Introduction

The following information should be read in conjunction with our consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Cautionary Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. From time to time, information provided by us or statements made by our employees may contain "forward-looking" information which involves risks and uncertainties. Any statements in this report and accompanying materials that are not statements of historical fact are forward-looking statements (including, but not limited to, statements concerning the characteristics and growth of our market and customers, our objectives and plans for future operations and products and our expected liquidity and capital resources). Such forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties, and accordingly, actual results could differ materially. Factors that may cause such differences include, but are not limited to: (i) the continued and future acceptance of and demand for our products and services; (ii) the outcome of the ongoing litigation involving the company; (iii) the effectiveness of our marketing initiatives; (iv) the rate of growth in the industries of our customers; (v) the presence of competitors with greater technical, marketing, and financial resources; (vi) our customers' ability to access the credit markets; (vii) our ability to promptly and effectively respond to technological change to meet evolving customer needs;
(viii) capacity and supply constraints or difficulties; (ix) our ability to successfully integrate businesses that we acquire; (x) our ability to successfully develop and expand our products, channels and operations; and
(xi) changes in general economic, political or geographical conditions. For a further discussion of these and other significant factors to consider in connection with forward-looking statements concerning us, reference is made to Item 1A "Risk Factors" in our Annual Report on Form 10-K for the period ended December 31, 2008.

We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are a leading global provider of technology products and services for the tracking and recovery of valuable mobile assets. Our proprietary technology, wireless network and unique integration with law enforcement agencies provide an effective means for tracking and recovery of stolen vehicles, construction equipment, motorcycles, cargo and people at risk.

We have three separately managed and reported business segments: domestic, international and Boomerang.

Domestic Segment

We develop and market a variety of products designed to track and recover stolen vehicles, construction equipment, motorcycles, cargo, and people at risk.

Our revenue in the United States is derived primarily from the sale of LoJack Units, LoJack Early Warning, and extended warranty products to consumers. Approximately 85% of domestic sales are made through a distribution network consisting of dealers of new and used automobiles. We have strong consumer brand awareness in the United States.

Given current economic conditions we are looking to maximize the variable installation cost of each LoJack Unit by increasing our installation volumes with certified dealers and other third parties. We monitor the quality of these alternative installations through the use of an expanded quality control process. We maintain full warranty service of LoJack Units, both for the convenience of dealers through which the LoJack Units are sold and to maintain a high degree of quality control and security over our technology.

We also offer warranty products at the point of sale to new customers and through direct sales efforts to our existing customers.

We record additions to deferred revenue for our LoJack Early Warning product and for certain warranty products for which we are deemed to be the primary obligor of the underlying contract. We typically receive full payment within 60 days of the transaction, but the deferred revenue is recognized over the estimated life of the product or service.

In April 2008, we acquired the assets of Locator Systems, of Victoria, British Columbia, Canada for approximately $1,000,000 to facilitate our entry into the market for tracking and rescuing people at risk. Locator Systems provides solutions to track and rescue people at risk, including those with Alzheimer's, autism, Down syndrome and dementia. In February 2009, we re-launched the Locator Systems product and service offerings under the LoJack SafetyNet brand name.

In 2008, and for the three months ended March 31, 2009, LoJack SafetyNet revenue was primarily comprised of the sale of search and rescue receivers, or SAR receivers, personal locator units and replacements parts to Project Lifesaver International, or PLI. In 2009, LoJack SafetyNet will transition from an order fulfillment revenue model servicing one primary customer, PLI, to a fulfillment and service model providing the LoJack SafetyNet solution to caregivers and consumers for a monthly fee. As part of this new business model, we plan to provide the search and rescue receivers directly to participating law enforcement at nominal or no cost.

We acquired 60% of SCI, in two transactions in 2007 and 2008, respectively. We also license to SCI the use of the LoJack trademark for its cargo and tracking recovery solution, called LoJack InTransit™. LoJack InTransit™ provides organizations with integrated prevention, detection, investigation and recovery solutions that reduce and manage risk related to cargo transport. We will continue to collaborate with SCI on business development activities and to provide them with product development support. Revenue for SCI is derived from the sale of tracking devices as well as subscription fees for monitoring service alerts and activity reporting.

International Segment

Internationally, our licensed and owned and operated stolen vehicle recovery technology is operational in 32 countries and territories around the world. We have a licensed presence in Latin America, South America, Europe, Africa and the Asia Pacific Rim. Revenue from this segment consists of product sales to our licensees, royalties and license fees.

We record additions to deferred revenue for international license fees and recognize the revenue over the term of the license (generally ten years). Royalty revenue is recognized when earned.

Italy is the only country outside of the United States and Canada where we own and operate a recovery network. Consumers who purchase a LoJack Unit in Italy are required to purchase a service contract with LoJack Italia. The terms of service contracts offered range from 12 to 60 months and are payable in full upon activation of the related unit or renewal of a previous service contract.

Boomerang Segment

Revenue from our Boomerang segment is derived primarily from the sale of Boomerang Espion, Boomerang Espion Alert, Boomerang, Boomerang2 and BoomerangXpress Units, related products, and service contracts. A majority of the insurance companies based in Quebec and Ontario offer rebates to customers who install a Boomerang Unit in their high priced or high risk of theft vehicles, and in many instances, require installation of a Boomerang Unit in such vehicles.

Consumers who purchase a Boomerang Unit are required to also purchase a service contract. The terms of service contracts offered range from 12 to 60 months and are payable in full upon activation of the related unit or renewal. Customers may also elect a monthly payment option.

Key Economic Factors and Trends and our Business

The general global economic outlook continues to be negative, due to the uncertain financial market environment. In 2009, the global automotive industry sales volume is projected to continue to weaken, with a full-year decline of approximately 15% from 2008 levels and a 40% decline compared to 2006 levels. Consumer and business spending has been severely constrained by credit conditions and general economic weakness. The impact of policy actions designed to address the crisis is not yet known and the current outlook is particularly uncertain.

The current retrenchment in consumer spending is expected to continue through 2009, as even consumers who are willing to spend may find that availability of automotive loans has been diminished as a result of the credit crisis. Over the longer term, spending on new vehicles is expected to resume its previous correlation with growth in per capita income.

The global economic crisis has included a sudden and substantial decline in the global automotive industry, with aftermarket products like LoJack Units being particularly adversely affected. The dramatic decline in automotive industry sales volume, combined with tight credit markets, and other economic factors and trends described above have considerably impacted our earnings and liquidity.

As the economic environment worsens, we believe that our continued focus on executing our strategic goals for 2009 is the appropriate strategy to achieve our objectives to:

• Effectively manage our business in an increasingly difficult global macro-economic environment by balancing investment in programs and technology necessary for future growth with aggressive cost management to maintain our solid financial position;

• Upgrade our domestic processes and systems to deliver more customer centric, efficient and flexible solutions that will meet increasing demands and address our changing business;

• Continue to enhance our core technology;

• Continue to drive international expansion by adding new licensees and geographies and partnering with our existing licensees to manage global economic challenges;

• Support our operations in Italy and at Boomerang; and

• Support LoJack SafetyNet and SCI in developing solutions for people at risk and cargo security, respectively.

Critical Accounting Policies

The consolidated financial statements include the accounts of LoJack, its wholly-owned subsidiaries, and SCI. Intercompany transactions and balances are eliminated in consolidation. Management is required, in certain instances, to use estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto. The actual results could differ from those estimates. Our accounting policies are described in Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the period ended December 31, 2008. A "critical accounting policy" is one that is both important to the portrayal of our financial condition and results of operations and requires management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Results of Operations for the three months ended March 31, 2009 versus the three months ended March 31, 2008

Revenue

The following table presents revenue by our segments (dollars in thousands):



                                Three Months Ended
                                    March 31,          Percentage Change
                                 2009         2008       2009 vs. 2008
              Domestic        $    21,020   $ 30,909                 -32 %
              International         3,986     10,353                 -61 %
              Boomerang             2,835      4,867                 -42 %

              Total revenue   $    27,841   $ 46,129                 -40 %

For our domestic segment, revenue for the three months ended March 31, 2009 decreased by $9,889,000, as compared to the same period in 2008.

In the three months ended March 31, 2009, our domestic revenue continued to be adversely impacted by the financial crisis which has caused a widespread credit freeze, liquidity problems, decreased consumer confidence and a dramatic decline in the capital markets. All of these factors had a powerful impact on the performance of U.S. businesses, with the domestic auto industry and related aftermarket products like LoJack Units being particularly hard hit. U.S. domestic auto sales in the first quarter of 2009 reflected a 38% drop in volume and a seasonally adjusted annual rate of 9.5 million new vehicles far below original industry expectations of 11.5 million new vehicle sales for the year. The decline in revenue was primarily as follows:

• A decrease of $10,585,000, or 42%, in revenue resulting from a 45% decrease in the number of LoJack Units sold during the period;

• A decrease of $344,000, or 15%, in revenue recognized from the sale of warranty products; offset by

• An increase of $592,000 in other revenue, which is primarily related to royalty revenue from an increase in the fair market value of the stock warrants issued by Absolute Software; and

• The inclusion of $797,000 in revenue from Locator Systems and SCI in the three months ended March 31, 2009, for which there was no comparable revenue in the same period in 2008.

For the three months ended March 31, 2009, revenue related to our international segment decreased by $6,367,000, as compared to the same period a year ago. This decline was primarily due to a 66% decline in unit volume compared to the comparable period one year ago. Our international unit volume and revenue reflect the impact of the widening global economic crisis, and the effects of a build-up of inventory at the end of 2008 by certain licensees in anticipation of better economic conditions during 2009. The economic uncertainty in the international markets has impacted the buying patterns of our licensees, as they work to preserve liquidity, reduce foreign exchange exposure and minimize inventory.

For the three months ended March 31, 2009, revenue at our Boomerang segment decreased by $2,032,000, as compared to the same period a year ago. The decline in value of the Canadian dollar relative to the U.S. dollar negatively affected revenue by $672,000 or 19%. The remainder of the decrease was primarily due to the impact of the same economic challenges as our domestic auto business, as well as the continued shift in the Canadian auto market away from high-end vehicles, where Boomerang has historically had a high penetration rate, and the attrition of analog subscribers following the transition to digital technology during 2008.

Cost of Goods Sold

The following table presents cost of goods sold by our segments (dollars in
thousands):



                                      Three Months Ended
                                          March 31,          Percentage Change
                                       2009         2008       2009 vs. 2008
         Domestic                   $    10,582   $ 14,956                 -29 %
         International                    2,077      4,738                 -56 %
         Boomerang                        1,573      2,619                 -40 %

         Total cost of goods sold   $    14,232   $ 22,313                 -36 %

As a percentage of revenue, cost of goods sold was 51% and 48% for the three months ended March 31, 2009 and 2008, respectively.

As a percentage of domestic revenue, cost of goods sold relating to our domestic segment was 50% and 48% for the three months ended March 31, 2009 and 2008, respectively.

Domestic unit volumes declined 45% in the three months ended March 31, 2009 as compared to the same period in 2008. While we undertook a thorough evaluation of our installation costs and methodologies in the fourth quarter of 2008, the continuing rapid decline of the U.S. auto market in the first quarter of 2009 led us to make additional installation staff and expense reductions which did not provide us with any gross margin benefit in the first quarter of 2009 as these reductions took place very late in the quarter. Absent another dramatic decline in new U.S. automobile sales, we expect that the cost reductions we have made will result in installation costs as a percentage of sales in future quarters to be more in line with our historical percentages.

The combined cost of goods sold associated with Locator Systems and SCI for the three months ended March 31, 2009 was 48% of their combined revenue.

As a percentage of international revenue, cost of goods sold relating to our international segment was 52% and 46% for the three months ended March 31, 2009 and 2008, respectively. The increase in cost of goods sold as a percent of revenues was due primarily to the significant reduction in unit revenues from sales to our licensees and an increase in network operations expenses in Italy.

As a percentage of Boomerang revenue, cost of goods sold relating to our Boomerang segment was 55% and 54% for the three months ended March 31, 2009 and 2008, respectively.

Operating Expenses

The following table presents our operating expenses (dollars in thousands):



                                        Three Months Ended
                                            March 31,          Percentage Change
                                         2009         2008       2009 vs. 2008
      Product development             $     1,600   $  1,782                 -10 %
      Sales and marketing                   7,575     11,089                 -32 %
      General and administrative            8,958      8,199                   9 %
      Depreciation and amortization         1,691      1,744                  -3 %

      Total operating expenses        $    19,824   $ 22,814                 -13 %

Product Development

As a percentage of revenue, product development expenses were 6% and 4% for the three months ended March 31, 2009 and 2008, respectively. Product development expense decreased $182,000 for the three months ended March 31, 2009 as compared to the same period in 2008. The decrease in 2009 was primarily due to a decrease of $82,000 in personnel-related costs, to support new product development, and decreased research and development costs of $100,000 primarily due to the timing of milestone payments made on the development of the next generation LoJack Unit.

In 2009, we expect product development expenses as a percentage of revenue to continue to be higher in 2009 that in 2008 due to our plans to develop new products that meet the changing technology requirements of automobile manufacturers and to expand the LoJack technology to other commercial applications.

Sales and Marketing

As a percentage of revenue, sales and marketing expenses were 27% and 24% for the three months ended March 31, 2009 and 2008, respectively.

The decrease of $3,514,000 for the three months ended March 31, 2009 as compared to the same period in 2008 was primarily attributable to:

• Decreased advertising expenses of $1,258,000 incurred in conjunction with the rollout of our cable television advertising campaign in 2008 with no comparable expense in the first quarter of 2009;

• Decreased compensation expenses of $996,000 based upon a reduction in the workforce as well as decreased incentive compensation as a result of lower sales volumes;

• Decreased travel and entertainment costs of $367,000;

• Decreased bad debt expenses of $394,000 as a result of improved aging statistics;

• Decreased dealer support and incentive costs of $132,000 as a result of lower sales volume;

• Decreased trade marketing, direct mail and promotions expenses of $145,000; and

• Decreased marketing expenses of $160,000 at our Boomerang segment which were higher in the first quarter of 2008 as a result of the segment's analog to digital conversion efforts.

General and Administrative

As a percentage of revenue, general and administrative expenses were 32% and 18% for the three months ended March 31, 2009 and 2008, respectively.

The increase of $759,000 for the three months ended March 31, 2009 as compared to the same period in 2008 was primarily attributable to:

• Increased general and administrative expenses of $781,000 related to the addition of the operations of Locator Systems in April 2008, and SCI, as a result of the consolidation of their operations beginning in August 2008, for which there are no comparable expenses in the first quarter of 2008;

• Increased legal expenses of $674,000, which were primarily attributable to legal costs related to the arbitration proceeding with our former licensee in China; offset by

• Decreased general and administrative expenses of $373,000 at our Boomerang segment resulting from the workforce reduction which took place in the fourth quarter of 2008; and

• Decreased travel expenses of $235,000.

Depreciation and Amortization

Depreciation and amortization expenses decreased by $53,000 for the three months ended March 31, 2009 as compared to the same period one year ago. The decrease is primarily related to a small number of assets becoming fully depreciated and not being replaced.

Other (Expense) Income

The following table presents our other (expense) income (dollars in thousands):



                                       Three Months Ended
                                            March 31,            Percentage Change
                                       2009           2008         2009 vs. 2008
      Interest income                $     157       $   599                   -74 %
      Interest expense                    (150 )        (319 )                 -53 %
      Equity loss in affiliate              -           (127 )                -100 %
      Other (expense) income              (592 )         202                  -393 %

      Total other (expense) income   $    (585 )     $   355                  -265 %

Other (expense) income for the three months ended March 31, 2009 decreased by $940,000 as compared to the same period in 2008. This decrease is primarily attributable to the following:

• Decreased interest income of $442,000, due to the decrease in our average investment balance versus the prior year, and a decrease in short-term interest rates;

• Decreased interest expense of $169,000, due to a decrease in short-term interest rates;

• Decreased equity loss in affiliate of $127,000 as a result of SCI's results being consolidated for the three months ended March 31, 2009, but not for the same period in 2008; and

• Decreased other income of $794,000 which was primarily due to: (i) a $459,000 decrease in gains related to valuing foreign currency and foreign currency transactions (primarily the Euro); and (ii) a $269,000 increase in losses associated with marketable securities, primarily related to a $308,000 other-than-temporary impairment of our investment in our French licensee; offset by (iii) a $29,000 gain associated with the valuation of Absolute common stock.

Provision for Income Taxes

The provision for income taxes decreased by $583,000, or 161%, for the three months ended March 31, 2009, as compared to the same period a year ago primarily due to a $8,157,000 decrease in pre-tax income. Our effective tax rates for the three months ended March 31, 2009 and March 31, 2008 were 3.3% and 26.8%, respectively. The decrease in the effective tax rate as compared to the same period of the prior year was primarily due to losses attributable to jurisdictions with higher effective tax rates.

Net (Loss) Income and Earnings Per Share Attributable to LoJack Corporation

As a result of the foregoing, earnings decreased by $7,574,000 from net income of $994,000 for the three months ended March 31, 2008, to a loss of $6,580,000 for the three months ended March 31, 2009. For three months ended March 31, 2009, the loss per share attributable to LoJack Corporation was $0.38 per diluted share as compared to earnings of $0.05 per diluted share in the same period in 2008.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51, or SFAS 160. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. We adopted SFAS 160 in the first quarter of 2009. SFAS 160, which was retrospectively applied relative to presentation and disclosure requirements, requires the noncontrolling interest to be separately presented as a component of stockholders' equity on the consolidated balance sheet and on the consolidated statement of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, or SFAS 161. SFAS 161 applies to all derivative instruments and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133 and related hedged items accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations, and cash flows. SFAS 161 was effective for us beginning January 1, 2009. Our adoption of SFAS 161 did not have a material impact on our consolidated financial position as of March 31, 2009 or our results of operations for the three months ended March 31, 2009.

In February 2008, the FASB issued FSP No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal periods beginning after November 15, 2008. We adopted SFAS 157 to our nonfinancial assets and nonfinancial liabilities, which include assets and liabilities acquired in connection with business combinations and intangible assets. Our adoption of SFAS 157 for nonfinancial assets and liabilities did not have a material impact on our consolidated financial position as of March 31, 2009 or our results of operations for the three months ended March 31, 2009.

In April 2009, the FASB issued three FASB Staff Positions, or FSPs, related to fair value measurement and disclosure. FSP FAS 157-4, Determining Fair Value . . .