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 transferred to the third party upon purchase by the consumer. As such, for the majority of extended warranty contracts originated after 2011, we 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 from Boomerang Units to LoJack Units during 2011) were required to enter into a service contract. The terms of the 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, we 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. Purchasers of LoJack Units in Canada are not required to enter into a service contract, however the tracking and recovery of LoJack Units in Canada is still performed internally and thus we continue to recognize service revenue for a portion of each sale.
Many insurance companies based in Quebec offer rebates to customers who install a LoJack Unit in their vehicles, and in some instances, insurance companies require installation of a LoJack Unit in such vehicles. International Segment
Internationally, our stolen vehicle recovery technology is operational in approximately 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 be in the 3% range, with some downward pressure in recent months. 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. Growth rates in China, Brazil and India have also slowed. In a recent statement, the International Monetary Fund indicated that it will reduce its estimate for global growth this year based on weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China. This global slowdown has also increased trade tensions in Latin America, resulting in restricted access levels to these markets.
North America Segment
The U.S. automotive industry continued to demonstrate strong growth in the second quarter of 2012 in spite of challenges in the domestic and international markets. Second quarter retail sales increased 15% as compared to the same period in 2011 and outpaced the performance of the first quarter of 2012. Industry experts expect this trend to continue throughout the year and are projecting growth of approximately 12% 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, a scrappage

rate of close to 14 million, historically low interest rates, increasing credit availability, and 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 declined significantly during the second quarter of 2012, reflecting the reduction in global demand. While sudden changes in prices may influence model mix, the recent decrease is not expected to influence overall demand for new vehicles, as is reflected in industry analysts maintaining their forecasts for 2012.
While there continues to be variability in growth rates amongst vehicle brands, the amount of variability and unfavorable brand rotation that impacted our performance during 2011, has abated. This trend can have positive effects on our business as our more highly penetrated brands return to growth and regain market share and we are successful in continuing to broaden our brand portfolio to leverage above average growth amongst our brands with lower penetration. The favorable market conditions and the increase in inventory levels amongst Japanese vehicle manufacturers following the supply interruption caused by last year's tsunami have resulted in increased dealer receptivity to our bulk installation programs and increased volumes within existing standard and bulk installation accounts. Additionally, dealers and manufacturers are increasingly confident with the first two quarters of 2012 having performed above initial expectations. However, sluggish U.S. employment growth and lackluster GDP growth continue to be obstacles to sustaining this industry optimism.
Demand for our heavy equipment, or commercial, product continued to be strong during the second 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 for 2012. While some of the expected rental growth in 2012 will come from increased demand as the construction industry recovers, the economic benefits of renting have more customers adopting the rental model to meet their project needs. 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 emphasis in both the commercial and dealer channels as well as on our expansion into 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 re-entrance 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 quarterly fluctuations 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.
In Argentina, recently implemented controls and restrictions on the importation of goods and the exchange of Argentine Pesos for U.S. Dollars have made the exportation of goods from any country to Argentina more difficult. Certain of our European territories are experiencing an economic downturn deepened by government wage and pension reductions, rising unemployment and tight consumer credit availability. These conditions have led to declines in consumer spending and are adversely affecting the sale of new vehicles. Certain European automobile industry trade associations have stated that they expect car sales in Europe to decline by 7% for the 2012 fiscal year. The effect of lower car sales has been mitigated in part by a positive market response to our new self-powered product.
Our business in Italy is continuing to gain traction and delivered growth in terms of both revenue and subscribers during the first six months of 2012. We entered 2012 with approximately 20,200 subscribers in Italy, and continued growing the number of subscribers, adding approximately 1,900 net new subscribers in Italy during the second quarter for a total of 24,300 subscribers as of June 30, 2012. While we continue to grow our business in Italy, our overall performance is slower than planned in part due to the overall weakness in the Italian economy, tightened access to credit by both our channel partners and consumers and the continuing decline in new vehicle registrations. During the first six months of 2012, new vehicle registrations are reported to have declined by 19% as compared to the same period in 2011. All Other Segment
During the quarter, the incidents of cargo theft continued to trend upward along with commodity product line value increases. When coupled with increased regulatory emphasis on shipping condition integrity, brand owners and manufacturers continue to

seek the type of visibility and risk reduction that SCI provides, both in the U.S. and for the international segments of its clients' supply chains. Supply chain extension into global markets is a trend that continues to build and we believe that SCI is positioned to capitalize on this trend. 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.
Accounting Guidance Issued But Not Yet Adopted See Note 1 to the accompanying condensed consolidated financial statements for accounting standards issued in 2012 but not yet adopted.
Results of Operations for the three months ended June 30, 2012 versus the three months ended June 30, 2011
Revenue
Revenue for the three months ended June 30, 2012 decreased by $1,858,000 as compared to the same period in 2011. The following table presents revenue by our segments (in thousands):

                        June 30,            Percentage Change
                    2012         2011         2012 vs. 2011
North America   $    24,416    $ 23,733              3  %
International         6,362       9,084            (30 )%
All Other               885         704             26  %
Total revenue   $    31,663    $ 33,521             (6 )%

Revenue related to our North America segment increased by $683,000 for the three months ended June 30, 2012, as compared to the same period in 2011. Revenue in the North America segment from our dealer channel in the United States increased 7% when compared to the same period in 2011. Revenue in the North America segment from our heavy equipment, or commercial, channel in the United States increased 22% over the same period in 2011. Our motorcycle and direct distribution channels in the United States market saw revenue declines of 22% and increases of 13%, respectively, as compared to the same period in 2011. Revenue in the North America segment from our Canadian business saw a decrease of 16% as compared to the same period in 2011.
The activity that resulted in a 3% increase in our North America segment revenue for the three months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to:
• An increase of $491,000, or 3%, in revenue from LoJack units, primarily due to a 10% increase in the number of units sold, partially offset by a 6% decrease in the average revenue per unit;

• An increase of $541,000, or 24%, in revenue from our Early Warning products;

• An increase of $447,000, or 21%, in revenue from our Warranty products; partially offset by

• A decrease of $475,000, or 16%, in Canadian unit and service revenue, primarily due to a decrease of $656,000, or 26%, in service revenue driven by a 28% decline in the average number of subscribers to 41,000 for the three months ended June 30, 2012, partially offset by a $181,000 increase in product revenue as the number of base units sold during the quarter increased from 1,758 in 2011 to 2,754 in 2012;

• A decrease in revenue from our motorcycle products of $125,000, or 22%; and

• A decrease of $185,000, or 49%, in other revenue.

Revenue related to our International segment decreased $2,722,000 for the three months ended June 30, 2012 as compared to the same period in 2011. The decrease was primarily due to a decline of $3,032,000, or 38%, in product revenue from our licensees due to a 44,000 decrease in the number of units sold in the three months ended June 30, 2012 compared to the same period in 2011. The decrease in units sold was primarily due to increased governmental regulation and adverse economic factors in several of our international markets. The decrease in revenue was partially offset by an increase of $174,000, or 54%, in revenue from the sale of infrastructure components, royalty, license fee, and other revenue from our licensees for the three months ended June 30, 2012 compared to the same period in 2011 and a $135,000, or 18%, increase in revenue from our Italy business as compared to the same period in 2011.
Revenue related to our All Other segment increased $181,000 for the three months ended June 30, 2012 as compared to the same period in 2011. The increase was primarily the result of an increase of $167,000, or 25%, in the revenue from SCI 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
                                   June 30,            Percentage Change
                               2012         2011         2012 vs. 2011
North America              $    11,893    $ 11,906              -  %
International                    2,961       4,257            (30 )%
All Other                          306         249             23  %
Total cost of goods sold   $    15,160    $ 16,412             (8 )%

As a percentage of total revenue, total cost of goods sold was 48% and 49% for the three months ended June 30, 2012 and 2011, respectively.
As a percentage of North America revenue, cost of goods sold relating to our North America segment was 49% and 50% for the three months ended June 30, 2012 and 2011, respectively.
As a percentage of International revenue, cost of goods sold relating to our International segment was 47% for both the three months ended June 30, 2012 and 2011.
As a percentage of All Other revenue, our cost of goods sold relating to our All Other segment was 35% for both the three months ended June 30, 2012 and 2011. Operating Expenses
The following table presents our operating expenses (in thousands):

                                   Three Months Ended
                                        June 30,            Percentage Change
                                    2012         2011         2012 vs. 2011
Product development             $     1,308    $  1,231              6  %
Sales and marketing                   7,698       6,616             16  %
General and administrative            7,810       7,539              4  %
Depreciation and amortization         1,217       1,672            (27 )%
Total operating expenses        $    18,033    $ 17,058              6  %

Product Development
As a percentage of total revenue, product development expenses were 4% for both the three months ended June 30, 2012 and 2011.
Product development expenses increased $77,000 for the three months ended June 30, 2012 as compared to the same period in 2011, due to offsetting changes in various product development expenses. Sales and Marketing
As a percentage of total revenue, sales and marketing expenses were 24% and 20% for the three months ended June 30, 2012 and 2011, respectively.

The increase of $1,082,000 of sales and marketing expenses for the three months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to:
• An increase in compensation expense of $384,000, primarily due to a $180,000 increase in salaries expense and a $160,000 increase in commissions expense;

• An increase in consulting expenses of $297,000;

•An increase in advertising expenses of $230,000; and
•An increase of $139,000 in travel expenses. General and Administrative
As a percentage of total revenue, general and administrative expenses were 25% and 22% for the three months ended June 30, 2012 and 2011, respectively. The increase of general and administrative expenses of $271,000 for the three months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to:
• An increase in consulting expenses of $251,000;

• An increase in patent counsel expenses of $107,000; and

• An increase in employee relocation expenses of $103,000; partially offset by

• A $267,000 decrease in legal expenses as compared to the same period in 2011.

Depreciation and Amortization
As a percentage of total revenue, depreciation and amortization expenses were 4%
and 5% for the three months ended June 30, 2012 and 2011, respectively.
Depreciation and amortization expenses decreased by $455,000 for the three
months ended June 30, 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 six months ended June 30, 2012.
Other Income (Expense)
The following table presents our other income (expense) (in thousands):
                                  Three Months Ended
                                       June 30,            Percentage Change
                                   2012          2011        2012 vs. 2011
Interest income                $      43       $   90              (52 )%
Interest expense                    (187 )       (164 )             14  %
Other, net                          (316 )        603             (152 )%
Total other income (expense)   $    (460 )     $  529             (187 )%

Total other income (expense) for the three months ended June 30, 2012 changed by $989,000, from income of $529,000 for the three months ended June 30, 2011 to expense of $460,000 for the same period in 2012. This change is primarily attributable to: . . .