Introduction

The following information should be read in conjunction with our unaudited condensed 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, 2011.

Safe Harbor Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 and other securities laws contain 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 expected capital expenditures, our objectives and plans for future operations and products and our expected liquidity, revenue, profit and capital expenditures and 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 our products and services; (ii) our ability to obtain financing from lenders; (iii) the outcome of ongoing litigation involving the company;
(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) our ability to successfully expand our operations; (ix) changes in general economic or geopolitical conditions, including the European debt crisis;
(x) conditions in the automotive retail market; and (xi) the expected timing of purchases by our customers. 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 year ended December 31, 2011 and in our other periodic filings with the Securities and Exchange Commission.

We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. Except as required by law, 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 and people with cognitive conditions such as autism or Alzheimer's who are at risk of wandering, or people at risk. Our proprietary technology, wireless network and unique integration with law enforcement agencies provide an effective means for the tracking and recovery of stolen vehicles, construction equipment, motorcycles, cargo and people at risk.

We have three separately managed and reported business segments: North America, International and All Other. Our North America segment is comprised of our domestic operation, which sells products and services that operate in 28 states and the District of Columbia in the United States, as well as our wholly owned subsidiary, Boomerang, a provider of stolen vehicle recovery products in Canada. Our International segment sells products, licenses or owns and operates LoJack proprietary vehicle recovery technology in more than 30 countries and territories throughout Europe, Africa and Latin America and through our wholly owned subsidiary in Italy, LoJack Italia, SRL, or LoJack Italia. Our All Other segment includes LoJack SafetyNet and SCI, which are providers of technology for the tracking and rescue or recovery of people at risk and of valuable cargo and business information, respectively.

North America Segment

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 our sales in the United States market are made through a distribution network consisting of dealers of new and used automobiles. We believe that we have strong consumer brand awareness in the United States.

The price paid by the consumer for a LoJack Unit includes installation. We maintain a workforce that performs these installations and we supplement our installation capacity by contracting with and certifying select dealers and other third parties to install our products. We continually seek to minimize the fixed costs related to the installation of a LoJack Unit by increasing our installation capacity with certified dealers and other third parties. We monitor the quality of these installations through the use of an expanded quality control process.

We record additions to deferred revenue for the monitoring service related to our LoJack Early Warning product and for certain warranty products for which we are the primary obligor of the underlying contract. We typically receive full payment within 60 days of the transaction, but recognition of the deferred revenue is recognized over the estimated life of the product or service. During the last quarter of 2011, we transferred the servicing and liability obligations for the majority of our extended warranty contracts originated in 2010 to a third party, eliminating any additional services or liability exposure as the primary obligor for those contracts. During the first quarter of 2012, we transferred the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to the third party and, beginning in 2012, all servicing and liability obligations associated with new contracts sold are being transferred to the third party upon purchase by the consumer. As such, for the majority of extended warranty contracts originated after 2011, we will recognize revenue upon delivery as opposed to deferring the revenue and recognizing it over the life of the contract.

Our revenue in Canada is derived primarily from the service contracts related to the sale and installation of Boomerang Espion, Boomerang Espion Alert, Boomerang, Boomerang2 and BoomerangXpress Units. Customers who purchased a Boomerang Unit (prior to the transition to LoJack Units) were required to enter into a service contract with Boomerang. The terms of service contracts offered ranged from 12 to 60 months and were generally payable in full upon the activation of the related unit or renewal of a previous service contract. Customers were also offered a month-to-month option. Beginning in 2011, Boomerang introduced the LoJack technology in Canada in the province of Quebec and the business model and product offerings are now similar to those of the United States. In January of 2012, the LoJack technology was introduced in Ontario.

Many insurance companies based in Quebec offer rebates to customers who install a Boomerang or LoJack Unit in their vehicles, and in some instances, insurance companies require installation of a Boomerang or LoJack Unit in such vehicles.

International Segment

Internationally, our stolen vehicle recovery technology is operational in more than 30 countries and territories around the world. We have existing licensees in South America, Mexico, the Caribbean, Africa and Europe. Revenue from this segment consists of product and infrastructure 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 North America where we own and operate a stolen vehicle recovery network. Consumers who purchase LoJack Units in Italy are also required to enter into a service contract with LoJack Italia. The terms of service contracts offered range from 12 to 84 months and are payable in full either upon activation of the related unit or renewal of the stolen vehicle recovery service or on a monthly basis. Service revenue from these contracts is deferred and recognized over the term of the service contract.

All Other Segment

Our All Other segment revenue is derived from our SCI and LoJack SafetyNet operations. SCI revenue is derived from the sale of cargo and business information tracking devices as well as subscription fees for monitoring service alerts and activity reporting.

LoJack SafetyNet revenue is primarily comprised of the sale of Personal Locator Units, or PLUs, replacement parts and related service contracts.

Key Economic Factors and Trends and our Business

During 2011, global economic growth slowed to an estimated 3%, as the worsening debt crisis in Europe, natural disasters in Japan and Thailand, and moderating economic growth in several key newly-developed and emerging markets all contributed to slow growth. During 2012, global economic growth is expected to remain in the 3% range. The European debt crisis represents a key risk to economic growth. The current economic performance in many European countries, particularly Greece, Ireland, Italy, Portugal and Spain, is being impacted by excessive government debt levels and the resulting budget austerity measures that are contributing to weak economic growth.

The U.S. automotive industry experienced a strong start to 2012, with retail sales increasing by 11% during the first quarter as compared to the same period in 2011. Industry experts expect this trend to continue throughout the year and are projecting growth of approximately 10% for both retail and total light vehicle sales for 2012. There are many factors which create a favorable outlook for the consumer demand for new vehicles, including an average vehicle age of almost 11 years, historically low interest rates, increasing credit availability, adequate inventories of new vehicles and new vehicle models being added to manufacturers' product lines. These factors, in addition to limited used vehicle inventories and higher used car prices, combine to make new car purchases attractive to consumers and profitable for those in the value chain.

Gas prices continued to rise during the first quarter of 2012 but have yet to negatively impact the demand for new vehicles. Estimates on the potential impact of rising gas prices are varied; however the industry consensus is that demand will remain strong into the mid to high $4 per gallon price range. As gas prices have risen, the industry has seen an increase in the sales of compact and sub-compact vehicles, which is consistent with the short-term behavioral changes seen with historical temporary gas price hikes. It is unclear how a sustained period of high gas prices would impact manufacturers' model mix, particularly given consumer preference to stay with their current vehicle type and the improving fuel economy across the fleet.

While there continues to be variability in growth rates amongst brands, the amount of variability and unfavorable brand rotation that impacted our performance during 2011 has begun to moderate. This trend may have positive effects on our business if our more highly penetrated brands return to growth and regain market share and we are successful in continuing to broaden our brand portfolio to include other brands with above average growth.

The favorable market conditions and the increase in inventory levels amongst Japanese manufacturers following the supply interruption caused by last year's tsunami has resulted in increased dealer receptivity to our bulk installation programs and increased volumes within existing standard and bulk installation accounts. Additionally, the solid close to 2011 and optimistic start for the U.S. automotive market during the first quarter of 2012 have created higher confidence levels amongst automotive dealers and manufacturers.

Demand for our heavy equipment, or commercial, product was strong during the first quarter of 2012 and there has been a high level of interest in our recently announced ruggedized self-powered product. The majority of the growth in the commercial industry is derived from rentals, where industry growth of close to 7% is expected in 2012. While some of the rental growth in 2012 is expected to come from increased demand as the construction industry recovers, the economic benefits of renting generally have more customers adopting the rental model to meet their project needs. We believe that the commercial LoJack Unit offers an appealing option to rental companies and small business owners looking for effective asset management solutions.

In our Canadian business, we have built out and launched the LoJack technology while increasing our emphasis in both the commercial and dealer channels as well on our expansion in the Ontario market. Increased competition and fewer insurance mandates have challenged our growth within the insurance market in the province of Quebec. Demand for our commercial product in the Canadian market has been strong, particularly in the province of Ontario. In addition, our reentrance into the automotive dealership channel in Ontario with LoJack technology has been met with favorable responses from dealers.

International Segment

Our international business declined from 2011 as a result of reduced shipments to a number of our licensees. In the past, we have experienced some quarterly fluctuation in purchases in the International segment, with sales in many of our international markets tending to be higher in the fourth quarter of the year as licensees seek to achieve lower pricing with higher annual unit purchases. We also are experiencing downward pricing pressure and reductions in unit volumes in a number of our markets due to a variety of factors that vary from country to country. Those factors include the relative maturity of the stolen vehicle recovery market in certain highly developed territories, re-use of our products in certain territories, declining theft rates in certain territories and increasing competitive pressures by both Radio Frequency, or RF, and GPS based tracking systems. We also are faced with uncertainty regarding developing governmental regulations in Argentina and Brazil that may affect sales to our licensees in those countries. Certain of our European territories are experiencing an economic downturn, which is adversely affecting the sale of new vehicles and our products, mitigated in part by a positive market response to our new self-powered product.

All Other Segment

The challenges we have faced in the automotive sector have reinforced the importance of our diversification efforts, which include the extension of the LoJack brand and the introduction of products for cargo and people at risk.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies and estimates which management believes are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition and deferred revenue, accounts receivable, valuation of investments, and income taxes. See the section entitled "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2011 for further discussion of our critical accounting policies and estimates.

Recently Adopted Accounting Guidance

See Note 1 to the accompanying condensed consolidated financial statements for accounting standards adopted in 2012.

Results of Operations for the three months ended March 31, 2012 versus the three months ended March 31, 2011

Revenue

Revenue for the three months ended March 31, 2012 increased by $3,963,000 as
compared to the same period in 2011. The following table presents revenue by our
segments (in thousands):



                               Three Months Ended
                                    March 31,             Percentage Change
                                2012          2011          2012 vs. 2011
             North America   $   27,123     $ 22,367                      21 %
             International        6,275        7,214                     (13 )
             All Other              904          758                      19

             Total revenue   $   34,302     $ 30,339                      13 %

Revenue related to our North America segment increased by $4,756,000 for the three months ended March 31, 2012, as compared to the same period in 2011.

Revenue in North America for our dealer channel increased 24% when compared to the same period in 2011. Revenue in North America from our heavy equipment, or commercial, channel increased 92% over the same period in 2011. Our motorcycle and direct distribution channels in the United States market saw revenue declines of 16% and increases of 44%, respectively, as compared to the same period in 2011.

The 21% increase in our North America segment revenue for the three months ended March 31, 2012 as compared to the same period in 2011 was primarily attributable to:

• An increase of $3,597,000 in revenue from our warranty products. The increase was primarily due to the transfer of the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to a third party as the primary obligor during March 2012, thus eliminating any additional services or future liability for the Company from those contracts. As a result, approximately $3,134,000 of previously recorded deferred revenue that was being recognized over time was accelerated and recognized as current revenue during the first quarter of 2012;

• An increase of $1,119,000, or 8%, in revenue from LoJack Units, primarily due to an 11% increase in the number of units sold, partially offset by a 3% decrease in average revenue per unit; and

• A decrease of $351,000, or 13%, in revenue from our Canadian business, primarily driven by a $530,000, or 21%, decrease in service revenue as the average number of total Canadian subscribers dropped 20% to 48,405 for the three months ended March 31, 2012 as compared to 60,688 for the same period in 2011. The decrease in service revenue was partially offset by a $179,000, or 72%, increase in unit revenue primarily due to a 67% increase in the number of base units sold from 1,052 to 1,761 and a 3% increase in average revenue per unit.

Revenue related to our International segment decreased $939,000 for the three months ended March 31, 2012, as compared to the same period in 2011. The decrease was primarily due to a decrease of $947,000, or 16%, in product revenue from our licensees due to a 28,000, or 32%, decrease in the number of units sold in the first quarter of 2012 compared to the same period in 2011, partially offset by a 24% increase in average revenue per unit.

Revenue related to our All Other segment increased $146,000 for the three months ended March 31, 2012 compared to the same period in 2011. The increase was primarily due to an increase of $177,000, or 26% in revenue from SCI, partially offset by a decrease of $32,000, or 46%, in SafetyNet revenue for the three months ended March 31, 2012 as compared to the same period in 2011.

Cost of Goods Sold

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



                                    Three Months Ended
                                         March 31,             Percentage Change
                                     2012          2011          2012 vs. 2011
       North America              $   12,618     $ 11,308                      12 %
       International                   2,737        3,730                     (27 )
       All Other                         284          261                       9

       Total cost of goods sold   $   15,639     $ 15,299                       2 %

As a percentage of total revenue, total cost of goods sold was 46% and 50% for the three months ended March 31, 2012 and 2011, respectively.

As a percentage of North America revenue, cost of goods sold relating to our North America segment was 47% and 51% for the three months ended March 31, 2012 and 2011, respectively. The decrease in cost of goods sold as a percentage of revenue was largely due to the recognition of $3,134,000 of previously deferred revenue upon the transfer of the servicing and liability obligations for the majority of our extended warranty contracts originated in 2011 to a third party as the primary obligor during March 2012, partially offset by an accrual of approximately $500,000 related to the battery evaluation discussed in Note 10 of the accompanying condensed consolidated financial statements. Additionally, cost of goods sold as a percentage of revenue decreased as lower defect costs were incurred in our Boomerang business during the three months ended March 31, 2012 as compared to the same period in 2011 due to the transition from Boomerang Units to LoJack Units during 2011.

As a percentage of International revenue, cost of goods sold relating to our International segment was 44% and 52% for the three months ended March 31, 2012 and 2011, respectively. The decrease in cost of goods sold as a percentage of revenue was primarily due to lower unit sales resulting in an increase in average revenue per unit based on the volume pricing model for our licensees.

As a percentage of All Other revenue, our cost of goods sold associated with the All Other segment for the three months ended March 31, 2012 and 2011 was 31% and 34%, respectively. The decrease in cost of goods sold as a percentage of revenue was primarily due to an increase in volume at SCI, resulting in lower fixed cost of goods sold per unit.

Operating Expenses

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



                                       Three Months Ended
                                            March 31,             Percentage Change
                                        2012          2011          2012 vs. 2011
     Product development             $    1,514     $  1,449                       4 %
     Sales and marketing                  6,969        6,585                       6
     General and administrative           9,685        7,983                      21
     Depreciation and amortization        1,140        1,666                     (32 )

     Total operating expenses        $   19,308     $ 17,683                       9 %

As a percentage of total revenue, product development expenses were 4% and 5% for the three months ended March 31, 2012 and 2011, respectively.

Product development expenses increased $65,000 for the three months ended March 31, 2012 as compared to the same period in 2011, primarily due to an increase of $84,000 in compensation expenses and a $94,000 increase in research and development expenses, partially offset by a $58,000 decrease in travel expenses and a $37,000 decrease in office rent expense.

Sales and Marketing

As a percentage of total revenue, sales and marketing expenses were 20% and 22% for the three months ended March 31, 2012 and 2011, respectively.

The increase of $384,000 in sales and marketing expenses for the three months ended March 31, 2012 as compared to the same period in 2011 was primarily attributable to an increase in advertising expenses of $241,000, an increase in bad debt expenses of $74,000, an increase of $48,000 in production agency expense and an increase of $56,000 in travel expenses, partially offset by a $45,000 decrease in total compensation expense.

General and Administrative

As a percentage of total revenue, general and administrative expenses were 28% and 26% for the three months ended March 31, 2012 and 2011, respectively.

The increase of general and administrative expenses of $1,702,000 for the three months ended March 31, 2012 as compared to the same period in 2011 was primarily attributable to:

• Increased compensation expenses of $863,000, primarily attributable to an increase of $186,000 in salaries expenses, an increase of $176,000 in other compensation expenses, an increase of $248,000 in bonus expense and a $241,000 increase in benefits expense; and

• An increase of $402,000 due to a reversal recorded during the first quarter of 2011 of an accrual for custom tariffs no longer owed.

The remaining increase related to smaller changes in various other general and administrative expense accounts.

Depreciation and Amortization

As a percentage of total revenue, depreciation and amortization expense was 3% and 5% for the three months ended March 31, 2012 and 2011, respectively.

Depreciation and amortization expense decreased by $526,000 for the three months ended March 31, 2012 as compared to the same period in 2011. The decrease is primarily related to retirement of assets and certain assets becoming fully depreciated during 2011 and the three months ended March 31, 2012.

Other Income (Expense)

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



                                     Three Months Ended
                                         March  31,              Percentage Change
                                     2012           2011           2012 vs. 2011
    Interest income                $      38       $   730                      (95 )%
    Interest expense                    (170 )        (164 )                      4
    Other income (expense)               739           666                       11

    Total other income (expense)   $     607       $ 1,232                      (51 )%

. . .