31, 2001.

     The Lifeline Service

         The Company's principal offering, called LIFELINE(R), consists of a
     monitoring service utilizing equipment designed and marketed by the
     Company. The Company's monitoring service is a personal response service
     which provides 24-hour monitoring and personalized support to elderly
     individuals with medical or age-related conditions and to physically
     challenged individuals throughout the United States and Canada. Through use
     of the LIFELINE service, individuals in need of help are able to signal
     monitoring personnel in one of the Company's response centers. These
     trained monitors identify the nature and extent of the subscriber's
     particular need and manage the situation by notifying the subscriber's
     friends, neighbors, and/or emergency personnel, as set forth in a
     predetermined protocol established by the Company. In many situations, this
     service can also provide social support

                                      -2-

<PAGE>

     for elderly individuals who live alone since trained monitoring personnel
     are contacted by these elders, who utilize the Lifeline service as an
     important social connection.

         The equipment used for the LIFELINE service includes a communicator,
     which connects to the telephone line in the subscriber's home, and a
     personal help button, which is worn or carried by the individual
     subscriber. When pressed, the personal help button sends a radio signal to
     the communicator; the communicator automatically dials a response center
     where monitoring personnel answer the call and dispatch the designated
     responders, typically a friend or relative of the subscriber and/or
     emergency service, when help is needed. Most of the time, however,
     subscribers' calls do not require Lifeline to dispatch a responder but
     instead require Lifeline to provide reassurance and support as a result of
     the subscriber's isolation or loneliness.

         The Company's primary monitoring center in Framingham, Massachusetts is
     supported by its proprietary CareSystem call center platform. This call
     center platform is a specially designed computer and telecommunications
     hardware and software system used to identify, track and respond to
     subscriber calls. CareSystem receives incoming signals from subscribers'
     communicators, matches and retrieves the appropriate subscriber data
     records from a central database, and routes both the call and the data
     record to monitoring personnel in the Lifeline Call Center.

         To provide its services, the Company develops relationships with
     hospitals or other healthcare providers ("customers") who establish a
     Lifeline program generally for the benefit of at-risk individuals in their
     coverage area ("subscribers"). The type of Lifeline program established by
     the customer determines the type of relationship that the Company has with
     these customers. The programs offered by Lifeline consist of the following:

             a.    Site monitored program - these customers locally provide
                   their own monitoring services to the subscriber by purchasing
                   monitoring equipment from the Company. Subscribers in need of
                   help are able to signal monitoring personnel at the
                   customer's facility. With this type of Lifeline program the
                   customer purchases monitoring equipment (installed at the
                   customer's facility) and home communicators (installed in the
                   subscribers' homes) from the Company and maintains all
                   responsibilities for the operation of the program. The
                   customer bills its subscribers for the monitoring services
                   and home communicators it is providing.

             b.    Lifeline Monitoring Services ("LMS") - with this type of
                   Lifeline program, the customer outsources the monitoring
                   activity to a Lifeline Call Center to service their
                   subscribers but generally retains other responsibilities for
                   the operation of the program. The customer purchases from
                   the Company the home communicators the customer provides to
                   its subscribers. The Company charges the customer a monthly
                   per-subscriber fee for the monitoring service that the
                   Company is providing. The sale by the Company to the
                   customer of the home communicators is not tied to the
                   monitoring agreement as the customer makes the determination
                   when to purchase home communicators. The customer typically
                   purchases home communicators to place in its own inventory
                   and then disperses the communicators as it acquires
                   subscribers who need the service. The customer is under no
                   contract that would require it to purchase product. The
                   customer bills the subscriber for the home communicators it
                   has placed in the subscriber's home and for the monitoring
                   services provided by the Company.



                                      -3-

<PAGE>

             c.    Business Management Services ("BMS") - for customers who
                   choose this type of Lifeline program, the Company provides a
                   comprehensive set of monitoring and business support
                   services that effectively reduce the customer's program
                   management and administrative responsibilities associated
                   with offering the Lifeline service. The program is designed
                   to meet the needs of customers that would like to make a
                   Lifeline program available to individuals in their coverage
                   area but which do not have the resources or the desire to
                   themselves provide all the activities related to providing
                   the Lifeline service in their community. The Company handles
                   day-to-day administrative tasks for the Lifeline service
                   including managing referrals, inquiries, service order
                   intake, service installation, ongoing customer service and
                   billing to support the needs of the customer. The Company
                   directly provides its customers' subscribers with a
                   comprehensive service offering, which includes monitoring
                   and the use of Company-owned home communicators for a single
                   fee, and the Company bills the subscriber on a monthly basis
                   for this service. The BMS service does not involve the sale
                   by the Company of products to its customers or to
                   subscribers.

     Customers

         The Company primarily markets its services and products to hospitals
     and other service providers in a variety of healthcare related fields.
     Hospitals, however, have historically been the Company's primary market.
     The Company believes that hospitals offer Lifeline's services and products
     to capture revenues from the sale of the service, improve healthcare for
     the communities they serve, enhance community relations, market other
     hospital services to the subscriber base, and/or contain healthcare costs
     by facilitating early discharge from the hospital, reducing the need for
     nursing home care and thereby allowing subscribers to remain in their own
     homes.

     Sales and Marketing

         The Company sells its services and products through its sales
     organization in the United States and Canada.

         In support of the sales effort, the Company's sales professionals
     assist the Company's customers in developing a marketing plan for the
     Lifeline program, monitoring progress against that plan, and providing
     training to the provider's staff on the management of their local Lifeline
     program. Programs' marketing plans typically address the introduction of
     Lifeline's services to the service provider's key decision makers; the
     planning and delivery of presentations to community responders such as
     police, fire, and medical emergency professionals; and the development of
     local referral networks of elder care and other service organizations to
     position the LIFELINE service as part of a continued care plan. Lifeline
     personnel also provide continuing operational support, ongoing
     consultation, and program evaluations.

     Source of Raw Materials

         Prior to 1999, the Company had manufactured all of its products,
     relying on outside vendors for components and enclosures. As previously
     disclosed, during the third quarter of 1999, the Company completed the
     outsourcing of the manufacturing of its personal response equipment to the
     Ademco Group, a division of Honeywell International, Inc. The Company
     anticipates that beginning in the second quarter of 2002 it will once again
     support a manufacturing site at its corporate location to assemble its
     personal response equipment and will end its outsourcing arrangement with
     Ademco. The Company intends to purchase assembled printed circuit boards
     from qualified vendors. The Company expects that this strategy will provide
     maximum flexibility to ensure adequate sources of supply. There can be no
     assurance however, that these vendors will not incur delays in providing
     assembled printed circuit boards for the Company as a result of process
     difficulties, component shortages or for other reasons.

                                      -4-

<PAGE>

     Any such delay could have a material adverse effect on the Company's
     business, financial condition, or results of operations.

     Patents, Licenses and Trademarks

         The Company considers its proprietary know-how with respect to the
     development and marketing of its personal response services to be a
     valuable asset. Due to rapid technological changes that characterize the
     industry, the Company believes that continued development of new services
     and products, the improvement of existing services and products, and patent
     and license protection are important in maintaining a competitive
     advantage.

         Although the Company owns numerous patents and patent applications in
     the United States, Canada, and other countries, the Company does not
     believe that its business as a whole is or will be materially dependent
     upon the protection afforded by its patents.

         The Company's LIFELINE trademark and servicemark are registered at the
     United States Patent and Trademark Office and in most states and some
     foreign countries. The Company also has a number of other trademarks.

     Research and Development

         Research and development efforts are geared towards enhancing and
     augmenting the Company's products and services. Research and development
     expenses were $1,610,000, $1,515,000, and $1,565,000 for the years ended
     December 31, 2001, 2000, and 1999, respectively.

     Backlog/Seasonality

         Because of the nature of the Company's products, the Company endeavors
     to minimize the time that elapses from the receipt of a purchase order to
     the date of delivery of the products. Accordingly, the Company's backlog as
     of the end of any period represents only a portion of the Company's
     expected sales for the succeeding period and is not significant in
     understanding the Company's business. The Company does not believe that the
     industry in which it operates is seasonal.

     Government Regulation

         The Company's products are registered with the Federal Communication
     Commission ("FCC") and comply with FCC regulations pertaining to radio
     frequency devices (Part 15) connected to the telephone system (Part 68).
     The Company has also received registrations of equipment from Canadian
     agencies. As new models are developed, they are submitted to appropriate
     agencies as required.

         The Company has registered its communicator products with the United
     States Food and Drug Administration.

         None of the Company's business is subject to re-negotiation of profits
     or termination of contract by the government, nor is it impacted by any
     existing environmental laws.

                                      -5-

<PAGE>

     Competition

         The Company believes that it is a major provider of personal response
     services and products since it was monitoring approximately 345,000
     subscribers as of December 31, 2001 and estimates it serves, along with its
     customers, approximately 400,000 subscribers in a North American personal
     emergency response services market estimated by the Company to serve over
     600,000 subscribers as of December 31, 2001. Other companies offer services
     and products competitive with those offered by the Company. These companies
     offer personal response services on a regional or national basis through
     both healthcare providers and directly to the subscribers themselves.

         The Company believes that the competitive factors its customers
     consider when choosing a personal response service are the high quality of
     service and product performance and reliability; customer support and
     service; price; and reputation and experience in the industry. The Company
     believes it competes favorably with respect to these factors.

     Employees

         As of February 28, 2002 the Company employed approximately 745
     full-time and 95 part-time employees. None of the Company's employees is
     represented by a collective bargaining unit, and the Company believes its
     relations with its employees are good.

ITEM 2.  Properties

         The Company is party to a fifteen-year lease for an 84,000 square foot
     facility in Framingham, Massachusetts for its corporate headquarters,
     including its U.S. based monitoring operations. Annual base rental payments
     under the lease approximate $814,000. The initial lease term expires in
     2013. The Company has two five-year renewal options contained within the
     lease. The Company also leases facilities in other locations to support its
     corporate, field and Canadian operations.

ITEM 3.  Legal Proceedings

     The Company is not party to any material litigation.

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

     None

     Executive Officers of the Registrant

     The following table sets forth certain information regarding the executive
officers of the Company as of March 25, 2002.

     Name                      Position                              Age
     ----                      --------                              ---
L. Dennis Shapiro        Chairman of the Board                       68
Ronald Feinstein         President, Chief Executive Officer
                         and Director                                55

                                      -6-

<PAGE>

Dennis M. Hurley       Senior Vice President, Finance,
                       Chief Financial Officer, Treasurer                 55
Richard M. Reich       Senior Vice President and Chief Information
                       Officer                                            55
Donald G. Strange      Senior Vice President, Sales                       55
Ellen R. Berezin       Vice President, Human Resources                    52
Barbara A. Trimble     Vice President, Customer Care                      50
Leonard E. Wechsler    Vice President and President, Lifeline Canada      45
Jeffrey A. Stein       Clerk                                              43

     L. Dennis Shapiro, Chairman of the Board, has served the Company in this
capacity since 1978, and at various times, has served as President and Chief
Financial Officer.

     Ronald Feinstein became an employee of the Company in September 1992 and
became Executive Vice President and Chief Operating Officer in October 1992. He
was appointed President and Chief Executive Officer in January 1993. Mr.
Feinstein has served as a director of the Company since 1985.

     Dennis M. Hurley is Senior Vice President, Finance; Chief Financial
Officer; and Treasurer. He joined the Company in March 1995 as Vice President,
Finance; Chief Financial Officer; and Treasurer.

     Richard M. Reich is Senior Vice President, Chief Information Officer. He
became Vice President, Chief Information Officer in September 1999. He had been
Vice President, Technology and Advanced Services since August 1994. From June
1990 to August 1994, Mr. Reich had served as Vice President, Product Planning
and Development. Since joining the Company in April, 1986 he had held the
position of Vice President, Engineering.

     Donald G. Strange is Senior Vice President, Sales. He was Vice President,
Sales and Marketing from December 1996 to June 2000. He joined the Company in
February 1993 as Vice President, Sales.

     Ellen R. Berezin joined the Company in March 2001 as Vice President, Human
Resources. From July 1997 to March 2001, Ms. Berezin worked at Harvard Vanguard
Medical Associates, a physician group practice based in Massachusetts, where she
served as Vice President, Human Resources. From November 1995 to June 1997, Ms.
Berezin was Vice President of Healthsource Massachusetts, a New Hampshire-based
HMO.

     Barbara A. Trimble has been Vice President, Customer Care since June 2000.
She joined the Company in September 1999 as Director of Subscriber Services.
From 1988 to 1999, Ms. Trimble worked at Matthew Thornton Health Plan, a New
Hampshire based HMO, where she served various roles, among them, Vice President
of Medical Services from 1994 to 1997. She also consulted with various start up
companies between 1997 and 1999. Ms. Trimble's last day of employment with the
Company will be April 19, 2002.

     Leonard E. Wechsler is Vice President and President, Lifeline Systems,
Canada. He joined the Company in 1996 as President, Lifeline Systems Canada when
the Company purchased CareTel, Inc. in July 1996. CareTel provided monitoring
services similar to those offered by the Company. From May 1993 to July 1996,
Mr. Wechsler was President, CareTel, Inc.

     Jeffrey A. Stein has been the Clerk of the Company since February 2000 when
he replaced Norman B. Asher who had been Clerk of the Company since July 1978.
Mr. Stein has been a partner of the law firm of Hale and Dorr LLP since 1994,
which has been general counsel to the Company since 1976.

                                      -7-

<PAGE>

                                     PART II

ITEM 5.  Market for the Registrant's Common Equity and Related Stockholder
         Matters

Quarterly Market Information and Related Matters

The Company's common stock is traded on the Nasdaq Stock Market under the symbol
"LIFE." On February 28, 2002, the Company had 417 registered shareholders. The
table below reflects the high and low sales prices for 2001 and 2000.

                                     High         Low
2000        First Quarter         $  15.00     $  7.50
            Second Quarter           14.75        8.88
            Third Quarter            16.94       11.00
            Fourth Quarter           16.13       12.13

2001        First Quarter         $  16.44     $ 11.88
            Second Quarter           20.10       14.19
            Third Quarter            20.50       18.40
            Fourth Quarter           23.93       18.35


During the periods presented, the Company has not paid or declared any cash
dividends on its common stock. While the payment of dividends is within the
discretion of the Company's Board of Directors, the Company presently expects to
retain all of its earnings for use in financing the future growth of the
Company.

                                      -8-

<PAGE>

ITEM 6.  Selected Financial Data

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                            --------------------------------------------------------------------
(In thousands, except per share data)          2001           2000           1999           1998           1997
                                               ----           ----           ----           ----           ----
<S>                                        <C>            <C>             <C>           <C>            <C>
OPERATING RESULTS

   Total revenues                           $ 96,560       $ 81,489       $ 70,792       $ 64,884       $ 57,366

   Income from operations                     10,561          5,031          3,190          9,513          3,327

   Income before income taxes                 10,223          5,304          4,176          9,976          3,921

   Net income                                  6,320          3,185          2,506          5,986          2,298

   Net income per share, diluted            $   0.98       $   0.51       $   0.40       $   0.95       $   0.37

   Diluted weighted average
   shares outstanding                          6,481          6,223          6,299          6,309          6,232

<CAPTION>
FINANCIAL POSITION/1/
                                                                  Years Ended December 31,
                                            --------------------------------------------------------------------
                                              2001           2000           1999           1998           1997
                                              ----           ----           ----           ----           ----
<S>                                         <C>           <C>            <C>            <C>            <C>
   Working capital                          $ 15,019       $  9,994       $ 10,069       $ 13,026       $ 12,320

   Total assets                               77,002         64,528         57,385         52,504         42,269

   Long-term obligations/2/                    5,000          2,701          3,354             11             16

   Stockholders' equity                       52,209         43,385         39,739         36,291         29,717

</TABLE>
  /1/There were no cash dividends paid or declared during any of the
     periods presented.
  /2/Excludes current portion of long-term obligations.




                                      -9-

<PAGE>

ITEM 7.  Management's Discussion and Analysis of Results of Operations
         and Financial Condition

This and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, with respect to, among other
things, the Company's 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 of which the Company is aware that may
cause the Company's 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." The Company's failure to successfully address any of
these factors could have a material adverse effect on the Company's future
results of operations.

RESULTS OF OPERATIONS

2001 Compared with 2000

Total revenues for the year ended December 31, 2001 were $96.6 million, an
increase of 18% compared with the $81.5 million recorded in 2000.

Service revenues increased by 21% to $68.2 million for the year ended December
31, 2001 compared to $56.2 million for the prior year. Service revenues
comprised 71% of the Company's total 2001 revenues, compared to 69% in 2000.
This growth is a result of a variety of factors. The Company introduced a price
increase for its monitoring services in 2001 that has resulted in higher average
revenue per subscriber in 2001 as compared to 2000. The increase in service
revenues and subscribers is also due in part to the acquisition of certain
assets of SOS Industries, Inc. Overall, the Company achieved a 10% increase in
its monitored subscriber base, of which approximately 9,500 subscribers were the
result of the SOS acquisition. The Company was monitoring approximately 345,000
subscribers at the end of the year as compared to 313,000 subscribers monitored
at December 31, 2000. The Company believes that the growth in the number of
subscribers in 2001 was negatively impacted by the previously disclosed
battery-related issue in some of its personal help buttons.

The service recovery efforts undertaken by the Company to resolve the issues it
faced in the second half of 1999 that impacted its service revenue growth during
2000 have resulted in significant service improvements in 2001 which enabled the
Company to put its focus back on service revenue growth in 2001. These service
recovery efforts included increasing call center staffing and training to
improve response time consistency, improvements within the Company's customer
administration and data entry departments, and increasing information technology
resources to facilitate the resolution of technical issues that may occur with
the CareSystem platform. The Company believes that these service recovery
efforts will position the Company for future increases in its service revenue.
The Company's ability to sustain the current level of service revenue growth
depends on its ability to continue to make improvements in service delivery,
expand the market for its personal response services, convert community hospital
programs to services provided by the Company and increase its focus on referral
development and innovative partner relationships. The Company believes that the
high quality of its services and its commitment to providing caring and rapid
response to the at-risk elderly and the physically challenged will be factors in
meeting this challenge.

                                      -10-

<PAGE>

Net product revenues improved 13% to $27.0 million for 2001, from $23.9 million
in 2000. The majority of the increase in 2001 was the result of the launch of a
newly developed site-monitoring platform for those customers who perform their
own monitoring at their local facilities. However, with a finite number of
customers who perform their own monitoring at their local facilities, the
Company believes that equipment sales in 2002 may be lower than 2001. It also
continues to believe that equipment sales may remain flat or decline in periods
subsequent to 2002 as it has experienced little or no growth in sales of its
home communicators since it began providing its customers' subscribers with the
Lifeline service under its BMS program, which includes monitoring and the use of
Company-owned home communicators for a single fee.

Finance and rental income, representing income earned from the Company's
portfolio of sales-type leases, declined 4% to just under $1.4 million for the
year ended December 31, 2001. With the Company's focus on its service offerings
it expects finance income to decline in future periods because such income is
directly related to product sales.

Total recurring revenues, consisting of service revenues and finance income, was
$69.6 million for the year ended December 31, 2001, an increase of nearly 21% as
compared to $57.6 million for the year ended December 31, 2000. These increases
are a result of the continued growth of the Company's service offerings which
increase the Company's recurring revenue base coupled with recurring revenues
generated from the acquisition of certain assets of SOS Industries, Inc. As the
Company continues to focus on its service business, it expects its recurring
revenues to continue to increase in future periods.

Cost of services, as a percentage of service revenues, was 61% for the year
ended December 31, 2001 as compared to 65% for the year ended December 31, 2000,
an improvement of 4%. The improvement is directly associated with the Company's
goal of making its service offerings more profitable and can be attributed to
productivity improvements and effective pricing strategies. On a dollar basis,
cost of services increased $5.0 million over 2000, due to a variety of reasons.
The Company incurred higher amortization of goodwill along with associated
operational costs in 2001 as a result of the purchase of certain assets of SOS
Industries, Inc. in April 2001 and the full year effect of the purchase of the
Argus Emergency Medical Division of Microtec Enterprises, Inc. by the Company's
Canadian subsidiary, Lifeline Systems, Canada, in the third quarter of 2000. The
growth in the number of subscribers serviced under the Company's BMS program
resulted in an increase in depreciation of the cost of home communicators
provided to those subscribers served under this model and also contributed to
the increase. The Company also had higher amortization of intangible acquisition
costs incurred pursuant to provider agreements entered into with its customers
for monitoring and/or business support services the Company provides under the
terms of the agreement. The Company has completed its assessment of the impact
of SFAS 142, "Goodwill and Other Intangible Assets", which is effective January
1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. The Company believes that the adoption of SFAS 142 will result in
an additional 1% improvement to service margins in 2002 as a result of the
exclusion of nearly $820,000 of goodwill amortization expense. The Company
expects continued positive service margin improvements in 2002.

For the years ended December 31, 2001 cost of product sales, as a percentage of
net product sales, was 33% as compared to 30% in 2000. Cost of sales was higher
as a percentage of net product sales in 2001 due in part to sales of the
Company's new site monitored platform which has a cost that is higher as a
percentage of revenue than the cost of the Company's home communicators. The
Company also experienced an increase in sales of its lower margin marketing
accessories in 2001 as compared to 2000

                                      -11-

<PAGE>

as its customers are marketing and growing their Lifeline service. The Company
anticipates that, beginning in the second quarter of 2002, it will once again
support a manufacturing site at its corporate location to assemble its personal
response equipment and will end its outsourcing arrangement with Ademco. The
Company believes that the decision to support a manufacturing assembly process
for its equipment will result in better cost containment and will maintain cost
of sales at a relatively consistent percentage of product sales in 2002.

Selling, general, and administrative expenses ("SG&A") as a percentage of total
revenues were 35% for the year ended December 31, 2001 and 2000. The Company's
improved 2001 revenue performance and its ability to control its SG&A expenses
have resulted in consistent SG&A percentages in 2001. The Company's increased
expenditures are primarily attributable to sales and marketing initiatives in
2001 that the Company did not incur during 2000 and increased sales and
management bonuses relating to the 2001 achievement of operating performance
goals. In 2001, the Company also incurred tax advisory fees associated with
obtaining a Tax Increment Finance ("TIF") agreement, noted below. The Company
expects that SG&A expenses in 2002 will be negatively affected by higher
insurance premiums and deductibles as a result of overall insurance industry
increases.

Research and development expenses represented 2% of total revenues in 2001 and
2000. Research and development efforts are focused on ongoing product
improvements and developments. The Company expects to maintain these expenses,
as a percentage of total revenues, at a relatively consistent level.

The Company's effective tax rate was 38% for 2001 as compared to 40% in 2000.
The reduction in the Company's effective tax rate was due to a tax credit earned
under a TIF agreement with the town of Framingham, Massachusetts, where the
Company relocated in 1999. The Company believes it will continue to receive
additional ongoing tax credits under the TIF agreement during the 12 remaining
years of its corporate headquarters lease. Earnings per share for the year ended
December 31, 2001 was positively impacted by this tax credit by approximately
$0.03 per diluted share.

The Company is currently being audited by Revenue Canada asserting deficiencies
in goods and services tax and sales tax for the Company's 1993 to 1999 tax
years. On March 26, 2002 the Company received a proposed tax assesssment, (which
includes penalties and interest), of CAN$1,050,000 (approximately US$700,000
based on current exchange rates). The Company believes that it should be able to
further reduce the amount of the proposed tax deficiency following further
discussion with Revenue Canada. However, there is no assurance that it will be
able to do so. The Company does not believe that the payment of any such
deficiency will have a material adverse impact on the Company's financial
position or results of operations or cash flows.

2000 Compared with 1999

Total revenues for the year ended December 31, 2000 were $81.5 million, an
increase of 15% compared with the $70.8 million recorded in 1999.

Service revenues continued to grow and rose by 19% to $56.2 million for the year
ended December 31, 2000 compared to $47.0 million for the prior year. Service
revenues comprised 69% of the Company's total 2000 revenues, compared to 66% in
1999. The Company's growth in service revenues continued because of its strategy
of providing its customers' subscribers with the Lifeline service under its BMS
program, which includes monitoring and the use of company-owned home
communicators for a single fee. This resulted in higher per-subscriber service
revenue. However, the Company believes that issues it faced in the second half
of 1999 as a result of the introduction of its new CareSystem call center
platform impacted the amount of growth in its service revenue in 2000. The
Company embarked on a company-wide service recovery effort aimed at restoring
confidence in its overall service, including subscriber response time
consistency and data entry accuracy. As a result of these service recovery
efforts, the Company's attention was taken away from service revenue growth and
focused on improved customer service in 2000.

                                      -12-

<PAGE>

Net product revenues improved 7% to $23.9 million for 2000, from $22.2 million
in 1999. This increase during 2000 has been a result of an improvement in the
Company's service performance, after a challenging second half of 1999 where the
Company experienced lower equipment sales than it had expected. Although the
Company believed it would have declining product sales in 1999, it believes that
challenges with its service during 1999 led to even lower than anticipated
product sales during that period, as customers were reluctant to purchase
equipment until the CareSystem platform implementation was completed. As a
result, the Company experienced higher than expected product revenue growth in
2000 as customers resumed and in many cases increased their purchasing of
equipment that they had curtailed in 1999.

Finance and rental income, representing income earned from the Company's
portfolio of sales-type leases, declined 6% to $1.4 million for the year ended
December 31, 2000 from the $1.5 million recorded in the previous year. With the
Company's focus on its service business segment it expects finance income to
decline in future periods because leasing is directly related to its product
business.

Total recurring revenues, consisting of service revenues and finance income, was
$57.6 million for the year ended December 31, 2000, an increase of nearly 19% as
compared to $48.6 million for the year ended December 31, 1999. As the Company
continues to focus on its service business, it expects its recurring revenues to
continue to increase in future periods.

Cost of services, as a percentage of service revenues, was 65% for the year
ended December 31, 2000 as compared to 62% for the year ended December 31, 1999.
Cost of services remained high due to a variety of reasons. The Company incurred
a labor rate increase during 2000 for its employees in its Customer Care
organization in order to remain competitive in the tight labor market. The first
full year of depreciation of its CareSystem call center platform also impacted
cost of services for 2000 as did related information technology consulting
expenses and information technology professionals hired for the CareSystem
platform. The Company also incurred a full year of customer service costs
associated with TelCare Systems, Inc., which was purchased by the Company in
August 1999. Additionally, the amortization of intangible acquisition costs for
agreements entered into with community hospitals for conversion to services
provided by the Company was significantly higher for 2000 as compared to 1999 as
it included amortization for all purchases during 1999 and 2000.

For the years ended December 31, 2000 and 1999, cost of product sales as a
percentage of product sales was 30%. The Company completed the transition of
outsourcing its manufacturing operations to Ademco during the third quarter of
1999 and had been successful in maintaining its cost of sales at a consistent
percentage of net product sales.

Selling, general, and administrative expenses ("SG&A") as a percentage of total
revenues improved to 35% for the year ended December 31, 2000 compared to 39%
for the year ended December 31, 1999. The Company's improved 2000 revenue
performance and its ability to control its SG&A expenses have resulted in
improved SG&A percentages for 2000. The dollar increase for SG&A was due
primarily to expenditures for a total company quality initiative which was
introduced in 2000, increased costs associated with recruiting and consulting in
a very competitive employment market for information technology professionals
and increased sales and management bonuses relating to the improved 2000
performance. The Company also experienced an increase in SG&A expenses as it
introduced new sales, marketing and business initiatives in 2000 that had been
delayed because of the implementation issues surrounding the CareSystem
platform.

                                      -13-

<PAGE>

Research and development expenses represented 2% of revenues in 2000 and 1999.
Research and development efforts are focused on ongoing product improvements and
developments.

In October 2000, the Company recorded a pre-tax non-recurring charge of $150,000
to write off an abandoned partnership with a senior living vendor.

In September 2000, the Company recorded a pre-tax non-recurring charge of
approximately $2.7 million for costs it expected to incur to address a
battery-related issue with some of its personal help buttons. Included in the
non-recurring charge were anticipated material and mailing costs for exchanging
buttons, providing hospital programs with higher inventory levels for the
planned swap, and the cost of installer visits to subscriber homes to replace
the buttons.

The Company's effective tax rate was 40.0% for 2000 and 1999.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 31, 2001, the Company's portfolio of cash and
cash equivalents increased $1.3 million to $5.7 million at December 31, 2001
from $4.4 million at December 31, 2000. The increase was mainly attributable to
profitable operations of $17.1 million as well as net borrowings of nearly $2.9
million related to financing the purchase of certain assets of SOS Industries,
Inc. in April 2001. Additional items which offset the increase in the Company's
cash position were purchases of property and equipment amounting to $9.2 million
and payments of nearly $0.7 million for intangible assets related to provider
agreements entered into with its customers for monitoring and/or business
support services provided by the Company under the terms of the agreement. The
Company experienced a net increase in its accounts receivable portfolio of
approximately $3.2 million as a result of the 18% increase in revenue in 2001
and a temporary negative impact from the implementation of its new billing
system in the third quarter. The Company also affected a net inventory increase
of $2.5 million in anticipation of supporting a manufacturing site at its
corporate location and to minimize the risk of supply interruption during the
transition. Once the Company gives notice of termination of the contract with
Ademco, in accordance with the terms of the contract, the Company will be
obligated to purchase certain amounts of inventory from its prearranged
manufacturing schedule with Ademco. The Company does not believe that this
obligation will have a material adverse effect on its liquidity, financial
condition or results of operations.

In April 2001, the Company acquired certain assets formerly owned by SOS
Industries, Inc. a personal response service provider based in New Smyrna Beach,
Florida with subscribers located in 37 states. The purchase price was $3.8
million. The acquisition was accounted for as a purchase transaction, and the
resulting goodwill was amortized over an estimated life of 10 years through
December 31, 2001. In accordance with SFAS 142 "Goodwill and Other Intangible
Assets," the Company discontinued the amortization of this acquisition effective
January 1, 2002 and will perform an annual review of impairment.

During 2001, the Company paid approximately $0.7 million to community hospitals
and distributors of its personal response products and services in connection
with the purchase by the Company of the rights to service and/or manage the
personal response systems program being operated by these entities. The majority
of the purchase price related to these agreements has been allocated to
intangible assets. These agreements allow the Company to monitor and provide
other related services to existing and future subscribers over the term of the
agreements. The Company amortizes the intangible assets over the life of the
agreements, which is typically five years. The amortization of these intangible
assets will continue in accordance with SFAS 142.

The Company is party to Master Lease Agreements for up to $5.6 million for
furniture, computers, security systems and other related equipment purchases.
For financial reporting purposes, these leases are

                                      -14-

<PAGE>

recorded as capital leases and accordingly the associated assets are being
depreciated over their estimated useful life. As of December 2001 the Company
had made purchases of approximately $5.0 million under these agreements.

In June 1999, the Company entered into an amended $10.0 million line of credit
which was originally obtained in April 1998. The agreement has two components,
the first of which is a working capital line of credit, the other, the ability
to convert up to five million dollars into a five-year fixed loan. The working
capital line of credit's interest rate is based on the London Interbank Offered
Rate (LIBOR), while the fixed loan is at the bank's prime interest rate. The
agreement contains several covenants, including the Company maintaining certain
levels of financial performance and capital structure. These financial covenants
include a requirement for a current ratio of at least 1.5 to 1.0 and a leverage
ratio of no more than 1.0 to 1.0. In addition, there are certain negative
covenants that include limitations on the Company's capital and other
expenditures, restrictions on the Company's capacity to obtain additional debt
financing, restrictions on the disposition of the Company's assets, and
restrictions on its investment portfolio. This line of credit matures on June
30, 2002, and as of December 31, 2001 the Company had $4.4 million outstanding
under this line. The Company is currently in the process of renegotiating a new
line of credit.

The Company expects that funding requirements for operations and in support of
future growth are expected to be met primarily from operating cash flow,
existing cash and marketable securities and the availability from time to time
under its line of credit. The Company expects these sources will be sufficient
to finance the cash needs of the Company through the next twelve months. This
includes the continued investment in its response center platform, the
requirements of its internally funded lease financing program, any future
potential acquisitions and other investments in support of its current business.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of financial condition and results of operations are
based upon the Company's 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. The Company
has identified the following accounting polices as critical to understanding the
preparation of its consolidated financial statements and results of operations.

Revenue recognition

The Company derives 71% of its revenue from its service offerings and 28% of its
revenue from product sales. Service revenues, associated primarily with
providing monitoring services under the Company's LMS and BMS programs, are
recognized in the period the service is provided. Deferred revenue represents
billings to customers for annual service contracts for which revenue has not
been recognized because the service has not yet been provided. Service revenues
are then recognized ratably over the contractual period. Product revenues from
the sale of personal response products are recognized upon shipment. While the
Company does not have a specific right of return policy, it does record a
provision for an estimated amount of future returns based on historical
experience and any notification received of an error in type of product shipped.
Such returns have historically been immaterial to the Company's total product
revenue, and the Company does not foresee any change that could have a material
adverse effect on the Company's operating results for the period or periods in
which such returns materialize.

                                      -15-

<PAGE>

Finance income attributable to sales-type lease contracts is initially recorded
as unearned income and subsequently recognized under the interest method over
the term of the leases.

Allowance for doubtful accounts

The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. It
estimates the allowance based upon historical collection experience, analysis of
accounts receivable by aging categories and customer credit quality. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.

Impairment of long-lived assets, goodwill and other intangibles

The Company assesses the impairment of long-lived assets, goodwill and other
intangibles whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. It uses an estimate of the future
undiscounted net cash flows of the related asset or asset grouping over the
remaining life in measuring whether assets are recoverable. Based on the
Company's expectation of future undiscounted net cash flows, an impairment loss
would be recorded by writing down the assets to their estimated realizable
values. Any resulting impairment loss could have a material adverse effect on
the Company's results of operations.

Inventories

The Company values its inventories at the lower of cost or market, as determined
by the first-in, first-out method. It regularly reviews inventory quantities on
hand and records a provision for excess or obsolete inventory based upon its
estimated forecast of product demand. If actual future demand is less than the
projections made by management, then additional provisions may be required.

Warranty

The Company's products are generally under warranty against defects in material
and workmanship. The Company provides 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 the Company's results of
operations.

NEWLY ISSUED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption. The Company will adopt SFAS 142 in the first quarter of 2002. It
believes that the adoption of SFAS 142 will result in an additional 1%
improvement to service margins in 2002 as a result of the exclusion of nearly
$820,000 of goodwill amortization expense.

                                      -16-

<PAGE>

In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of."
SFAS 144 applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company does not believe that the
adoption of SFAS 144 will have a significant impact on its financial statements.

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 Annual Report on Form 10-K and presented elsewhere by management from time
to time.

The Company completed the transition of its United States subscribers to its new
CareSystem call center platform during 1999. There can be no assurance that the
Company will realize the productivity improvements and other intended benefits
from CareSystem to justify the Company's investment.

The Company recorded a non-recurring charge of approximately $2.7 million in the
third quarter of 2000 for costs it expected to incur to address a previously
disclosed battery-related issue, including anticipated material and mailing
costs for exchanging buttons, providing hospital programs with higher inventory
levels for the planned swap, and support for the cost of installer visits to
subscriber homes to replace the button. The Company cannot be certain that the
charge it recorded to address this issue will be sufficient to cover all of its
associated expenses. In addition, the Company has changed its battery vendor.
The Company cannot be certain that it will not experience disruption related to
such change.

The Company anticipates that beginning in the second quarter of 2002 it will
once again support a manufacturing site at its corporate location to assemble
its personal response equipment and will end its outsourcing arrangement with
Ademco. The Company has not supported a manufacturing site for the past two
years and as a result there can be no assurance that the transition from
outsourcing manufacturing to internally supporting a manufacturing assembly
process for its personal response equipment will not have a negative adverse
effect on its results of operations or that the Company will not experience
difficulties in successfully transitioning the assembly process of its personal
response equipment to its corporate location. There also can be no assurance
that the decision to assemble its equipment will result in the anticipated cost
containment or that the Company will maintain cost of sales at a relatively
consistent percentage of product sales in 2002. This could have a material
adverse effect on the Company's business, financial condition, or results of
operations.

The Company's results are partially dependent on its ability to develop services
and products that keep pace with continuing technological changes, evolving
industry standards, changing subscriber preferences and new service and product
introductions by the Company's competitors. There can be no assurance that
services, products or technologies developed by others will not render
Lifeline's services or products noncompetitive or obsolete.

The Company's revenue growth is partially dependent on its ability to increase
the number of subscribers served by its monitoring centers while continuing to
sell its home communicators to its healthcare programs. The Company's ability to
continue to increase service revenue is a key factor in its long-term growth,
and there can be no assurance that the Company will be able to do so. The
Company's failure to increase service revenue could have a material adverse
effect on the Company's business, financial condition, or results of operations.

                                      -17-

<PAGE>

The Company's monitoring operations are concentrated principally in its
corporate headquarters facility. Although the Company believes that it has
constructed safeguards to protect against system failures, the disruption of
service at its monitoring facility, whether due to telephone or electrical
failures, earthquakes, fire, weather or other similar events or for any other
reason, could have a material adverse effect on the Company's business,
financial condition, or results of operations.

The Company believes that its future success will depend in large part upon its
ability to attract and retain key personnel. Although the Company believes it is
making progress in retaining and recruiting well-trained, highly capable people,
there can be no assurance that the Company will continue to be successful in
attracting and retaining such personnel.

While the Company's product revenue increased in 2001 as compared to 2000,
product revenue may be lower in 2002 than 2001 and may remain flat or decline in
periods subsequent to 2002 as a result of the Company's strategy of providing
its customers' subscribers with the Lifeline service, which includes monitoring
and the use of Company-owned home communicators during the period of the service
coverage, for a single fee. As the Company continues with this strategy to
increase its recurring revenue, there can be no assurance that service revenue
will increase at a rate sufficient to offset the expected decrease in higher
margin product revenue both on a quarterly and annual basis. Moreover, the
Company's product sales are ordinarily made to healthcare providers that
establish their own Lifeline programs. These healthcare providers typically
rent, rather than sell, Lifeline home communicators to subscribers and
accordingly following such time as a home communicator is no longer used by a
subscriber, it is returned to the healthcare provider and becomes available for
rent to another subscriber. As a result of this use and reuse of the Company's
home communicators, sales of such products are dependent on growth in the number
of subscribers and on the ability of the Company to encourage its healthcare
provider customers to replace their existing inventory by continuing to enhance
its products with new features or new technology.

The Company may expand its operations through the acquisition of additional
businesses, such as its recent acquisition of certain assets formerly owned by
SOS Industries, Inc. in April 2001. There can be no assurance that the Company
will be able to identify, acquire or profitably manage additional businesses or
successfully integrate any acquired businesses into the Company without
substantial expenses, delays or other operational or financial problems. In
addition, acquisitions may involve a number of special risks, including
diversion of management's attention, failure to retain key acquired personnel,
unanticipated events, contingent liabilities and amortization of acquired
intangible assets. There can be no assurance that the acquired businesses, if
any, will achieve anticipated revenues or earnings.

ITEM 7a  Quantitative and Qualitative Disclosures about Market Risk

The Company has 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." The Company
had no holdings of derivative financial or commodity-based instruments or other
market risk sensitive instruments entered into for trading purposes at
December 31, 2001. As described in the following paragraphs, the Company
believes that it currently has no material exposure to interest rate and foreign
currency exchange rate risks in its instruments entered into for other than
trading purposes.

                                      -18-

<PAGE>

Interest rates

The Company's balance sheet includes a revolving credit facility and a term loan
that are subject to interest rate risk. Both loans are priced at floating rates
of interest, with the working capital line of credit being based on LIBOR and
the fixed loan being based on the bank's prime interest rate at the Company's
option. As a result of these factors, at any given time, a change in interest
rates could result in either an increase or decrease in the Company's interest
expense. The Company performed sensitivity analysis as of December 31, 2001 to
assess the potential effect of a 100 basis point increase or decrease in
interest rates and concluded that near-term changes in interest rates in such
magnitude should not materially affect the Company's consolidated financial
position, results of operations or cash flows.

Foreign currency exchange rates

The Company's 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 its
products and services in Canada and translation adjustments associated with the
conversion of the Company's Canadian subsidiary into the reporting currency
(U.S. Dollar). As such, the Company's exposure to changes in Canadian exchange
rates could impact the Company's consolidated financial position, results of
operations or cash flows. The Company performed a sensitivity analysis as of
December 31, 2001 to assess the potential effect of a 10% increase or decrease
in Canadian foreign exchange rates and concluded that near-term changes in
Canadian exchange rates should not materially affect the Company's consolidated
financial position, results of operations or cash flows. The Company's
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 its services/products.


                                      -19-

<PAGE>

ITEM 8.  Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
Quarterly Results of Operations
(Unaudited)                                                           Quarter Ended
                                                    ---------------------------------------------------------------
(Dollars in thousands, except per share data)       Mar 31        Jun 30        Sep 30       Dec 31       Full Year
                                                    ------        ------        ------       ------       ---------
<S>                                              <C>            <C>           <C>          <C>           <C>
2001   Total revenues                              $ 21,564      $ 24,098      $ 25,583     $ 25,315      $ 96,560
       Gross profit                                  10,196        11,411        12,204       12,203        46,014
       Net income                                     1,118         1,368         1,978        1,856         6,320
       Net income per share, diluted               $   0.18      $   0.21      $   0.30     $   0.28      $   0.98

2000   Total revenues                              $ 18,679      $ 19,854      $ 21,017     $ 21,939      $ 81,489
       Gross profit                                   8,336         9,329         9,797       10,206        37,668
       Net income (loss)                                923         1,018          (232)       1,476         3,185
       Net income (loss) per share, diluted        $   0.15      $   0.16      $  (0.04)    $   0.24      $   0.51

</TABLE>


                                       -20-

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 47 present fairly, in all material
respects, the financial position of Lifeline Systems, Inc. at December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 47 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

Boston, Massachusetts
February 11, 2002 (Except as to the 19th paragraph of Note E and Note M for
which the date is March 27, 2002)

                                      -21-

<PAGE>

                                      LIFELINE SYSTEMS, INC.
                                    CONSOLIDATED BALANCE SHEETS
                                    December 31, 2001 and 2000
                                      (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                               2001           2000
ASSETS                                                                         ----           ----
<S>                                                                         <C>           <C>
Current assets:
     Cash and cash equivalents                                                $ 5,742       $ 4,417
     Accounts receivable, net of allowance for doubtful
        accounts of $442 in 2001 and $449 in 2000                              12,118         9,223
     Inventories                                                                4,129         1,641
     Net investment in sales-type leases                                        2,874         2,909
     Prepaid expenses and other current assets                                  1,947         1,509
     Deferred income taxes                                                      1,436         1,986
                                                                          ------------   -----------
        Total current assets                                                   28,246        21,685

Property and equipment, net                                                    30,712        26,406
Net investment in sales-type leases                                             4,337         5,073
Goodwill and other intangible assets, net                                      13,640        11,204
Other assets                                                                       67           160
                                                                          ------------   -----------
        Total assets                                                         $ 77,002      $ 64,528
                                                                          ============   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                         $ 1,972       $ 2,576
     Accrued expenses                                                           2,197         2,063
     Accrued payroll and payroll taxes                                          4,282         2,985
     Accrued income taxes                                                         730           232
     Deferred revenues                                                          1,026           755
     Current portion of capital lease obligation                                1,080           583
     Current portion of long term debt                                          1,105           405
     Product warranty and other current liabilities                               329           751
     Accrued restructuring and other non-recurring charges                        506         1,341
                                                                          ------------   -----------
        Total current liabilities                                              13,227        11,691

Deferred income taxes                                                           5,799         4,897
Long term portion of capital lease obligation                                   1,657         1,531
Long term debt, net of current portion                                          3,343         1,170
Accrued restructuring and other non-recurring charges, long term                  617         1,237
Other non-current liabilities                                                     150           617
                                                                          ------------   -----------
        Total liabilities                                                      24,793        21,143

Commitments and contingencies

Stockholders' equity:
     Common stock, $0.02 par value, 20,000,000 shares authorized,
        6,934,461 shares issued in 2001 and 6,641,554 shares issued in 2000       139           133
     Additional paid-in capital                                                22,000        19,296
     Retained earnings                                                         35,446        29,126
     Less: Treasury stock at cost, 621,089 shares in 2001 and 2000             (4,556)       (4,556)
           Notes receivable - officer                                            (550)         (550)
           Accumulated other comprehensive loss-cumulative translation
            adjustment                                                           (270)          (64)
                                                                          ------------   -----------
        Total stockholders' equity                                             52,209        43,385
                                                                          ------------   -----------
             Total liabilities and stockholders' equity                      $ 77,002      $ 64,528
                                                                          ============   ===========

</TABLE>

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

                                      -22-

<PAGE>


                                         LIFELINE SYSTEMS, INC.
                                    CONSOLIDATED STATEMENTS OF INCOME
                                        AND COMPREHENSIVE INCOME
                          For the years ended December 31, 2001, 2000 and 1999
                                (In thousands except for per share data)

<TABLE>
<CAPTION>
                                                               2001             2000             1999
                                                               ----             ----             ----
<S>                                                        <C>                <C>           <C>
Revenues
     Services                                                   $68,222          $56,169          $47,024
     Net product sales                                           26,956           23,875           22,237
     Finance and rental income                                    1,382            1,445            1,531
                                                           -------------    -------------    -------------

         Total revenues                                          96,560           81,489           70,792
                                                           -------------    -------------    -------------

Costs and expenses
     Cost of services                                            41,634           36,588           29,201
     Cost of sales                                                8,871            7,233            6,736
     Selling, general, and administrative                        33,884           28,421           27,477
     Research and development                                     1,610            1,515            1,565
     Restructuring and other non-recurring charges                    -            2,701            2,623
                                                           -------------    -------------    -------------

         Total costs and expenses                                85,999           76,458           67,602
                                                           -------------    -------------    -------------

Income from operations                                           10,561            5,031            3,190
                                                           -------------    -------------    -------------

Other income (expense)
     Interest income                                                162              646              219
     Interest expense                                              (449)            (345)            (129)
     Other income (expense)                                         (51)             (28)             896
                                                           -------------    -------------    -------------

         Total other income (expense), net                         (338)             273              986
                                                           -------------    -------------    -------------

Income before income taxes                                       10,223            5,304            4,176
Provision for income taxes                                        3,903            2,119            1,670
                                                           -------------    -------------    -------------

Net income                                                        6,320            3,185            2,506

Other comprehensive income (loss), net of tax
     Foreign currency translation adjustments                      (128)             (37)              53
                                                           -------------    -------------    -------------

Comprehensive income                                            $ 6,192          $ 3,148          $ 2,559
                                                           =============    =============    =============

Net income per weighted average share:
     Basic                                                      $ 1.03           $ 0.53           $ 0.43
                                                           =============    =============    =============

     Diluted                                                    $ 0.98           $ 0.51           $ 0.40
                                                           =============    =============    =============

Weighted average shares:
     Basic                                                       6,165            5,986            5,892
                                                           =============    =============    =============

     Diluted                                                     6,481            6,223            6,299
                                                           =============    =============    =============

</TABLE>

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


                                      -23-



<PAGE>

                             LIFELINE SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 2001, 2000 and 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>


                                    Common Stock    Additional             Treasury Stock         Notes   Cumulative         Total
                                  -----------------    Paid-In  Retained   ----------------  Receivable  Translation  Stockholders'
                                     Shares  Amount    Capital  Earnings   Shares    Amount    Officers   Adjustment        Equity
                                  -------------------------------------------------------------------------------------------------
<S>                              <C>          <C>     <C>       <C>        <C>     <C>        <C>          <C>           <C>

BALANCE, DECEMBER 31, 1998        5,832,866    $129    $16,945   $23,435   592,548  ($4,028)      ($100)        ($90)      $36,291

Purchase of treasury stock          (29,541)                                29,541     (535)                                  (535)
Issuance of treasury stock            1,000                  7              (1,000)       7                                     14
Exercise of stock options           138,243       2      1,674                                     (300)                     1,376
Cumulative translation adjustment                                                                                 87            87
Net income                                                         2,506                                                     2,506
                                  -------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 1999        5,942,568     131     18,626    25,941   621,089   (4,556)       (400)          (3)       39,739

Exercise of stock options            58,797       2        467                                                                 469
Issuance of stock under employee
 stock purchase plan                 19,100                203                                                                 203
Issuance of note to officer                                                                        (250)                      (250)
Repayment of loan by officer                                                                        100                        100
Cumulative translation adjustment                                                                                (61)          (61)
Net income                                                         3,185                                                     3,185
                                  -------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2000        6,020,465     133     19,296    29,126   621,089   (4,556)       (550)         (64)       43,385

Exercise of stock options           264,308       6      2,331                                                               2,337
Issuance of stock under employee
 stock purchase plan                 28,599                373                                                                 373
Cumulative translation adjustment                                                                               (206)         (206)
Net income                                                         6,320                                                     6,320
                                  -------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2001        6,313,372    $139    $22,000   $35,446   621,089  ($4,556)      ($550)       ($270)      $52,209
                                  =================================================================================================

</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.


                                      -24-

<PAGE>

                                         LIFELINE SYSTEMS, INC.
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                         For the years ended December 31, 2001, 2000, and 1999
                                         (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                      2001          2000           1999
                                                                      ----          ----           ----
<S>                                                                <C>            <C>            <C>
Cash flows from operating activities:
     Net income                                                     $ 6,320        $ 3,185       $ 2,506
     Adjustments to reconcile net income to net cash provided
         by operating activities:
         Write off of fixed assets and intangibles                       13            314           916
         Non-cash portion of restructuring charge                         -          2,700           380
         Depreciation and amortization                                9,035          7,404         5,712
         Treasury stock issued for employee compensation                  -              -            14
         Provision for bad debts                                        221             16           528
         Deferred income tax provision                                1,452            107         1,494
         Deferred compensation                                           35            (23)            4
     Changes in operating assets and liabilities:
         Accounts receivable                                         (3,170)           (15)       (2,231)
         Inventories                                                 (2,488)           964        (1,109)
         Net investment in sales-type leases                            771             75          (452)
         Prepaid expenses, other current assets and other assets       (350)           200           528
         Accounts payable, accrued expenses and other liabilities      (726)           478          (914)
         Accrued payroll and payroll taxes                            1,322            866          (581)
         Income taxes payable                                           514             97        (1,152)
         Accrued restructuring and other non-recurring charges       (1,455)          (778)         (587)
                                                                 -----------   ------------   -----------

            Net cash provided by operating activities                11,494         15,590         5,056
                                                                 -----------   ------------   -----------

Cash flows from investing activities:
     Purchases of investments                                             -              -        (3,145)
     Sales and maturities of investments                                  -              -         9,841
     Additions to property and equipment                             (9,148)        (4,772)       (9,162)
     Business purchases and other                                    (5,297)        (7,167)       (5,383)
                                                                 -----------   ------------   -----------
            Net cash used in investing activities                   (14,445)       (11,939)       (7,849)
                                                                 -----------   ------------   -----------
Cash flows from financing activities:
     Principal payments under long-term obligations                  (1,597)        (3,661)         (353)
     Proceeds from issuance of long term debt                         3,578          2,747         2,025
     Proceeds from stock options exercised and
         employee stock purchase plan                                 2,375            441           353
     Issuance of note to officer                                          -           (250)            -
     Repayment of loan from officer                                       -            100             -
     Purchase of treasury stock                                           -              -          (535)
                                                                 -----------   ------------   -----------
            Net cash provided by (used in) financing activities       4,356           (623)        1,490
                                                                 -----------   ------------   -----------
Net increase (decrease) in cash and cash equivalents                  1,405          3,028        (1,303)
                                                                 -----------   ------------   -----------
Effect of foreign exchange on cash                                      (80)           (26)           16
                                                                 -----------   ------------   -----------
Cash and cash equivalents at beginning of year                        4,417          1,415         2,702
                                                                 -----------   ------------   -----------
Cash and cash equivalents at end of year                            $ 5,742        $ 4,417       $ 1,415
                                                                 ===========   ============   ===========
Non-cash activity:
     Issuance of note receivable for exercise of stock option           $ -            $ -         $ 300
     Acquistion related obligation                                        -            670             -
     Capital leases                                                   1,516            365         2,257
     Deferred compensation                                              335            231         1,023
     Issuance of treasury stock for compensation                          -              -            14

</TABLE>

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

                                   -25-

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Lifeline Systems, Inc. (the "Company") provides 24-hour personal response
monitoring services to its subscribers, primarily elderly individuals with
medical or age-related conditions as well as physically challenged individuals.
The Company develops relationships with hospitals or other healthcare providers
("customers") who establish a Lifeline program for these individuals. With a
Lifeline Monitoring Services ("LMS") program, the customer outsources the
monitoring activity to a Lifeline Call Center to service their subscribers but
generally retains other responsibilities for the operation of the program. With
a Business Management Services ("BMS") program, the Company provides a
comprehensive set of monitoring and business support services that effectively
reduce the customer's program management and administrative responsibilities
associated with offering the Lifeline service. All subscribers communicate with
the Company through products designed and marketed by the Company, consisting
principally of a communicator which connects to the telephone line in the
subscriber's home and a personal help button, which is worn or carried by the
individual subscriber and which, when activated, initiates a telephone call from
the subscriber's communicator to either the Company's central monitoring
facilities or a local community hospital.

Principles of Consolidation

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

Use of Estimates in the Preparation of Financial Statements

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

Cash, Cash Equivalents, and Investments

The Company considers all securities purchased with a maturity of three months
or less at the date of acquisition to be cash equivalents.

Inventories

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

                                      -26-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

Equipment                                         3 to 10 years
Furniture and fixtures                                  7 years
Equipment provided to customers                         5 years
Equipment under capital leases                     3 to 7 years
Leasehold improvements                            5 to 15 years

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

Equipment Provided to Customers

In accordance with its BMS programs, the Company provides its customers'
subscribers with home communicators as part of a unified service offering in
which the Company bills the subscriber on a monthly basis for the monitoring and
business support service and records service revenue in the period earned. The
cost of the home communicators provided to the subscriber is recorded as an
asset on the Company's balance sheet and depreciation is computed by the
straight-line method over an estimated useful life of 5 years.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets are recorded at cost and amortized on a
straight-line basis over the estimated useful life.

During 2001, the Company recorded $4.1 million of goodwill in connection with
the purchase of certain assets of SOS Industries, Inc. and recorded
approximately $1.2 million of intangible assets related to provider agreements
whereby the Company agrees to pay the customer a fee for the use of its referral
sources and agrees to provide monitoring and/or business support services to the
customer under a LMS or BMS program in accordance with the terms of the
agreement. The Company amortizes the acquisitions costs over the life of the
agreements, which is typically five years.

The Company has completed its assessment of the impact of SFAS 142, "Goodwill
and Other Intangible Assets." The Company will adopt SFAS 142 in the first
quarter of 2002. Refer to the discussion of SFAS 142 in the Newly Issued
Accounting Pronouncements section of this footnote.

                                      -27-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of Long-lived Assets

The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events and circumstances have occurred that indicate possible
impairment. The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of the future undiscounted net
cash flows of the related asset or asset grouping over the remaining life in
measuring whether assets are recoverable. Based on the Company's expectation of
future undiscounted net cash flows, an impairment loss would be recorded by
writing down the assets to their estimated realizable values.

The Company has completed its assessment of SFAS 144, "Accounting for the
Impairment or Disposal of Long Lived Assets," which supersedes SFAS No. 121. The
Company will adopt SFAS 144 in the first quarter of 2002. Refer to the
discussion of SFAS 144 in the Newly Issued Accounting Pronouncements section of
this footnote.

Product Warranty

The Company's products are generally under warranty against defects in material
and workmanship. The Company provides an accrual for estimated warranty costs at
the time of sale of the related products.

Revenue Recognition

Service revenues, associated primarily with providing monitoring services under
the Company's LMS and BMS programs, are recognized in the period the service is
provided. Incremental external installation costs related to the installation of
the Company's products that exceed installation revenue generated by the Company
are expensed in the period incurred. The Company monitors its installation
revenue periodically, and in situations where installation revenue exceeds
incremental external installation costs that revenue is recognized over the
estimated period of which an average subscriber continues to use the Lifeline
service.

Deferred revenue represents billings to customers for annual service contracts
for which revenue has not been recognized because the service has not yet been
provided. Service revenues are then recognized ratably over the contractual
period. Revenues from the sale of personal response products are recognized upon
shipment. Finance income attributable to sales-type lease contracts is initially
recorded as unearned income and subsequently recognized under the interest
method over the term of the leases.

Foreign Currency Translation

The financial statements of the Company's subsidiary outside the United States
are generally measured using the local currency as the functional currency.
Assets and liabilities of this subsidiary are translated at the rates of
exchange at the balance sheet date. The resulting translation adjustments are
included in cumulative translation adjustment as a separate component of
stockholders' equity. Income and expense items are translated at average monthly
rates of exchange. Gains and losses from foreign currency transactions of this
subsidiary are in net income.

                                      -28-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Income Taxes

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

Net Income Per Common Share

Net income per basic common share is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Net income per diluted common share is computed based on the
weighted-average number of common and dilutive common equivalent shares
outstanding during each period. Common equivalent shares consist of stock
options calculated in accordance with SFAS No. 128, "Earnings per Share."

Industry Segments

The Company is active in one business segment: designing, marketing, monitoring
and supporting its personal response units. The Company maintains sales and
marketing operations in both the United States and Canada. Foreign revenues,
from Canada, comprise less than 10% of the Company's total revenues, and
tangible assets in foreign countries represent less than 10% of the Company's
total assets as of December 31, 2001.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of
credit risk, include cash, cash equivalents, investments, and trade receivables.
The Company provides its services primarily to hospitals and other healthcare
institutions. The Company performs ongoing credit evaluations of its customers
and, in the case of sales-type leases the leased equipment serves as collateral
in the transactions. The Company has established guidelines relative to credit
ratings, diversification and maturities that maintain safety and liquidity. The
Company has not experienced any significant losses on these financial
instruments.

Reclassification

Certain prior year balances have been reclassified to conform to the current
year presentation.

Newly Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.

                                      -29-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Newly Issued Accounting Standards (continued)

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption. The Company will adopt SFAS 142 in the first quarter of 2002. It
believes that the adoption of SFAS 142 will result in an additional 1%
improvement to service margins in 2002 as a result of the exclusion of nearly
$820,000 of goodwill amortization expense.

In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of."
SFAS 144 applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company will adopt SFAS 144 in the
first quarter of 2002. It does not believe that the adoption of SFAS 144 will
have a significant impact on its financial statements.

B.   INVENTORIES

Inventories consist of the following:

                                                               December 31,
                                                           ---------------------
(Dollars in thousands)                                        2001         2000
--------------------------------------------------------------------------------

Purchased parts and assemblies                                $759          $80
Work in progress                                                42            -
Finished goods                                               3,328        1,561
--------------------------------------------------------------------------------
Total inventories                                           $4,129       $1,641
================================================================================

                                      -30-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

C.   PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                             December 31,
                                                     ---------------------------
(Dollars in thousands)                                  2001               2000
--------------------------------------------------------------------------------

Equipment                                            $ 26,285          $ 22,519
Furniture and fixtures                                    873               702
Equipment provided to customers                        16,707            11,707
Equipment under capital leases                          5,050             3,535
Leasehold improvements                                  5,314             4,984
Capital in progress                                       925             1,230
--------------------------------------------------------------------------------
                                                       55,154            44,677
Less: accumulated depreciation                        (24,442)          (18,271)
--------------------------------------------------------------------------------
Total property and equipment, net                    $ 30,712          $ 26,406
================================================================================

Accumulated depreciation amounted to $7,910,000 and $5,829,000 on equipment
provided to customers and $1,957,000 and $1,219,000 on equipment under capital
leases at December 31, 2001 and 2000, respectively. In total, depreciation
expense amounted to $6,271,000, $5,233,000, and $4,758,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.

D.   LEASING ARRANGEMENTS

As Lessor

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

                                      -31-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

D.  LEASING ARRANGEMENTS
The components of the net investment in sales-type leases are as follows:

                                                                December 31,
                                                        -----------------------
(Dollars in thousands)                                   2001           2000
--------------------------------------------------------------------------------
Minimum lease payments receivable                       $ 9,614        $ 10,480
Less:  Unearned interest                                  2,047           2,291
       Allowance for doubtful accounts                      356             207
--------------------------------------------------------------------------------
Net investment in sales-type leases                       7,211           7,982
Less:  Current portion                                    2,874           2,909
--------------------------------------------------------------------------------
Long-term portion, net investment in sales-type leases  $ 4,337         $ 5,073
--------------------------------------------------------------------------------

Future minimum lease payments due under non-cancellable sales-type leases at
December 31, 2001 are as follows:

(Dollars in thousands)
2002                                                                   $  3,830
2003                                                                      2,527
2004                                                                      1,764
2005                                                                      1,057
2006                                                                        429
Thereafter                                                                    7
--------------------------------------------------------------------------------
Total  future minimum lease payments                                   $  9,614
================================================================================

As Lessee

In November 1997 the Company entered into a ten-year operating lease for a new
corporate facility in Framingham, Massachusetts which the Company occupied in
1999. In November 1999 this lease was extended to fifteen years. Annual rental
payments under the lease approximate $814,000. The lease includes scheduled base
rent increases over the term of the lease. The total amount of base rent
payments is being charged to expense on the straight-line method over the term
of the lease. The Company has recorded a deferred credit to reflect the excess
of rent expense over cash payments upon the commencement of the lease. In
addition, the Company pays a monthly allocation of the building's operating
expenses and real estate taxes. The Company has two renewal options of five
years each.

                                      -32-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

D.   LEASING ARRANGEMENTS (continued)

The Company also has several operating lease arrangements for sales offices and
office equipment that expire through 2010 and leases certain equipment under
capital leases which expire through 2007. Capital lease obligations are
collateralized by the related items. Capital leases total $5.0 million, which
are comprised of $2.4 million for furniture and $2.6 million for equipment.

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

(Dollars in thousands)                      Capital Leases   Operating Leases
                                            --------------   ----------------


2002                                              $1,217       $ 1,256
2003                                                 885         1,222
2004                                                 458         1,303
2005                                                 302         1,229
2006                                                 118         1,126
Thereafter                                            11         7,570
----------------------------------------------------------------------
Total minimum lease payments                       2,991       $13,706
                                                               =======

Less amount representing interest                    254
--------------------------------------------------------
Present value of net minimum lease payments        2,737
Less current portion                               1,080
--------------------------------------------------------
Long-term obligation under capital leases         $1,657
========================================================

Total rent expense under all operating leases was $1,476,000, $1,358,000, and
$1,318,000 for the years ended December 31, 2001, 2000, and 1999, respectively.

E.   STOCKHOLDERS' EQUITY

Net Income Per Common Share

In accordance with SFAS No. 128, "Earnings per Share" the Company presents basic
and diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. A reconciliation of basic
EPS to diluted EPS and dual presentation on the face of the statement of income
are also required.

                                      -33-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

E.   STOCKHOLDERS' EQUITY (continued)

Calculation of per share earnings is as follows:

(In thousands except per share figures)
<TABLE>
<CAPTION>
                                                           2001     2000       1999
                                                           ----     ----       ----
<S>                                                      <C>      <C>        <C>
Basic:
-----
Net income                                               $6,320    $3,185    $2,506
Weighted average common shares outstanding                6,165     5,986     5,892

Net income per share, basic                               $1.03     $0.53     $0.43
                                                         ======    ======     =====

Diluted:
-------
Net income for calculating diluted earnings per share    $6,320    $3,185     2,506

Weighted average common shares outstanding                6,165     5,986     5,892
Common stock equivalents                                    316       237       407
                                                         ------    ------     -----
Total weighted average shares                             6,481     6,223     6,299

Net income per share, diluted                             $0.98     $0.51     $0.40
                                                         ======    ======     =====
</TABLE>


For the years ended December 31, 2001, 2000 and 1999 options to purchase
202,030, 484,114 and 155,834 shares, respectively, at an average exercise price
of $21.41, $18.38 and $23.75, respectively, have not been included in the
computation of diluted net income per share as their effect would have been
anti-dilutive.

Stock-Based Compensation Plans

The Company has adopted the disclosure requirements of SFAS No. 123 "Accounting
for Stock-Based Compensation." The Company continues to recognize compensation
costs using the intrinsic value based method described in Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees," and FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation."

In July 2000, the Company's stockholders approved the 2000 Stock Incentive Plan
(the "2000 Plan"). The 2000 Plan provides that officers and key employees may be
granted either nonqualified or incentive stock options for the purchase of the
Company's common stock at the fair market value at the date of grant. The
employee options granted generally become exercisable in three equal
installments beginning on the first anniversary of the date of grant.
Additionally, the 2000 Plan provides for an automatic annual grant to
non-employee directors. The non-employee director options become exercisable in
three equal installments with the first installment exercisable on the date of
grant and an additional one-third becoming exercisable on each of the next two
anniversary dates. The options expire ten years from date of grant.

                                      -34-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

E.   STOCKHOLDERS' EQUITY (continued)

In February 2000, the Board of Directors of the Company approved the 2000
Employee Stock Option Plan (the "2000 Option Plan"). This plan was authorized
primarily to enable the Company to grant options in 2000 as part of its annual
stock option program. No stockholder approval was sought for the 2000 Option
Plan.

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

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

Certain options, as originally granted, became exercisable only to the extent
the Company achieved specific financial goals. During 1995 these options were
amended to provide for vesting on the earlier of the six-year anniversary of the
date of grant or the original vesting schedule upon the achievement of the
aforementioned financial goals. In 1998 the Company achieved the specific
financial goals as outlined in the 1994 Plan and as such fully recognized the
related compensation expense. Accumulated deferred compensation was $5,000 and
$305,000 at December 31, 2001 and 2000, respectively.

In July 1998, the Company's Board of Directors adopted a Shareholder Rights Plan
in which common stock purchase rights were distributed as a dividend at the rate
of one right for each share of the Company's common Stock outstanding as of the
close of business on August 3, 1998. This plan was adopted as a means of
deterring possible coercive or unfair takeover tactics and to prevent a
potential acquirer from gaining control of the Company without offering a fair
price to all of the Company's shareholders. Unless the rights are redeemed or
exchanged earlier, they will expire on July 24, 2008. No rights were exercised
through December 31, 2001.

At December 31, 2001 shares available for future grants under all option plans
were 300,214.

                                      -35-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

E.   STOCKHOLDERS' EQUITY (continued)

Net income and net income per share as reported in these financial statements
and on a pro forma basis for the years ended December 31, 2001, 2000 and 1999,
as if the fair value based method described in SFAS No. 123 had been adopted are
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
                                                                2001         2000         1999
                                                                ----         ----         ----
<S>                                 <C>                     <C>          <C>          <C>
Net income                             As Reported             $6,320       $3,185       $2,506
                                       Pro Forma               $5,534       $2,603       $1,887

Basic net income per share             As Reported              $1.03        $0.53        $0.43
                                       Pro Forma                $0.90        $0.43        $0.32

Diluted net income per share           As Reported              $0.98        $0.51        $0.40
                                       Pro Forma                $0.88        $0.42        $0.31

</TABLE>

The effect of applying SFAS No. 123 for the purpose of providing pro forma
disclosure may not be indicative of the effects on reported net income and net
income per share for future years. The pro forma disclosures include the effects
of all awards granted after January 1, 1997 and additional awards in future
years are anticipated.

For the purpose of providing pro forma disclosures, the fair values of stock
options granted were estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 2001, 2000 and
1999, respectively: a risk-free interest rate of 5.1%, 6.4% and 6.0%; an
expected life of 7 years in all years; expected volatility of 36% in 2001 and
2000 and 33% in 1999 and no expected dividends.

                                      -36-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

E.        STOCKHOLDERS' EQUITY (continued)
The following table summarizes all stock option plan activity for the years
ended December 31:
<TABLE>

                                                      2001                          2000                        1999
                                           -------------------------       ---------------------       -----------------------
<S>                                       <C>           <C>               <C>           <C>            <C>        <C>
                                                          Wgtd. Avg.                   Wgtd. Avg.                    Wgtd. Avg.
                                            Shares       Exer. Price       Shares    Exer. Price       Shares      Exer. Price
                                            ------       -----------       ------    -----------       ------      -----------
Outstanding
at beginning of year                       990,715          $12.63         909,523      $12.66         924,550       $10.71
            Granted                        204,370           13.87         209,500       11.52         134,000        18.00
            Exercised                     (264,308)           7.57         (58,797)       4.33        (138,243)        4.60
            Cancelled or lapsed            (73,856)          15.80         (69,511)      16.66         (10,784)       15.51
                                         ----------                        -------                     -------
Outstanding at end of year                 856,921           $14.01        990,715      $12.63         909,523       $12.66
                                         ==========                        =======                     =======
Options exercisable
at year end                                471,383           $13.80        615,926      $11.39         554,866        $9.86

Weighted average fair value
of options granted at fair
market value during the year                                  $6.49                       $5.54                       $7.90
</TABLE>


                                      -37-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

E.   STOCKHOLDERS' EQUITY (continued)

The following table summarizes information about stock options outstanding at
December 31, 2001:
<TABLE>

                                 Options Outstanding                                                 Options Exercisable
---------------------------------------------------------------------------------------    -----------------------------------------
<S>                  <C>                <C>                    <C>                        <C>                <C>
                           Number           Weighted Average                                    Number
      Range of          Outstanding           Remaining            Weighted Average          Exercisable        Weighted Average
  Exercise Prices       at 12/31/01        Contractual Life         Exercise Price           at 12/31/01         Exercise Price
--------------------  ---------------    ---------------------  ----------------------    ----------------    ---------------------
     $3.00-$5.00           79,338                1.9                   $ 4.46                  79,338                $4.46
      5.50-10.00          137,919                6.1                     7.99                  81,585                 7.16
     11.19-14.81          336,134                8.1                    13.48                 104,233                13.25
     15.75-19.88          188,850                6.4                    17.54                 115,107                17.53
     20.28-24.00          114,680                6.3                    23.63                  91,120                23.82
                          -------                                                             -------
    $ 3.00-$24.00         856,921                6.6                   $14.01                 471,383               $13.80
                          =======                                                             =======
</TABLE>


In July 2000, the stockholders of the Company approved the 2000 Employee Stock
Purchase Plan ("ESPP") whereby eligible employees may invest up to 10% of their
base salary in shares of the Company's common stock. The purchase price of the
shares is 85% of the fair market value of the stock on either the commencement
date or the date of purchase whichever is lower. Under the Plan, 200,000 shares
of common stock were available for purchase over ten offering periods through
May 2005, of which approximately 160,634 shares remain available as of December
31, 2001. Shares purchased under this plan totaled 28,599 and 10,767 in 2001 and
2000, respectively. The weighted-average grant-date fair value of shares
purchased under the 2000 ESPP was $17.12 in 2001 and $15.47 in 2000.

In May 1995 the stockholders approved the 1995 ESPP similar to the 2000 ESPP
noted above. The purchase price of the shares under this plan was 90% of the
fair market value of the stock on either the commencement date or the date of
purchase whichever was lower. Under the plan, 200,000 shares of common stock
were available for purchase over ten offering periods through April 2000. Shares
purchased under this plan totaled 8,333 in 2000. The weighted-average grant-date
fair value of these shares purchased under the 1995 ESPP was $12.97 in 2000. No
shares were purchased in 1999. Approximately 141,483 shares remained under the
1995 ESPP when the plan terminated in April 2000.

For the purpose of providing pro forma disclosures, the fair values of shares
purchased were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for purchases in 2001 and 2000,
respectively: a risk free interest rate of 2.95% and 5.9%; an expected life of 6
months in each year; expected volatility of 38% and 39%; and no expected
dividends.

Common Stock

In April 2000, the Company loaned $250,000 to its Chief Executive Officer,
pursuant to a collateralized promissory note. The note, which bears interest at
a rate of 6.94%, payable annually in arrears, is due April 5, 2005 and is
collateralized by 25,641 shares of common stock of the Company.

                                      -38-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

E.   STOCKHOLDERS' EQUITY (continued)

In August 1999, the Company loaned $300,000 to its Chief Executive Officer
("CEO"), pursuant to a collateralized promissory note, for the exercise of a
stock option which was to expire. The note, which bears interest at a rate of
6.77% per annum, payable annually in arrears, is due August 23, 2004 and is
collateralized by 16,552 shares of common stock of the Company. The CEO has the
right to put 70,459 shares (representing the net number of shares issued to the
CEO with the proceeds of the loan, after withholding for taxes) back to the
Company at a price equal to $16.3125 commencing April 30, 2001 for a period of
eighteen months expiring October 30, 2002.

In order to eliminate potential compensation expense exposure to the Company as
a result of this put right, the CEO sold all shares covered by this agreement in
the open market as of March 2002.

F.   INCOME TAXES

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

                                            For the years ended December 31,
                                        ----------------------------------------
(Dollars in thousands)                   2001              2000            1999
--------------------------------------------------------------------------------
Domestic                                 $9,001           $4,198         $3,323
Foreign                                   1,222            1,106            853
                                        ----------------------------------------
                                        $10,223           $5,304         $4,176
                                        ========================================

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

                                            For the years ended December 31,
                                        ----------------------------------------
(Dollars in thousands)                   2001              2000            1999
--------------------------------------------------------------------------------
Federal income taxes:
   Current                               $1,486           $1,242          ($110)
   Deferred                               1,547               92          1,316
--------------------------------------------------------------------------------
                                          3,033            1,334          1,206
--------------------------------------------------------------------------------
State income taxes:
   Current                                  486              347             22
   Deferred                                 (94)              15            178
--------------------------------------------------------------------------------
                                            392              362            200
--------------------------------------------------------------------------------
Foreign income taxes                        478              423            264
--------------------------------------------------------------------------------
Provision for income taxes              $ 3,903          $ 2,119        $ 1,670
================================================================================


                                      -39-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

F.   INCOME TAXES (continued)

Total deferred tax assets (liabilities) are as follows at December 31:

(Dollars in thousands)                                       2001          2000
--------------------------------------------------------------------------------
Total deferred tax assets                                  $1,436        $1,986
Total deferred tax liabilities                             (5,799)       (4,897)

--------------------------------------------------------------------------------
Net deferred tax liability                                ($4,363)      ($2,911)
================================================================================

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

                                                             2001          2000
                                                             -----         ----
Current deferred tax assets:

   Inventory and warranty reserves                            $569         $667
   Restructuring reserve                                       200          584
   Deferred compensation                                         2          121
   Deferred revenue                                            241          188
   Accounts receivable reserves                                136          213
   Accrued vacation and other reserves                         288          213
--------------------------------------------------------------------------------
Net current deferred tax asset                               1,436        1,986
--------------------------------------------------------------------------------
Noncurrent deferred tax assets (liabilities):

   Sales type leases                                        (3,810)      (4,144)
   Restructuring reserve                                       244          490

   Depreciation                                             (4,049)      (2,552)
   Amortization                                              1,816        1,309
--------------------------------------------------------------------------------
Net noncurrent deferred tax liability                       (5,799)      (4,897)
--------------------------------------------------------------------------------
Net deferred tax liability                                 ($4,363)     ($2,911)
================================================================================

The differences between the statutory U.S. federal income tax rate and the
Company's effective tax rate are as follows:
<TABLE>
                                                    For the years ended December 31,
                                               -----------------------------------------
<S>                                            <C>            <C>           <C>
(Dollars in thousands)                            2001           2000          1999
----------------------------------------------------------------------------------------
Provision at statutory rate                      $ 3,476        $ 1,803       $ 1,420
State income tax, net of federal tax effect          339            239           188
Tax exempt income                                      -              -            (2)
Goodwill                                              62             75            51
Foreign rate differences                             109             99            40
Other, net                                           (83)           (97)          (27)
----------------------------------------------------------------------------------------
Provision for income taxes                       $ 3,903        $ 2,119       $ 1,670
========================================================================================
</TABLE>


                                      -40-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

G.   EMPLOYEE BENEFIT PLAN

The Company has a 401(k) defined contribution savings plan covering
substantially all of its employees. The Company's contributions, which are
included in selling, general and administrative expenses, were $515,000,
$471,000 and $434,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

H.   SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for income taxes amounted to $1,429,000, $2,678,000 and $2,134,000
during 2001, 2000 and 1999, respectively. Interest paid was $442,000, $334,000
and $129,000 during 2001, 2000 and 1999, respectively.

I.   GOODWILL AND INTANGIBLES

During 2001, the Company recorded approximately $1.2 million of intangible
assets related to provider agreements whereby the Company agrees to pay the
customer a fee for the use of its referral sources and agrees to provide
monitoring and/or business support services to the customer under a LMS or BMS
program in accordance with the terms of the agreement. The Company amortizes the
acquisition costs over the life of the agreements, which is typically five
years.

Under a provider agreement to convert to a LMS program, the customer agrees to
use the Lifeline call center as its provider of monitoring services during the
term of the Agreement. The Company agrees to provide personal response
monitoring services to the customer's subscribers through the Lifeline call
center, and the customer agrees to continue to manage referrals, inquiries,
service order intake, service installation, and ongoing customer service. The
customer continues to purchase home communicators from the Company. The Company
charges the customer a monthly fee per subscriber for the monitoring services
provided. The sale of home communicators to the customer is not tied to the
monitoring agreement as the customer makes the determination when to purchase
home communicators. The customer typically purchases home communicators to place
in its own inventory and then disperses the home communicators as it acquires
subscribers who need the service. The customer is under no contract that would
require it to purchase home communicators. The customer bills its subscribers
for the home communicators it has placed in the subscriber's home and for the
monitoring services provided by the Company.

Under an agreement with the Company to convert to a BMS program, the customer
agrees to use Lifeline as its provider of monitoring services and business
support services during the term of this agreement. The Company agrees to handle
day-to-day administrative tasks for the Lifeline service including managing
referrals, inquiries, service order intake, service installation, ongoing
customer service and billing to support the needs of the customer. The Company
directly provides its customer's subscribers with the Lifeline service, which
includes monitoring and the use of Company-owned home communicators for a single
fee, and the Company bills the subscriber on a monthly basis for this service.

                                      -41-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

I.   GOODWILL AND INTANGIBLES (continued)

In April 2001, the Company acquired certain assets formerly owned by SOS
Industries, Inc. a personal response service provider based in New Smyrna Beach,
Florida with subscribers located in 37 states. The purchase price was $3.8
million. The acquisition was accounted for as a purchase transaction, and the
resulting goodwill was amortized over an estimated life of 10 years through
December 31, 2001. The results of the acquired business are included in the
Company's consolidated financial statements from the date of acquisition and did
not have a material impact on 2001 operating results.

In September 2000, Lifeline Systems, Canada, a wholly owned subsidiary of the
Company, completed the acquisition of the Argus Emergency Medical Division of
Microtec Enterprises Inc. of Quebec, Canada. Argus provided personal response
services similar to the services provided by the Company. The purchase price was
approximately $1.5 million of which $1.1 million was paid at the closing with
the remainder to be paid during 2001 and 2002. This acquisition was accounted
for as a purchase transaction, and the resulting goodwill was amortized over an
estimated life of 10 years through December 31, 2001.

The proforma effects of the aforementioned acquisitions did not have a material
impact on results of operations in the respective years of acquisition.

In accordance with the adoption of SFAS 142 discussed in Footnote A above, the
Company will discontinue the amortization of goodwill resulting from the
aforementioned acquisitions effective January 1, 2002. The Company will, however
continue to amortize the intangible assets related to the aforementioned
provider agreements.

Goodwill and intangible amortization expense was $2,764,000, $2,171,000, and
$954,000, for the years ended December 31, 2001, 2000 and 1999, respectively.
Accumulated goodwill and intangible amortization amounted to $5,965,000 and
$3,225,000 as of December 31, 2001 and 2000, respectively.

J.   RESTRUCTURING AND NON RECURRING CHARGES

In September 2000, the Company recorded a pre-tax non-recurring charge of
approximately $2.7 million for costs it expected to incur to address erroneous
low-battery signals in some of its personal help buttons. Included in the
non-recurring charge are anticipated material and mailing costs for exchanging
buttons, providing hospital programs with higher inventory levels for the
planned swap, and the cost of installer visits to subscriber homes to replace
the buttons.

At December 31, 2001, accrued restructuring and other non-recurring charges of
nearly $1,123,000 represented the remaining unutilized costs associated with the
anticipated cost of addressing erroneous low-battery signals in personal help
buttons.

                                      -42-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

J.   RESTRUCTURING AND NON RECURRING CHARGES (continued)

The following is a summary of activity for 2001:

                                   December 31,  Amounts          December 31,
                                       2000      Utilized            2001
                             -------------------------------------------------
Reduction of workforce and             $85         ($85)                 $-
other cash flows

Erroneous low battery                2,493       (1,370)              1,123
signals
                             -------------------------------------------------
Total                               $2,578      ($1,455)             $1,123
                             =================================================


K.   LONG TERM DEBT

In June 1999, the Company entered into an amended $10.0 million line of credit
which was originally obtained in April 1998. The agreement contains several
covenants, including the Company maintaining certain levels of financial
performance and capital structure. These financial covenants include a
requirement for a current ratio of at least 1.5 to 1.0 and a leverage ratio of
no more than 1.0 to 1.0. In addition, there are certain negative covenants that
include limitations on the Company's capital and other expenditures,
restrictions on the Company's capacity to obtain additional debt financing,
restrictions on the disposition of the Company's assets, and restrictions on its
investment portfolio. The line of credit matures on June 30, 2002, and as of
December 31, 2001 the Company had $4.4 million outstanding under this line. The
Company is currently in the process of renegotiating a new line of credit.

The agreement has two components, the first being a working capital line of
credit. Borrowings under this portion of the line of credit are based on the
London Interbank Offered Rate (LIBOR) interest rate plus 0.75 per annum. The
other component of this agreement is the ability to convert up to $5 million
dollars into a five year fixed loan at the Bank's prime interest rate at the
date of conversion. The balance at December 31, 2001 of $4.4 million consisted
entirely of borrowings converted to fixed term loans. As of December 31, 2001
the weighted average interest rate of the Company's outstanding line of credit
was approximately 5.5 per annum. Principal payments are to be made in monthly
installments.

                                      -43-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

K.   LONG TERM DEBT (continued)

Future term loan payments at December 31, 2001 are as follows:

(Dollars in thousands)

2002                                                                    $1,271
2003                                                                     1,256
2004                                                                     1,146
2005                                                                       741
2006                                                                       534
-------------------------------------------------------------------------------
Total                                                                    4,948
Less amount representing interest                                          500
-------------------------------------------------------------------------------
Total principal payments                                                 4,448

Less current portion                                                     1,105
-------------------------------------------------------------------------------
Total long-term principal payments                                      $3,343
===============================================================================

L.   SEGMENT INFORMATION

The Company is active in one business segment: designing, marketing, monitoring
and supporting its personal response units. The Company maintains sales and
marketing operations in both the United States and Canada.

Geographic Segment Data

Net revenues to external customers are based on the location of the customer.
Geographic information as of December 31, 2001, 2000 and 1999 and for the years
then ended is presented as follows:

                                     2001              2000            1999
                             ------------------------------------------------
Net Sales:
     United States                  $89,296          $75,199         $65,579
     Canada                           7,264            6,290           5,213
                             ------------------------------------------------
                                    $96,560          $81,489         $70,792
                             ================================================
Net Income:
     United States                   $5,576           $2,502          $2,305
     Canada                             744              683             201
                             ------------------------------------------------
                                     $6,320           $3,185          $2,506
                             ================================================

Total Assets:
     United States                  $69,495          $58,725         $53,970
     Canada                           7,507            5,803           3,415
                             ------------------------------------------------
                                    $77,002          $64,528         $57,385
                             ================================================

                                      -44-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

M.   CONTINGENT LIABILITIES AND COMMITTMENTS

The Company is currently being audited by Revenue Canada asserting deficiencies
in goods and services tax and sales tax for the Company's 1993 to 1999 tax
years. On March 26, 2002 the Company received a proposed tax assessment, (which
includes penalties and interest), of CAN$1,050,000 (approximately US$700,000
based on current exchange rates). The Company believes that it should be able to
further reduce the amount of the proposed tax deficiency following further
discussion with Revenue Canada. However, there is no assurance that it will be
able to do so. The Company does not believe that the payment of any such
deficiency will have a material adverse impact on the Company's financial
position or results of operations or cash flows.

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

None.




                                      -45-

<PAGE>

                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant

     The information under the heading "Election of Directors" in the Company's
definitive proxy material for its 2001 annual meeting of stockholders is
incorporated herein by reference. Information concerning officers of the Company
appears in Part I of this Annual Report on Form 10-K.

ITEM 11. Executive Compensation

     The information under the heading "Executive Compensation," excluding the
"Compensation Committee Report on Executive Compensation" and the Stock Price
Performance Graph in the Company's definitive proxy material for its 2001 annual
meeting of stockholders, is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

     (a)  Security ownership of certain beneficial owners: The information under
          the heading "Beneficial Ownership of Common Stock" in the Company's
          definitive proxy material for its 2001 annual meeting of stockholders
          is incorporated herein by reference.

     (b)  Security ownership of management: The information under the heading
          "Beneficial Ownership of Common Stock" in the Company's definitive
          proxy material for its 2001 annual meeting of stockholders is
          incorporated herein by reference.

     (c)  Changes in control: None known.

ITEM 13. Certain Relationships and Related Transactions

     The information under the heading "Certain Relationships and Related
Transactions," in the Company's definitive proxy material for its 2001 annual
meeting of stockholders is incorporated herein by reference.

                                      -46-

<PAGE>

                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Financial Statements

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

Report of Independent Accountants                                          21

Consolidated Balance Sheets as of December 31, 2001 and 2000               22

Consolidated Statements of Income and Comprehensive Income
 for the years ended December 31, 2001, 2000, and 1999                     23

Consolidated Statements of Stockholders' Equity
  for the years ended December 31, 2001, 2000, and 1999                    24

Consolidated Statements of Cash Flows for the years
  ended December 31, 2001, 2000, and 1999                                  25

Notes to Consolidated Financial Statements                                26-45


(a)(2) Financial Statement Schedule

       The following financial statement schedule of Lifeline Systems, Inc.
is filed herewith and included in ITEM 14 (a)(2) on the pages indicated below.

                                                                         Page
Schedule II - Valuation and Qualifying Accounts for
  the years ended December 31, 2001, 2000 and 1999                        53




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

(b)  Reports on Form 8-K

     The Company filed no reports on Form 8-K with the Securities and Exchange
Commission during the quarter ended December 31, 2001.

(c)  Exhibits

     The  Exhibits which are filed with this Report or which are incorporated
herein by reference are set forth in the Exhibit Index, which appears on pages
49 through 52 hereof.

                                      -47-

<PAGE>

                                   SIGNATURES

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


                                                   LIFELINE SYSTEMS, INC.


March 26, 2002                                     By:  /s/ Ronald Feinstein
----------------                                        -----------------------
Date                                                    Ronald Feinstein
                                                        Chief Executive Officer

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

<TABLE>
<CAPTION>

Signature                                        Capacity                                             Date
---------                                        --------                                             ----
<S>                                            <C>                                          <C>

/s/ L. Dennis Shapiro                            Chairman of the Board                         March 26, 2002
----------------------------------------                                                       ---------------------------------
L. Dennis Shapiro

/s/ Ronald Feinstein                             Chief Executive Officer,                      March 26, 2002
----------------------------------------         President and Director (Principal             ---------------------------------
Ronald Feinstein                                 Executive Officer)


/s/ Dennis M. Hurley                             Senior Vice President of Finance              March 26, 2002
----------------------------------------         (Principal Financial and                      ---------------------------------
Dennis M. Hurley                                 Accounting Officer)


/s/ Everett N. Baldwin                           Director                                      March 26, 2002
----------------------------------------                                                       ---------------------------------
Everett N. Baldwin

/s/ Joseph E. Kasputys                           Director                                      March 26, 2002
----------------------------------------                                                       ---------------------------------
Joseph E. Kasputys

/s/ Carolyn C. Roberts                           Director                                      March 26, 2002
----------------------------------------                                                       ---------------------------------
Carolyn C. Roberts

/s/ Gordon C. Vineyard                           Director                                      March 26, 2002
----------------------------------------                                                       ---------------------------------
Gordon C. Vineyard

</TABLE>

                                      -48-

<PAGE>

                                  EXHIBIT INDEX

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

Exhibit No.         Exhibit                                                                          SEC Document Reference
-----------         -------                                                                          ----------------------
<S>              <C>                                                                      <C>

Exhibit 3.          Articles of Incorporation and By-Laws

      3.1           Articles of Organization of Lifeline Systems, Inc.,                                 2-84060 Exhibit 3.1
                         as amended.

      3.2           Articles of Amendment of Lifeline Systems, Inc.                                    1987 10K Exhibit 3.4

      3.3           Restated By-Laws of Lifeline Systems, Inc.                                         1990 10K Exhibit 3.4

Exhibit 4.          Instruments Defining the Rights of Security Holders

      4.1           Specimen Stock Certificate.                                                         2-84060 Exhibit 4.1

      4.2           Shareholder Rights Plan dated July 24, 1998                                    8-K dated August 5, 1998

      4.3           Amendment Number 1 to Shareholder                                             10Q for the quarter ended
                         Rights Plan dated October 18, 1998                                  September 30, 1998 Exhibit 4.3

Exhibit 10.         Material Contracts

    10.01           Medical Expense Reimbursement Plan.                                               2-84060 Exhibit 10.21

    10.02           Registrant's 1991 Stock Option Plan.                                             1990 10K Exhibit 10.37

    10.03           Form of Non-statutory Stock Option Agreement                                     1992 10K Exhibit 10.32
                         for Registrant's 1991 Stock Option Plan.

    10.04           Form of Special Non-statutory Stock Option Agreement                             1992 10K Exhibit 10.33
                         for Registrant's 1991 Stock Option Plan.

    10.05           Amended Employment and Noncompetition Agreement                                  1992 10K Exhibit 10.36
                         between Ronald Feinstein and the Registrant,
                         dated August 27, 1992.


    10.06           Second Amendment to Lease Agreement                                              1993 10K Exhibit 10.44
                         dated August 31, 1989 and Consent to
                         Assignment of Lease between the Registrant
                         and Tierrasanta 234 dated September 9, 1993.

</TABLE>

                                      -49-

<PAGE>

<TABLE>
<CAPTION>

Exhibit No.         Exhibit                                                                          SEC Document Reference
-----------         -------                                                                          ----------------------
<S>              <C>                                                                         <C>
   10.07            Letter Agreement between Ronald Feinstein                                        1993 10K Exhibit 10.45
                         and the Registrant dated March 4, 1994.

   10.08            Nonstatutory Stock Option Agreement between                                      1993 10K Exhibit 10.46
                         Ronald Feinstein and the Registrant dated
                         February 11, 1994.

   10.09            Registrant's 1994 Stock Option Plan.                                             1994 10K Exhibit 10.48

   10.10            Form of Non-statutory Stock Option Agreement                                     1994 10K Exhibit 10.49
                         for Registrant's 1994 Stock Option Plan.

   10.11            Form of Special Non-statutory Stock Option Agreement                             1994 10K Exhibit 10.50
                         for Registrant's 1994 Stock Option Plan.

   10.12            Master Lease Agreement between Registrant and                                    1994 10K Exhibit 10.52
                         U.S. Leasing Corporation

   10.13            Security and Pledge Agreement between
                         Thomas E. Loper and the Registrant,
                         dated September 11, 1995.                                                   1995 10K Exhibit 10.31

   10.14            Form of the Non-statutory Stock Option
                         Agreement to Registrant's 1991 Stock
                         Option Plan                                                                 1995 10K Exhibit 10.33

   10.15            Form of the Non-statutory Stock Option
                         Agreement to Registrant's 1994 Stock
                         Option Plan                                                                 1995 10K Exhibit 10.34

   10.16            Amended Employment Agreement between

                         Ronald Feinstein and the Registrant,                                     10Q for the quarter ended
                         dated June 14, 1996                                                   June 30, 1996, Exhibit 10.60


   10.17            Stock purchase agreement between
                         Lifeline Systems (Canada), Inc. and
                         Len Wechsler dated July 3, 1996                                          10Q for the quarter ended
                                                                                          September 30, 1996, Exhibit 10.61
   10.18            Stock purchase agreement between
                         Lifeline Systems (Canada), Inc., and
                         CareTel, Inc. and the stockholders of                                    10Q for the quarter ended
                         CareTel, Inc., dated July 3, 1996                                September 30, 1996, Exhibit 10.62

   10.19            Amendment to Registrant's 1991
                         Stock Option Plan                                                           1996 10K Exhibit 10.41

   10.20            Amendment to Registrant's 1994                                                   1996 10K Exhibit 10.42
                         Stock Option Plan
</TABLE>

                                      -50-

<PAGE>
<TABLE>

Exhibit No.         Exhibit                                                                          SEC Document Reference
-----------         -------                                                                          ----------------------
<S>             <C>                                                                         <C>
 10.21              Bishop/Clark Associates Limited Partnership
                         dated November 11, 1997                                                     1997 10K Exhibit 10.44

 10.22              Offer to Lease between CareTel, Inc. and Graduate Holdings
                         Limited and Samuel Sarick Limited
                         dated September 1, 1994                                                     1997 10K Exhibit 10.46

 10.23              Form of Change in Control Agreement for
                         for the following Named Executives:
                         Mr. Richard Reich, Mr. Thomas Loper,
                         Mr. Dennis Hurley, Mr. John Gugliotta                                       1997 10K Exhibit 10.49

 10.24              Revolving Line of Credit between
                         State Street Bank and Trust Company                                      10Q for the quarter ended
                         and the Registrant, dated April 22, 1998                               June 30, 1998 Exhibit 10.51

 10.25              First amendment to lease agreement
                         between Registrant and Bishop/Clark Associates                           10Q for the quarter ended
                         Limited Partnership dated June 30, 1998                                June 30, 1998 Exhibit 10.52

 10.26              Lease agreement between the Registrant and                                    10Q for the quarter ended
                         Triangle Realty Trust dated August, 1998                          September 30, 1998 Exhibit 10.53


 10.27              Master Lease Agreement between the
                         Registrant and Andover Capital Group                                     10Q for the quarter ended
                         dated March 11, 1999                                                  March 31, 1999 Exhibit 10.60

 10.28              Loan Document Modification Agreement between
                         State Street Bank and Trust Company and                                  10Q for the quarter ended
                         the Registrant dated June 30, 1999                                September 30, 1999 Exhibit 10.61

 10.29              Amended and Restated Note between State Street
                         Bank and Trust Company and the Registrant                                10Q for the quarter ended
                         dated June 30, 1999                                               September 30, 1999Exhibit  10.62

 10.30              The supply agreement between the Ademco Group                                   1999 10-K Exhibit 10.65
                         a division of Honeywell International, Inc.,
                         formerly the Pittway Corporation and the
                         Registrant dated December 29, 1999

 10.31              Second amendment to lease agreement between                                     1999 10-K Exhibit 10.67
                         Registrant and Bishop/Clark Associates
                         Limited Partnership dated November 18, 1999

10.32               Secured Promissory Note between Ronald                                      10-Q for the quarter ended
                         Feinstein and the Registrant, dated April 5, 2000                    March 31, 2000 Exhibit 10.69

</TABLE>

                                      -51-

<PAGE>
<TABLE>

Exhibit No.         Exhibit                                                                         SEC Document Reference
-----------         -------                                                                         ----------------------
<S>             <C>                                                                       <C>

10.33               Security and Pledge Agreement between Ronald                                10-Q for the quarter ended
                         Feinstein and the Registrant, dated April 5, 2000                    March 31, 2000 Exhibit 10.70

10.34               Amended Employment Agreement                                                10-Q for the quarter ended
                         Agreement between Len Wechsler and                                    June 30, 2000 Exhibit 10.71
                         Lifeline Systems, Canada, dated July 2000

10.35               Registrant's 2000 Stock Incentive Plan                                      10-Q for the quarter ended
                                                                                               June 30, 2000 Exhibit 10.72

10.36               Registrant's 2000 Employee Stock Option Plan                                10-Q for the quarter ended
                                                                                               June 30, 2000 Exhibit 10.73

10.37              Tax Increment Financing Agreement between                                       2000 10-K Exhibit 10.74
                         Registrant and Town of Framingham dated
                         October 25, 2000

</TABLE>

Exhibit 21.         Subsidiaries.

Filed herewith:
  21.1              Subsidiaries of Lifeline Systems, Inc.

Exhibit 23.         Consents of Experts and Counsel.

Filed herewith:
  23.1              Consent of PricewaterhouseCoopers LLP

                                      -52-

<PAGE>

                             LIFELINE SYSTEMS, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

              For the years ended December 31, 2001, 2000, and 1999

                             (Dollars in thousands)



<TABLE>
<S>                                     <C>               <C>             <C>              <C>
                                                            Additions
                                           Balance at       Charged to                      Balance at
                                            Beginning        Costs &                          End of
Description                                  of Year         Expenses        Deductions(1)     Year
-----------                                  -------         --------        ----------        ----

2001
----

Allowance for doubtful receivables:
   Trade accounts receivable                     $449             $221           $228          $442
   Lease receivables                              207              159             10           356
                                                 ----             ----           ----          ----
     Total                                       $656             $380           $238          $798

2000
----

Allowance for doubtful receivables:
   Trade accounts receivable                     $706              $16           $273          $449
   Lease receivables                              147               60              -           207
                                                 ----              ---           ----          ----
     Total                                       $853              $76           $273          $656

1999
----

Allowance for doubtful receivables:
   Trade accounts receivable                     $239             $528            $61          $706
   Lease receivables                              190                -             43           147
                                                 ----             ----           ----          ----
     Total                                       $429             $528           $104          $853

</TABLE>

1)  Uncollectible accounts and adjustments.



                                      -53-