The following discussion and analysis of the consolidated financial condition and results of operations of I.D. Systems, Inc. (the "Company," "we" or "us") should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein.

This report contains various forward-looking statements made pursuant to the safe harbor provisions under the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and information that is based on management's beliefs as well as assumptions made by and information currently available to management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to be correct. When used in this report, the words "anticipate", "believe", "estimate", "expect", "predict", "project", and similar expressions or words, or the negatives of those words, are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and should be aware that the Company's actual results could differ materially from those described in the forward-looking statements due to a number of factors, including business conditions and growth in the wireless tracking industries, general economic conditions, lower than expected customer orders or variations in customer order patterns, competitive factors including increased competition, changes in product and service mix, and resource constraints encountered in developing new products and other factors described under "Risk Factors" set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and other filings with the Securities and Exchange Commission (the "SEC"). Any forward-looking statements regarding industry trends, product development and liquidity and future business activities should be considered in light of these factors. The Company undertakes no obligation, and expressly disclaims any obligation, to publicly release the results on any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, or otherwise.

The Company makes available through its internet website free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to such reports and other filings made by the Company with the SEC, as soon as practicable after the Company electronically files such reports and filings with the SEC. The Company's website address is www.id-systems.com. The information contained in this website is not incorporated by reference in this report.

In the following discussions, most percentages and dollar amounts have been rounded to aid presentation, and accordingly, all amounts are approximations.

Overview

The Company develops, markets and sells wireless solutions for managing and securing high-value enterprise assets. These assets include industrial vehicles, such as forklifts and airport ground support equipment, and rental vehicles. Our patented Wireless Asset Net system, which utilizes RFID technology, addresses the needs of organizations to control, track, monitor and analyze their assets. Our solutions enable our customers to achieve tangible economic benefits by making timely, informed decisions that increase the security, productivity and efficiency of their operations.

We sell our system to both executive and division-level management. Typically, our initial system deployment serves as a basis for potential expansion across the customer's organization. We work closely with customers to help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments.

During the six months ended June 30, 2009, we generated revenues of $5.6 million, and the U.S. Postal Service and Wal-Mart Stores, Inc. accounted for 29% and 16% of our revenues, respectively. During the six months ended June 30, 2008, we generated revenues of $ 9.8 million, and the U.S. Postal Service accounted for 80% of our revenues.

We are highly dependent upon sales of our system to a few customers. The loss of any of these key customers, or any material reduction in the amount of our products they purchase during a particular period, could materially and adversely affect our revenues for such period, as had occurred with the U.S. Postal Service during the first half of 2009. Conversely, a material increase in the amount of our products purchased by a key customer (or customers) during a particular period could result in a significant increase in our revenues for such period, and such increased revenues may not recur in subsequent periods. Some of these key customers, as well as other customers of the Company, operate in markets that have suffered business downturns in the past few years or may so suffer in the future, particularly in light of the current global economic downturn, and any material adverse change in the financial condition of such customers could materially and adversely affect our financial condition and results of operations. If we are unable to replace such revenue from existing or new customers, the market price of our common stock could decline significantly.

We expect that customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across multiple or all divisions of their organizations. A customer's decision to deploy our solutions throughout its organization will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing information to prospective customers about the benefits of our solutions.

The timing of the deployment of our solutions may vary widely and will depend on the specific deployment plan of each customer, the complexity of the customer's organization and the difficulty of such deployment. Customers with substantial or complex organizations may deploy our solutions in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict the timing or size of these sales and deployment cycles. Long sales cycles, as well as our expectation that customers will tend to place large orders sporadically with short lead times, may cause our revenues and results of operations to vary significantly and unexpectedly from quarter to quarter.

Our ability to increase our revenues and generate net income will depend on a number of factors, including, for example, our ability to:

· increase sales of products and services to our existing customers;

· convert our initial programs into larger or enterprise-wide purchases by our customers;

· increase market acceptance and penetration of our products; and

· develop and commercialize new products and technologies.

Critical Accounting Policies

For the six months ended June 30, 2009, there were no changes to the Company's critical accounting policies as identified in its Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

The following table sets forth, for the periods indicated, certain operating
information expressed as a percentage of revenue:

                                                  Three months ended              Six months ended
                                                       June 30,                       June 30,
                                                  2008           2009           2008           2009
Revenue:
Products                                             63.6 %         66.0 %         68.7 %         56.1 %
Services                                             36.4           34.0           31.3           43.9
                                                    100.0          100.0          100.0          100.0
Cost of revenues:
Cost of products                                     30.7           33.1           32.8           30.0
Cost of services                                     16.8           12.0           16.3           15.5

Total gross profit                                   52.5           54.9           50.8           54.5

Selling, general and administrative expenses         78.4          140.2           87.2          142.0
Research and development expenses                    13.0           25.8           14.5           24.6

Loss from operations                                (38.9 )       (111.1 )        (50.9 )       (112.1 )
Interest income, net                                 10.9           10.5           14.5           11.2
Interest expense                                        -           (1.6 )                        (0.8 )
Other income                                            -           15.6              -            5.6

Net loss                                            (28.0 )%       (86.6 )%       (36.4 )%       (96.0 )%

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

REVENUES. Revenues decreased by $2.8 million, or 50.8%, to $2.7 million in the three months ended June 30, 2009.

Revenues from products decreased by $1.7 million or 49.0%, to $1.8 million in the three months ended June 30, 2009 from $3.5 million in the same period in 2008. The decrease in revenues was attributable to the decrease in the amount of orders received from the United States Postal Service due to a spending freeze in the amount of $2.4 million, partially offset by an increase in revenue from other customers.

Revenues from services decreased by $1.1 million or 54.1%, to $913,000 in the three months ended June 30, 2009 from $2.0 million in the same period in 2008. The decrease in service revenue is primarily attributable a decrease in the amount of services rendered to the United States Postal Service in the amount of $1.3 million during the three months ended June 30, 2009, partially offset by increased maintenance revenue from other customers.

COST OF REVENUES. Cost of revenues decreased by $1.4 million, or 53.3%, to $1.2 million in the three months ended June 30, 2009 from $2.6 million for the same period in 2008. The decrease is attributable to the decrease in revenue in 2009. Gross profit was $1.5 million in 2009 compared to $2.9 million in 2008. As a percentage of revenues, gross profit increased to 54.8% in 2009 from 52.5% in 2008.

Cost of products decreased by $788,000, or 47.0%, to $890,000 in the three months ended June 30, 2009 from $1.7 million in the same period in 2008. Gross profit was $881,000 in 2009 compared to $1.8 million in 2008. As a percentage of product revenues, gross profit decreased to 49.7% in 2009 from 51.7% in 2008. The decrease in gross profit was due to lower revenue in 2009 resulting in fixed expenses having a greater impact on the gross profit percentage in 2009.

Cost of services decreased by $594,000, or 64.8%, to $323,000 in the three months ended June 30, 2009 from $917,000 in the same period in 2008. Gross profit was $590,000 in 2009 compared to $1.1 million in 2008. As a percentage of service revenues, gross profit increased to 64.6% in 2009 from 53.9% in 2008. The gross margin increase was due to a mix in service revenue. During the three months ended June 30, 2008 a higher percentage of our service revenue was for vehicle and infrastructure installations for the United States Postal Service. Those services are performed by subcontractors and have lower gross margins than training and support services performed by our own field staff. Maintenance revenue which has higher margins also increased by $147,000 in the three months ended June 30, 2009 compared to June 30, 2008.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $514,000, or 12.0%, to $3.8 million in the three months ended June 30, 2009 compared to $4.3 million in the same period in 2008. This decrease was primarily attributable to a reduction of non-payroll related selling expenses in the amount of $129,000 and reduced stock-based compensation expense of $329,000 for the three months ended June 30, 2009. As a percentage of revenues, selling, general and administrative expenses increased to 140.2% in the three months ended June 30, 2009 from 78.4% in the same period in 2008 primarily due to the decrease in revenue in the three months ended June 30, 2009. During April of 2009, we reduced our workforce by approximately ten percent. The reduction is expected to yield annual cost savings of approximately $1.0 million. The reductions were not in the area of sales and marketing, as we want to continue to invest in growth opportunities.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased by $17,000, or 2.4%, to $691,000 in the three months ended June 30, 2009 from $708,000 in the same period in 2008. As a percentage of revenues, research and development expenses increased to 25.7% in the three months ended June 30, 2009 from 13.0% in the same period in 2008 due primarily to a decrease in revenue in the three months ended June 30, 2009 as discussed above.

INTEREST INCOME. Interest income decreased by $310,000 to $283,000 in the three months ended June 30, 2009 from $593,000 in the same period in 2008. This decrease was attributable primarily to the decrease in the rate of interest earned on the Company's various investments.

INTEREST EXPENSE Interest expense increased by $43,000 in the three months ended June 30, 2009 from $0 in the same period in 2008. This increase was due to interest expense incurred on the Company's line of credit facility which was not in place during 2008.

OTHER INCOME. Other income of $420,000 in the three months ended June 30, 2008 reflects the change in the fair value of the Company's investment in auction rate securities and the auction rate security rights.

NET LOSS. Net loss was $2.3 million, or $(0.21) per basic and diluted share, for the three months ended June 30, 2009 as compared to net loss of $1.5 million or $(0.14) per basic and diluted share for the same period in 2008. The increase in net loss was due primarily to the reasons described above.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

REVENUES. Revenues decreased by $4.2 million, or 42.6%, to $5.6 million in the six months ended June 30, 2009.

Revenues from products decreased by $3.6 million, or 53.2%, to $3.1 million in the six months ended June 30, 2009 from $6.7 million in the same period in 2008. The decrease in revenues was primarily attributable to the decrease in the amount of orders received from the United States Postal Service due to a spending freeze in the amount of $4.9 million offset by increases in revenue from other customers.

Revenues from services decreased by $595,000, or 19.4%, to $2.5 million in the six months ended June 30, 2009 from $3.1 million in the same period in 2008. The decrease in revenues was primarily attributable to a decrease in field service product implementations and installations partially offset by increased maintenance revenue contracts.

COST OF REVENUES. Cost of revenues decreased by $2.3 million, or 46.8%, to $2.6 million in the six months ended June 30, 2009. The decrease was attributable to the decrease in revenue in 2009. Gross profit was $3.1 million in 2009 compared to $5.0 million in 2008. As a percentage of revenues, gross profit increased to 54.5% in 2009 from 50.8% in 2008.

Cost of products decreased by $1.5 million, or 47.5%, to $1.7 million in the six months ended June 30, 2009 from $3.2 million in the same period in 2008. Gross profit for products was $1.5 million in 2009 compared to $3.5 million in 2008. As a percentage of product revenues, gross profit decreased to 46.4% in 2009 from 52.2% in 2008. The decrease in gross profit was due to lower revenue in 2009 resulting in fixed expenses having a greater impact on the gross profit percentage in 2009.

Cost of services decreased by $727,000, or 45.5%, to $870,000 in the six months ended June 30, 2009 from $1.6 million in the same period in 2008. Gross profit for services was $1.6 million in 2009 compared to $1.5 million in 2008. As a percentage of service revenues, gross profit increased to 64.8% in 2009 from 47.9% in 2008. The gross margin increase was due to a mix in service revenue. During the six months ended June 30, 2008 a higher percentage of our service revenue was for vehicle and infrastructure installations for the United States Postal Service. Those services are performed by subcontractors and have lower gross margins than training and support services performed by our own field staff. Maintenance revenue which has higher margins also increased by $253,000 in the six months ended June 30, 2009 compared to June 30, 2008.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $564,000, or 6.6%, to $8.0 million in the six months ended June 30, 2009 compared to $8.5 million in the same period in 2008. This decrease was primarily attributable to a reduction of non-payroll related selling expenses in the amount of $136,000 and reduced stock-based compensation expense of $548,000 for the six months ended June 30, 2009. As a percentage of revenues, selling, general and administrative expenses increased to 142% in the six months ended June 30, 2009 from 87.2% in the same period in 2008 due to a decrease in revenue.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased $39,000, or 2.7%, to $1.38 million in the six months ended June 30, 2009 from $1.42 million in the same period in 2007. As a percentage of revenues, research and development expenses increased to 24.6% in the six months ended June 30, 2009 from 14.5% in the same period in 2008 due primarily to a decrease in revenue in the six months ended June 30, 2009, as discussed above.

INTEREST INCOME. Interest income decreased $789,000 to $630,000 in the six months ended June 30, 2009 from $1.4 million in the same period in 2008. This decrease was attributable primarily to the decrease in interest rates earned on the Company's investments.

INTEREST EXPENSE Interest expense increased by $43,000 in the three months ended June 30, 2009 from $0 in the same period in 2008. This increase was due to interest expense incurred on the Company's line of credit facility which was not in place during 2008.

OTHER INCOME. Other income of $312,000 in the six months ended June 30, 2008 reflects the change in the fair value of the Company's investment in auction rate securities and the auction rate security rights.

NET LOSS. Net loss was $5.4 million, or $(0.49) per basic and diluted share, for the six months ended June 30, 2009 as compared to net loss of $3.6 million, or $(0.33) per basic and diluted share, for the same period in 2008. The increase in net loss was due primarily to the reasons described above.

Liquidity and Capital Resources

Historically, except in the first quarter of 2009 with respect to our line of credit borrowing, the Company's capital requirements have been funded primarily from the net proceeds from the sale of its securities, including the sale of its common stock upon the exercise of options and warrants and from cash flows generated from operations. As of June 30, 2009, the Company had cash and marketable securities of $67.0 million and working capital of $25.4 million compared to $56.0 million and $30.9 million, respectively, as of December 31, 2008.

Operating Activities

Net cash used in operating activities was $1.8 million for the six months ended June 30, 2009, compared to net cash used by operating activities of $4.4 million for the same period in 2008. The change was due primarily to a decrease in accounts and unbilled receivables partially offset by an increase in inventory and the increase in net loss for the period.

Investing Activities

Net cash used by investing activities was $5.0 million for the six months ended June 30, 2009, compared to net cash provided by investing activities of $13.8 million for the same period in 2008. The change was due primarily to an increase in the purchase of investments which was partially offset by an increase in maturities of investments.

Financing Activities

Net cash provided in financing activities was $12.7 million for the six months ended June 30, 2009, compared to net cash used in financing activities of $2.1 million for the same period in 2008. The increase was due to the borrowing of $12.9 million from the UBS line of credit facility.

Capital Requirements

The Company believes that with the cash and investments it has on hand it will have sufficient funds available to cover its working capital requirements.

The Company's working capital requirements depend on a variety of factors, including, but not limited to, the length of the sales cycle, the rate of increase or decrease in its existing business base, the success, timing, and amount of investment required to bring new products to market, revenue growth or decline and potential acquisitions. Failure to generate positive cash flow from operations will have a material adverse effect on the Company's business, financial condition and results of operations. The Company may determine in the future that it requires additional funds to meet its long-term strategic objectives, including completion of potential acquisitions. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve significant restrictive covenants, and the Company cannot make any assurances that such financing will be available on terms acceptable to it or at all.

At June 30, 2009, the Company held approximately $20.4 million par value in auction rate securities ("ARS") ($20.4 million fair value including the ARSR described below, which was valued at $1.7 million at June 30, 2009). These ARS represent interests in collateralized pools of student loan receivables issued by agencies established by counties, cities, states and other municipal entities within the United States. Liquidity for these ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals. In February 2008 and continuing in 2009, these securities failed to sell at auction. These failed auctions represent liquidity risk exposure and are not defaults or credit events. As holder of the securities, the Company continues to receive interest on the ARS.

The Company purchased all of the ARS it holds from UBS. In October 2008, the Company received an offer (the "Offer") from UBS for a put right (the "ARSR") permitting the Company to sell all of its ARS to UBS at a future date (any time during a two-year period beginning June 30, 2010). The Offer also included a commitment to loan the Company 75% of the UBS-determined value of the ARS at any time until the put is exercised at a variable interest rate that will equal the lesser of: (i) the applicable reference rate plus a spread set forth in the applicable credit agreement and (ii) the then-applicable weighted average interest or dividend rate paid to the Company by the issuer of the ARS that is pledged to UBS as collateral. In November 2008, the Company accepted the Offer. In exchange for the Offer, the Company provided UBS with a general release of claims (other than certain consequential damages claims) concerning the Company's ARS and granted UBS the right to purchase the Company's ARS at any time for full par value.

In March 2009, the Company borrowed $12,900,000 (which amount was equal to 75% of the UBS-determined value of the ARS) against the UBS line of credit facility. Principal payments reduced this obligation to $12,666,000 at June 30, 2009. This line of credit facility is payable on demand. The Company will be paying interest on this obligation based upon the methodology described above, which will partially offset interest earned on the underlying ARS.

Given the substantial dislocation in the financial markets and among financial services companies, there can be no assurance that UBS ultimately will have the ability to repurchase the Company's ARS at par, or at any other price, as these rights will be an unsecured contractual obligation of UBS, or that if UBS determines to purchase the Company's ARS at any time, the Company will be able to reinvest the cash proceeds of any such sale at the same interest rate or dividend yield currently being paid to the Company under the ARS. Also, as a condition of accepting the ARSR, the Company was required to sign a release of claims against UBS, which will prevent the Company from making claims against UBS related to the Company's investment in ARS, other than claims for consequential damages.

Impact of Recently Issued Accounting Pronouncements

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth (1), the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company has evaluated subsequent events through August 10, 2009 which is the date that these financial statements were filed with the Securities and Exchange Commission.

In June 2009, the FASB issued SFAS No. 166 ,"Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140" ("SFAS 166"). SFAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. SFAS 166 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of SFAS 166 will have on its financial statements.

In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS 167 improves financial reporting by enterprises involved with variable interest entities and addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities," as a result of the elimination of . . .