<PAGE>
 
PAGE  1                                                         EXHIBIT (99.1)



                                 ANNUAL  REPORT



                        Pursuant to Section 15(d) of the
                             Securities Act of 1934



                               For the Year Ended
                               December 31, 1996


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


      LIFELINE  SYSTEMS,  INC.  EMPLOYEES'  SAVINGS  AND  INVESTMENT  PLAN
      --------------------------------------------------------------------
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

              FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES TO
                           ACCOMPANY 1996 FORM 5500
                    ANNUAL REPORT OF EMPLOYEE BENEFIT PLAN
                              UNDER ERISA OF 1974

                FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

           INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES


                for the years ended December 31, 1996 and 1995

<TABLE> 
<CAPTION> 

                                                                         Page(s)
                                                                         ------ 
<S>                                                                      <C> 
Report of Independent Accountants                                          2

Financial Statements:
 Statements of Net Assets Available for Plan Benefits, 
   with Fund Information, December 31, 1996 and 1995                      3-4

 Statements of Changes in Net Assets Available for Plan 
   Benefits, with Fund Information, for the years ended 
   December 31, 1996 and 1995                                             5-6

 Notes to Financial Statements                                           7-13


Supplemental Schedules:

 Line 27a - Schedule of Assets Held for Investment 
   Purposes as of December 31, 1996                                       14

 Line 27d - Schedule of Single Transactions in Excess 
   of 5% of the Current Value of Plan Assets                              15

 Line 27d - Schedule of Series of Transactions in Excess 
   of 5% of the Current Value of Plan Assets                              16
</TABLE> 


Certain supplementary schedules have been omitted because they are either not
required or not applicable under the Employee Retirement Income Security Act of
1974.

                                       1
<PAGE>
 
                [LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Plan Administrator of the
Lifeline Systems, Inc. Employee Savings
 and Investment Plan:

We have audited the accompanying statements of net assets available for plan
benefits of the Lifeline Systems, Inc. Employee Savings and Investment Plan (the
"Plan") as of December 31, 1996 and 1995, and the related statements of changes
in net assets available for plan benefits for the years then ended.  These
financial statements are the responsibility of the Plan's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of the Plan as
of December 31, 1996 and 1995, and the changes in net assets available for plan
benefits for the years then ended in conformity with generally accepted
accounting principles.

Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole.  The supplemental schedules listed in the
index on page 1 are presented for the purpose of additional analysis and are not
a required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974.  The fund information in the statement of net assets available for plan
benefits and the statement of changes in net assets available for plan benefits
is presented for purposes of additional analysis rather than to present the net
assets available for plan benefits and changes in net assets available for plan
benefits of each fund.  The supplemental schedules and fund information have
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic financial statements taken as a whole.

The investments held by the Plan are stated at current value as required for
presentation on Form 5500.  As explained in Note D to the financial statements,
the information provided by the custodian does not include the historical cost
of investments.  Therefore, the schedule of assets held for investment purposes
and the schedules of reportable transactions do not disclose the historical cost
of investments.  Disclosure of this information is required by the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974.



Boston, Massachusetts                       /s/ Coopers & Lybrand L.L.P.
May 21, 1997

                                       2
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

  STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION

                               December 31, 1996
<TABLE> 
<CAPTION> 

                                                                                Fidelity       Fidelity            
                                                                   Fidelity      Asset         Blue Chip     
                                                      Income       Balanced    Allocation       Growth       
                              ASSETS                   Fund          Fund         Fund           Fund        
                                                      ------       --------    ----------      ---------
<S>                                                 <C>            <C>         <C>           <C> 
Investments, at fair value (Notes C and D):                                                             
   Bank pooled fund                                 $ 1,619,950                                          
   Shares of registered investment companies                       $ 641,432    $ 401,737    $ 2,215,056 
   Lifeline Systems, Inc. stock                                                                          
   Participant loans receivable                                                                          
   Bank account                                                                                          
                                                    ------------   ----------   ----------   ------------

            Total investments                         1,619,950      641,432      401,737      2,215,056 
                                                                                                        
Employer contributions receivable                        13,118        8,110        6,114         26,485 
Employee contributions receivable                        13,173        8,819        8,153         30,538 
Loan payment receivable                                   4,004        1,906          865          4,105 
Interfund transfers                                      75,388       80,322                             
                                                    ------------   ----------   ----------   ------------

            Total assets                              1,725,633      740,589      416,869      2,276,184 
                                                                                                        
                                                                                                        
     LIABILITIES AND NET ASSETS                                                                              
     AVAILABLE FOR PLAN BENEFITS                                                                             
                                                                                                        
Interfund transfers pending                                                        84,364        106,260 
Other payables                                              377           48          (12)           191 
                                                    ------------   ----------   ----------   ------------
                                                                                                        
            Total liabilities                               377           48       84,352        106,451 
                                                    ------------   ----------   ----------   ------------
                                                                                                        
Net assets available for plan benefits              $ 1,725,256    $ 740,541    $ 332,517    $ 2,169,733 
                                                    ============   ==========   ==========   ============

<CAPTION> 

                                                     Lifeline                    
                                                   Systems, Inc.  Participant     Conduit       Total   
                                                    Stock Fund     Loan Fund      Account       Plan 
                              ASSETS               -------------  -----------     -------       -----
<S>                                                 <C>            <C>         <C>           <C> 
Investments, at fair value (Notes C and D):  
   Bank pooled fund                                                                          $ 1,619,950       
   Shares of registered investment companies                                                   3,258,225
   Lifeline Systems, Inc. stock                     $ 1,028,405                                1,028,405
   Participant loans receivable                                   $  295,447                     295,447
   Bank account                                                                $   21,439         21,439
                                                    ------------  -----------  -----------   ------------

            Total investments                         1,028,405      295,447       21,439      6,223,466
                                                                                                        
Employer contributions receivable                        10,276                                   64,103
Employee contributions receivable                        10,114                                   70,797
Loan payment receivable                                   2,418                                   13,298
Interfund transfers                                      34,914                                  190,624
                                                    ------------  -----------  -----------   ------------
                                                                                                        
            Total assets                              1,086,127      295,447       21,439      6,562,288
                                                                                                        
                                                                                                        
     LIABILITIES AND NET ASSETS                                                                          
     AVAILABLE FOR PLAN BENEFITS                                                                         
                                                                                                        
Interfund transfers pending                                                                      190,624
Other payables                                               67                    21,439         22,110
                                                    ------------  -----------  -----------   ------------
                                                                                                        
            Total liabilities                                67                    21,439        212,734
                                                    ------------  -----------  -----------   ------------
                                                                                                        
Net assets available for plan benefits              $ 1,086,060   $  295,447         --      $ 6,349,554
                                                    ============  ===========  ===========   ============
</TABLE> 



                                        
   The accompanying notes are an integral part of the financial statements.

                                        3
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

   STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION

                                December 31, 1995
<TABLE> 
<CAPTION> 
                                                                                Fidelity       Fidelity            
                                                                   Fidelity      Asset         Blue Chip     
                                                      Income       Balanced    Allocation       Growth       
                ASSETS                                 Fund          Fund         Fund           Fund        
                                                      ------       --------    ----------      ---------
<S>                                                <C>            <C>          <C>           <C> 
Investments, at fair value (Notes C and D):
  Bank pooled fund                                 $ 1,261,916                                      
  Shares of registered investment companies                       $  624,284   $  252,492    $ 1,409,962
  Lifeline Systems, Inc. stock                                                                          
  Participant loans receivable                                                                          
  Bank account                                                                                          
                                                                                                       
Investments, at contract value (Notes C and D):                                                        
  Pooled separate accounts                             380,617                                          
                                                   ------------   -----------  -----------   ------------
                                                                              
          Total investments                          1,642,533       624,284      252,492      1,409,962
                                                                                                       
Employer contributions receivable                       13,593         5,954        2,271         13,538
Employee contributions receivable                       13,580         6,842        3,446         15,891
Loan payment receivable                                  4,774         1,278          422          4,251
Interfund transfers                                                    9,026       24,688         64,687         
                                                   ------------   -----------  -----------   ------------
                                                                                                       
          Total assets                               1,674,480       647,384      283,319      1,508,329
                                                                                                       

    LIABILITIES AND NET ASSETS                                                                             
    AVAILABLE FOR PLAN BENEFITS                                                                            
                                                                                                       
Payable to other funds                                  52,220                                          
Other payables                                             331            50                         175
                                                   ------------   -----------  -----------   ------------
                                                                                                       
          Total liabilities                             52,551            50                         175
                                                   ------------   -----------  -----------   ------------
                                                                                                       
Net assets available for plan benefits             $ 1,621,929    $  647,334   $  283,319    $ 1,508,154
                                                   ============   ===========  ===========   ============

<CAPTION> 
                                                     Lifeline                    
                                                   Systems, Inc.  Participant     Conduit       Total   
                ASSETS                              Stock Fund     Loan Fund      Account       Plan 
                                                   -------------  -----------     -------       -----
<S>                                                 <C>           <C>           <C>          <C> 
Investments, at fair value (Notes C and D):      
  Bank pooled fund                                                                           $ 1,261,916  
  Shares of registered investment companies                                                    2,286,738
  Lifeline Systems, Inc. stock                      $  786,913                                   786,913
  Participant loans receivable                                    $  190,236                     190,236
  Bank account                                                                  $  24,174         24,174
                                                                                                        
Investments, at contract value (Notes C and D):                                                         
  Pooled separate accounts                                                                       380,617
                                                    -----------   -----------   ----------   ------------

          Total investments                            786,913       190,236       24,174      4,930,594
                                                                                                        
Employer contributions receivable                        5,870                                    41,226
Employee contributions receivable                        7,018                                    46,777
Loan payment receivable                                    749                                    11,474
Interfund transfers                                                                               98,401      
                                                    -----------   -----------   ----------   ------------
                                                 
          Total assets                                 800,550       190,236       24,174      5,128,472
                                                                                                        
                                                                                                        
    LIABILITIES AND NET ASSETS                                                                              
    AVAILABLE FOR PLAN BENEFITS                                                                             
                                                                                                        
Payable to other funds                                  46,188                                   98,408 
Other payables                                                                     24,174        24,730 
                                                    -----------   -----------   ----------   ------------
                                                                                                        
          Total liabilities                             46,188                     24,174       123,138 
                                                    -----------   -----------   ----------   ------------
                                                                                                        
Net assets available for plan benefits              $  754,362    $  190,236         --      $ 5,005,334             
                                                    ===========   ===========   ==========   ============
</TABLE> 

                                                  
   The accompanying notes are an integral part of the financial statements.

                                        4
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

        STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS,
                             WITH FUND INFORMATION

                     for the year ended December 31, 1996

<TABLE> 
<CAPTION> 

                                                                                                  Fidelity          Fidelity      
                                                                                  Fidelity          Asset           Blue Chip
                                                                   Income         Balanced        Allocation         Growth 
                                                                    Fund            Fund            Fund              Fund 
                                                                    ----            ----            ----              ----
<S>                                                              <C>               <C>             <C>             <C> 
Additions:
         Employee contributions and rollovers                   $   145,952       $  96,252       $  72,736      $    359,562
         Employer contributions                                      53,704          30,461          20,039            94,608
         Interest and dividend income                                90,095          30,440          31,680           156,823
         Net appreciation in fair value of investments                               25,680          11,758           132,400 
         Interfund transfers                                        148,796         103,273          31,503           300,440
                                                                 -----------       ---------       ---------      ------------
   
                           Total additions                          438,547         286,106         167,716         1,043,833

Deductions:
         Benefits and withdrawals                                   121,283          80,372          20,270           204,979
         Net depreciation in fair value of investments                2,692          
         Administrative expenses                                      1,463             300              14               950
         Interfund transfers                                        209,782         112,227          98,234           176,325
                                                                 -----------       ---------       ---------      ------------

                           Total deductions                         335,220         192,899         118,518           382,254
                                                                 -----------       ---------       ---------      ------------

Net additions                                                       103,327          93,207          49,198           661,579

Net assets available for plan benefits, beginning of year         1,621,929         647,334         283,319         1,508,154
                                                                 -----------       ---------       ---------      ------------

Net assets available for plan benefits, end of year             $ 1,725,256       $ 740,541       $ 332,517      $  2,169,733
                                                                ============      ==========      ==========     =============


<CAPTION> 

                                                                  Lifeline                  
                                                                Systems, Inc.     Participant         Total   
                                                                 Stock Fund        Loan Fund          Plan
                                                                 ----------        ---------          ---- 
<S>                                                             <C>               <C>               <C> 
Additions:
         Employee contributions and rollovers                   $   121,414                      $    795,916
         Employer contributions                                      35,612                           234,424
         Interest and dividend income                                   238      $   18,347           327,623
         Net appreciation in fair value of investments              316,414                           486,252
         Interfund transfers                                         90,261         270,209           944,482
                                                                ------------      ----------      ------------

                           Total additions                          563,939         288,556         2,788,697
                                                                
Deductions:
         Benefits and withdrawals                                    51,180          16,141           494,225
         Net depreciation in fair value of investments                                                  2,692
         Administrative expenses                                        351                             3,078
         Interfund transfers                                        180,710         167,204           944,482
                                                                ------------      ----------      ------------
                           Total deductions                         232,241         183,345         1,444,477
                                                                ------------      ----------      ------------

Net additions                                                       331,698         105,211         1,344,220

Net assets available for plan benefits, beginning of year           754,362         190,236         5,005,334
                                                                ------------      ----------      ------------

Net assets available for plan benefits, end of year             $ 1,086,060       $ 295,447       $ 6,349,554
                                                                ============      ==========      ============
</TABLE> 


   The accompanying notes are an integral part of the financial statements.

                                       5
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

        STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS,
                             WITH FUND INFORMATION

                     for the year ended December 31, 1995
<TABLE> 
<CAPTION> 

                                                                                                  Fidelity          Fidelity      
                                                                                  Fidelity          Asset           Blue Chip
                                                                   Income         Balanced        Allocation         Growth 
                                                                    Fund            Fund            Fund              Fund 
                                                                    ----            ----            ----              ----
<S>                                                             <C>               <C>             <C>              <C> 
Additions:
         Employee contributions and rollovers                   $   203,233       $ 114,090       $  44,306       $   238,429
         Employer contributions                                      61,812          26,186           8,800            45,376
         Interest and dividend income                               106,276          27,847           6,698             5,172
         Net appreciation in fair value of investments                               58,458          27,625           249,896    
         Interfund transfers                                        230,415          25,505          43,944           386,564
                                                                ------------      ----------      ----------      ------------

                           Total additions                          601,736         252,086         131,373           925,437

Deductions:
         Benefits and withdrawals                                   177,825          71,370             629            98,751
         Net depreciation in fair value of investments                2,359           
         Administrative expenses                                      1,800             225                               888
         Interfund transfers                                        352,314         284,958          43,388            31,418
                                                                ------------      ----------      ----------      ------------

                           Total deductions                         534,298         356,553          44,017           131,057
                                                                ------------      ----------      ----------      ------------

Net additions (deductions)                                           67,438        (104,467)         87,356           794,380

Net assets available for plan benefits, beginning of year         1,554,491         751,801         195,963           713,774
                                                                ------------      ----------      ----------      ------------

Net assets available for plan benefits, end of year             $ 1,621,929       $ 647,334       $ 283,319       $ 1,508,154
                                                                ============      ==========      ==========      ============

<CAPTION> 

                                                                Lifeline                  
                                                              Systems, Inc.    Participant         Conduit           Total   
                                                               Stock Fund       Loan Fund          Account            Plan 
                                                               ----------       ---------          -------            ----
<S>                                                            <C>              <C>              <C>              <C> 
Additions:
         Employee contributions and rollovers                   $  81,714                                         $   681,772
         Employer contributions                                    15,598                                             157,772
         Interest and dividend income                                 156       $  17,077                             163,226
         Net appreciation in fair value of investments            343,544                                             679,523
         Interfund transfers                                      144,529         143,355                             974,312
                                                                ----------      ----------       -----------      ------------

                           Total additions                        585,541         160,432                           2,656,605

Deductions:
         Benefits and withdrawals                                   4,518           7,826                             360,919
         Net depreciation in fair value of investments                                                                  2,359
         Administrative expenses                                      250                                               3,163
         Interfund transfers                                       59,005         126,924        $   74,337           972,344
                                                                ----------      ----------       -----------      ------------

                           Total deductions                        63,773         134,750            74,337         1,338,785
                                                                ----------      ----------       -----------      ------------

Net additions (deductions)                                        521,768          25,682           (74,337)        1,317,820

Net assets available for plan benefits, beginning of year         232,594         164,554            74,337         3,687,514
                                                                ----------      ----------       -----------      ------------

Net assets available for plan benefits, end of year             $ 754,362       $ 190,236              --         $ 5,005,334
                                                                ==========      ==========       ===========      ============
</TABLE> 

   The accompanying notes are an integral part of the financial statements.

                                       6
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                         NOTES TO FINANCIAL STATEMENTS



A.  Description of the Plan:
    ----------------------- 

    The following description of the Lifeline Systems, Inc. Employee Savings and
    Investment Plan (the "Plan") provides only general information. Participants
    should refer to the plan document for a more complete description of the
    Plan's provisions.

      General

      The Plan is a defined contribution profit-sharing plan covering all
      employees of Lifeline Systems, Inc. (the "Company") who work at least
      1,000 hours during the plan year.  Employees become eligible to
      participate on the entry date following six months of service.  The Plan
      was established in 1984 to provide participants an opportunity to defer
      taxes on their savings and is intended to be a "qualified cash or deferred
      arrangement" under certain sections of the Internal Revenue Code.  It is
      subject to the provisions of the Employee Retirement Income Security Act
      of 1974 (ERISA).

      Contributions

      Participants may contribute from 1% to 15% of their pay on a pretax basis
      subject to the annual dollar limits established by the Internal Revenue
      Service (IRS) and plan limitations.  Participants are immediately vested
      in their contributions and earnings thereon.  Rollover contributions from
      qualified 401(k) plans are also allowed.  Withdrawals are permitted as
      specified by IRS regulations.

      Employer contributions may vary from year to year in such amounts as have
      been voted by the Company pursuant to the provisions of the Plan.  For the
      year ended December 31, 1996, the Company matched 100% of the first 2%
      contributed and 50% of the next 2% contributed up to a maximum of $400 per
      quarter, or $1,600 per year.  This was an increase from 1995 in which the
      Company contributed up to a maximum of $250 per quarter, or $1,000 per
      year per participant.

      Loans

      With the approval of the plan administrator, participants may borrow from
      their vested account balance attributable to employee pre-tax, matching,
      discretionary, and rollover contributions.  The maximum amount that may be
      borrowed is 50% of a participant's vested interest or $50,000, whichever
      is less.  The minimum loan is $1,000.  The interest rate is fixed and will
      be equal to the prime rate plus one and one-half percent.  The maximum
      loan period is five years.  The interest rate charged on participant loans
      ranged from 9.75% to 10.00% in 1996 and 10.00% to 10.50% in 1995.


                                   Continued

                                       7
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED

      Benefits and Withdrawals

      The Plan allows benefits to be paid in the form of a cash payment or an 
      in-kind distribution for employees who invest in the Company Stock Fund.
      Several annuity options may be selected by participants (or their
      beneficiaries) with account balances exceeding $3,500 as of December 1,
      1990.

      The Plan also provides for a preretirement survivor annuity to
      participants of the Plan with account balances exceeding $3,500 as of
      December 1, 1990, which allows 100% of a married participant's benefits to
      be used to provide benefits to his/her spouse if the participant dies
      before benefit payments commence.  This provision may be waived once the
      participant reaches age 35 and obtains written consent from his/her
      spouse.  Benefits to participants not married who die before retirement
      will be distributed to designated beneficiaries.  No death benefits were
      paid in 1996 or 1995.

      Hardship withdrawals are allowed under the provisions of the Plan.

      Vesting

      Plan participants are 100% vested in the value of their own contributions,
      rollovers and employer matching contributions immediately.

      The Plan allows that, upon disability, normal retirement age or death, an
      employee is 100% vested in all contributions.

      In May 1995, when the Company acquired Tele-Response & Support Services,
      Inc., the Plan was amended.  An employee's months of service with Tele-
      Response were credited towards meeting the Company's service requirements
      for eligibility in the Plan.

      Investment Options

      Participants may invest in the following investment options at December
      31, 1996:

       . The Income Fund -

           Bankers Trust Company Pyramid Guaranteed Investment Contracts Fund -
           This fund invests in Guaranteed Investment Contracts and Bank
           Investment Contracts issued by life insurance companies or banks.
           The estimated range of returns for the fund is announced at the
           beginning of each year.  Interest is credited monthly.  The interest
           rate ranged from 5.32% to 5.68% and 5.91% to 6.14% for the years
           ended December 31, 1996 and 1995, respectively.

       . Fidelity Balanced Fund - Funds are invested in shares of a registered
         investment company that invests in stocks and bonds.  This is a
         "moderate risk" mutual fund investing no greater than 75% of its assets
         in common stocks and no less than 25% in bonds.

                                   Continued

                                       8
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED

       . Fidelity Asset Allocation Fund - Funds are invested in shares of a
         registered investment company that invests in stocks, bonds and short-
         term fixed income investments.  The assets will normally be invested
         within the following ranges:  10% - 60% in stocks; 20% - 60% in bonds;
         and 0 - 70% in short-term fixed income instruments.

       . Fidelity Blue Chip Growth Fund - Funds are invested in shares of a
         registered investment company that invests in stocks, seeking long-term
         earnings growth.  At least 65% of its assets are invested in the common
         stocks of large blue chip growth companies.

       . Lifeline Systems, Inc. Common Stock - The Plan's trustee purchases the
         stock on the open market.  For the years ended December 31, 1996 and
         1995, purchases and sales of Lifeline Systems, Inc. Common Stock
         amounted to $142,098 and $216,665, and $211,119 and $0, respectively.

     Participants may allocate their individual accounts among the five
     investment alternatives and may make transfers as specified in the plan
     document.  At December 31, 1996, there were 138 employees participating in
     the Income Fund, 121 employees participating in the Balanced Fund, 88
     employees participating in the Asset Allocation Fund, 195 employees
     participating in the Blue Chip Growth Fund, and 96 employees participating
     in the Stock Fund.  The Plan also has a Conduit Account which is invested
     with PNC Bank and is utilized as a "pass-through" holding account for
     employer and employee contributions. Funds are deposited into this account
     and allocated to other investment options based on participant's elections.



B.  Summary of Significant Accounting Policies:
    ------------------------------------------ 

     Basis of Presentation

     The financial statements of the Plan have been prepared under the accrual
     basis of accounting and in conformity with generally accepted accounting
     principles. Interest and dividend income is recorded as earned on the
     accrual basis. Benefit payments are recorded when paid.

     Investment Valuation

     Investments in mutual and pooled funds and the Company's common stock are
     valued at fair market value using year-end closing prices. Investments in
     group annuity contracts are valued at the contract value (see Note C).
     Participant loans are valued at cost which approximates fair value.

     The Plan presents in the statement of changes in net assets the net
     appreciation (depreciation) in the fair value of its investments which
     consists of the realized gains or losses and the unrealized appreciation
     (depreciation) on those investments.


                                   Continued

                                       9
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


      Contributions

      Contributions from the Company are accrued as of December 31 based upon
      the contribution formula.  Employee contributions are recorded in the
      period in which the employee payroll deductions are made.

      Expenses

      All administrative expenses and fees are paid by the Company except for
      loan fees which are paid by the Plan.

      Estimates

      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 income and expenses
      during the reporting period.  Actual results could differ from those
      estimates.

      Reclassifications

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



C. Investment Contracts with Insurance Company and Bank:
   ---------------------------------------------------- 

   In 1991, the Plan entered into an investment contract with Massachusetts
   Mutual Life Insurance Company ("Mass Mutual").  This investment is maintained
   in a pooled account.  The account is credited with earnings on the underlying
   investments and charged for plan withdrawals and administrative expenses.
   The contract is included in the financial statements at contract value, which
   approximates fair value, as reported to the Plan by Mass Mutual.  Contract
   value represents contributions made under the contract, plus earnings, less
   plan withdrawals and administrative expenses.  Withdrawals are allowed under
   the terms of the contract.  The withdrawal method used for administrative
   purposes is the Current Contract Pro Rata Withdrawal Method.  The contract
   expired on January 2, 1996 resulting in a transfer of $380,697 of assets to
   the Bankers Trust Pyramid Guaranteed Investment Contracts Fund.

   In January 1992 the Plan entered into an investment agreement with Bankers
   Trust Company to enter into the Bankers Trust Pyramid Guaranteed Investment
   Contracts Fund, a separate pooled fund established and managed by Bankers
   Trust Company.  The Fund invests primarily in Guaranteed Investment Contracts
   ("GICs") and Bank Investment Contracts issued by life insurance companies,
   banks or other financial institutions, and any of the Bankers Trust
   Commingled short-term investments funds.  The Fund's assets are valued at
   fair market value, provided, however, assets for which there is no readily
   ascertainable market value are valued at fair value determined in good faith
   by the Trustee of the Fund.  The Fund expects to maintain a constant unit

                                   Continued

                                      10
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED

    value of $1.00.  Withdrawals are permitted and are subject to a deferred
    payout schedule which may have an average maturity of no greater than 2.5
    years and a final payment no later than 5 years from the receipt of such
    notice by the Trustee of the Fund.



D.  Investments:
    ----------- 

    Investments held by the Plan at December 31, 1996 and 1995 are summarized as
    follows:

<TABLE> 
<CAPTION> 

                                                        1996            1995
                                                        Fair            Fair
            Description                                Value           Value
            -----------                                -----           -----
<S>                                                 <C>             <C> 
Income Fund:                                                   
  Bankers Trust Company Pyramid Guaranteed                     
       Investment Contracts Fund                    $1,619,950*     $1,261,916*
  Massachusetts Mutual Life Insurance Company                                 
       Group Annuity Contract                                -         380,617*
Fidelity Balanced Fund                                 641,432*        624,284*
Fidelity Asset Allocation Fund                         401,737*        252,492*
Fidelity Blue Chip Growth Fund                       2,215,056*      1,409,962*
Lifeline Systems, Inc. Common Stock                  1,028,405*        786,913*
Participant Loan Fund                                  295,447         190,236
PNC Bank Conduit Account                                21,439          24,174
                                                    ----------      ----------
 
                                                    $6,223,466      $4,930,594
                                                    ==========      ==========
</TABLE> 

      * Investment represents 5% or more of net assets available for plan
        benefits.

    Information provided by the custodian does not disclose the historical cost
    of investments. This information required by the Department of Labor's Rules
    and Regulations for Reporting and Disclosure under the Employee Retirement
    Income Security Act of 1974 is not available and is not disclosed.


                                   Continued

                                      11
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


E.  Reconciliation of Financial Statements to Form 5500:
    --------------------------------------------------- 

    The following is a reconciliation of net assets available for plan benefits
    per the financial statements to the Form 5500:
<TABLE> 
<CAPTION> 

                                                                                          December 31,          
                                                                                ----------------------------    
                                                                                1996                    1995    
                                                                                ----                    ----    
      <S>                                                                     <C>                    <C>        
      Net assets available for plan benefits per                                                                
        the financial statements                                              $6,349,554             $5,005,334 
                                                                                                                
      Amounts allocated to withdrawing participants                             (830,362)              (874,388)
                                                                              ----------             ----------  

      Net assets available for plan benefits per the Form 5500                $5,519,192             $4,130,946
                                                                              ==========             ==========
</TABLE> 

    The following is a reconciliation of benefits paid to participants per the
financial statements to the Form 5500:

<TABLE> 
<CAPTION> 
                                                                                              Year Ended  
                                                                                          December 31, 1996
                                                                                          -----------------
      <S>                                                                                 <C> 
      Benefits paid to participants per the financial statements                              $494,225

      Add:   amounts allocated to withdrawing participants at
             December 31, 1996                                                                 830,362

      Less:  amounts allocated to withdrawing participants at
             December 31,1995                                                                 (874,388)
                                                                                             --------- 
      Benefits paid to participants per the Form 5500                                         $450,199
                                                                                              ========
</TABLE> 

    Amounts allocated to withdrawing participants are recorded on the Form 5500
    for benefit claims that have been processed and approved for payment prior
    to December 31, but not yet paid as of that date.


F.  Tax Status:
    ---------- 

    The Internal Revenue Service has determined and informed the Company by a
    letter dated July 10, 1995 that the Plan and related trust are designed in
    accordance with applicable sections of the Internal Revenue Code (IRC).  The
    Plan has been amended since receiving the determination letter.  However,
    the plan administrator and the Plan's tax counsel believe that the Plan is
    designed and is currently being operated in compliance with the applicable
    requirements of the IRC.

                                   Continued

                                      12
<PAGE>
 
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


G.  Plan Termination:
    ---------------- 

    The Company intends to continue the Plan indefinitely but reserves the right
    to terminate the Plan at any time without any liability whatsoever for such
    discontinuance or termination.  After payment of expenses by the trustee,
    the Plan would be liquidated and each participant would receive his or her
    interest in the form of a lump-sum payment.



H.  Subsequent Event:
    ---------------- 

    Effective January 1, 1997, the Company changed its Plan administrator from
    New York Life Benefit Services to State Street Solutions.  In addition, the
    Plan has changed its investment advisor to State Street Global Advisors and
    as such now offers ten investment options including stock of the Company to
    which employees may allocate their contributions and the Company-matching
    contributions.  Also, the Company match was increased to a maximum of $500
    per quarter, or $2,000 per year.

                                      13
<PAGE>
          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                             SUPPLEMENTAL SCHEDULE

          Line 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES

                               December 31, 1996
<TABLE> 
<CAPTION> 

Identity of Issue, Borrower,                                                    Rate of                               Current
Lessor or Similar Party                     Description of Investment           Interest             Cost **           Value
----------------------------                -------------------------           --------             -------           -----
<S>                                         <C>                               <C>                    <C>             <C> 
   Bankers Trust Company Pyramid
       Guaranteed Investment Contracts
       Fund                                 Bank Pooled Fund                  5.32% - 5.68 %                         $1,619,950
                                                                                             
   Fidelity Balanced Fund                   Mutual Fund                            N/A                                  641,432
                                                                              
   Fidelity Asset Allocation Fund           Mutual Fund                            N/A                                  401,737
                                                                              
   Fidelity Blue Chip Growth Fund           Mutual Fund                            N/A                                2,215,056
                                                                              
*  Lifeline Systems, Inc. Common Stock      Shares of Common Stock                 N/A                                1,028,405
                                                                                             
*  Participant loans, payment                                                                
   schedule:  fully amortized               Participant Loans                 9.75% - 10.00%                            295,447
                                                                                             
   PNC Bank Conduit Account                 Cash Account                         Floating                                21,439
                                                                                                                     ----------
                                                                            
                                                                                                                     $6,223,466
                                                                                                                     ==========
</TABLE> 
     * Party-in-interest

    ** NYL Benefit Services Company does not maintain historical cost
       information required by the Department of Labor's Rules and Regulations
       for reporting and disclosure under the Employee Retirement Income
       Security Act of 1974. Accordingly, for the purpose of this schedule,
       historical cost information is not presented.


                                      14
<PAGE>

          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                             SUPPLEMENTAL SCHEDULE

                Line 27d - SCHEDULE OF REPORTABLE TRANSACTIONS

    SINGLE TRANSACTIONS IN EXCESS OF 5% OF THE CURRENT VALUE OF PLAN ASSETS

                     for the year ended December 31, 1996


Transactions in excess of 5% of the current value of plan assets as of the
beginning of the plan year are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                Purchase         Selling         Cost of           Net Gain
Identity of Party Involved            Description of Asset        Price           Price          Assets *           (Loss) *
--------------------------            --------------------      ---------        -------         -------          ----------
<S>                                   <C>                       <C>              <C>             <C>              <C>  
Massachusetts Mutual Life
        Insurance Company Group
        Annuity Contract              Group Annuity Contract                     $380,697

Bankers Trust Company Pyramid
        Guaranteed Investment
        Contracts Fund                Bank Pooled Fund           $380,697

PNC Bank                              Conduit Account            $380,697        $380,697
</TABLE> 

  * NYL Benefit Services Company does not maintain historical cost information
    required by the Department of Labor's Rules and Regulations for reporting
    and disclosure under the Employee Retirement Income Security Act of 1974.
    Accordingly, for the purpose of this schedule, historical cost information
    and the related net gain (loss) are not presented.

                                      15
<PAGE>

          LIFELINE SYSTEMS, INC. EMPLOYEE SAVINGS AND INVESTMENT PLAN

                             SUPPLEMENTAL SCHEDULE

                Line 27d - SCHEDULE OF REPORTABLE TRANSACTIONS

  SERIES OF TRANSACTIONS IN EXCESS OF 5% OF THE CURRENT VALUE OF PLAN ASSETS

                     for the year ended December 31, 1996


Series of transactions in excess of 5% of the current value of plan assets as of
the beginning of the plan year are summarized as follows:

<TABLE> 
<CAPTION> 
                                                           Number                    Number
                                    Description              of         Purchase       of         Selling    Cost of       Net
Identity of Party Involved            of Asset          Transactions     Price     Transactions    Price     Asset  *  Gain (Loss)*
--------------------------          -----------         ------------    --------   ------------   -------    --------  ------------
<S>                              <C>                    <C>             <C>        <C>           <C>         <C>       <C> 
Massachusetts Mutual Life
     Insurance Company Group
     Annuity Contract            Group Annuity Contract                                  1       $  380,697
                                                                                                          
Fidelity Balanced Fund           Mutual Fund                 18       $  153,754        15       $  161,813
                                                                                                          
Fidelity Blue Chip Growth Fund   Mutual Fund                 24       $  774,652                          
                                                                                                          
Bankers Trust Company Pyramid                                                                             
     Guaranteed Investment                                                                                
     Contracts Fund              Bank Pooled Fund            16       $  629,561        14       $  357,973
                                                                                                          
Lifeline Systems, Inc.           Stock Fund                  17       $  142,098        13       $  216,665
                                                                                                          
PNC Bank Conduit Account         Cash Account                97       $2,447,549       170       $2,425,973
</TABLE> 

* NYL Benefit Services Company does not maintain historical cost information
  required by the Department of Labor's Rules and Regulations for reporting and
  disclosure under the Employee Retirement Income Security Act of 1974.
  Accordingly, for the purpose of this schedule, historical cost information and
  the related net gain (loss) are not presented.


                                       16