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 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, and 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

We develop, market and sell 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 have focused our business activities on two primary applications - industrial fleet management and security, and rental fleet management. Our solution for industrial fleet management and security allows our customers to reduce operating costs and capital expenditures and to comply with certain safety regulations by accurately and reliably measuring and controlling fleet activity. This solution also enhances security at industrial facilities and areas of critical infrastructure, such as airports, by controlling access to, and restricting the use of, vehicles and equipment. Our solution for rental fleet management allows rental car companies to generate higher revenue by more accurately tracking vehicle data, such as fuel consumption and odometer readings, and improve customer service by expediting the rental and return processes. In addition to focusing on these core applications, we have adapted, and intend to continue to adapt, our solutions to meet our customers' broader asset management needs.

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.

We market and sell our solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as automotive manufacturing, heavy industry, retail and wholesale distribution, aerospace and defense, homeland security and vehicle rental.

During the nine months ended September 30, 2009, we generated revenues of $7.5 million, and the U.S. Postal Service, Wal-Mart Stores, Inc. and Ford Motor Company Inc. accounted for 27%, 19% and 12 % of our revenues, respectively. During the nine months ended September 30, 2008, we generated revenues of $ 19.1 million, and the U.S. Postal Service accounted for 50% 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. 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 nine months ended September 30, 2009, there were no significant 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             Nine months ended
                                                    September 30,                  September 30,
                                                  2008          2009            2008           2009
Revenue:
Products                                             78.8 %        66.2 %          73.6 %         58.5 %
Services                                             21.2          33.8            26.4           41.5
                                                    100.0         100.0           100.0          100.0
Cost of revenue:
Cost of products                                     38.8          32.8            35.7           30.7
Cost of services                                     10.2          18.4            13.3           16.2
                                                     49.0          51.2              49           46.9
Gross profit                                         51.1          48.8            50.9           53.1

Selling, general and administrative expenses         41.9         197.9            65.1          155.8
Research and development expenses                     7.2          34.9            10.9           27.1

Income (loss) from operations                         2.0        (184.0 )         (25.1 )       (129.8 )
Interest income, net                                  4.6          15.4             9.7           12.2
Interest expense                                        -          (2.4 )                         (1.2 )
Other income                                            -           6.0               -            5.7

Net Income (loss)                                     6.6 %      (165.0 )%        (15.4 )%      (113.0 )%

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

REVENUES. Revenues decreased by $7.5 million, or 80.3%, to $1.8 million in the three months ended September 30, 2009.

Revenues from products decreased by $6.1 million, or 83.5%, to $1.2 million in the three months ended September 30, 2009 from $7.4 million in the same period in 2008. Overall, the decrease in revenues was attributable to a decrease in the number of large orders received. The decrease in product orders was primarily accounted for in reduced revenue of $6.6 million from Wal-Mart Stores, Inc.

Revenues from services decreased by $1.3 million, or 68.5%, to $623,000 in the three months ended September 30, 2009 from $2.0 million in the same period in 2008. The decrease in service revenue is primarily attributable to a decrease in the amount of services rendered to the United States Postal Service in the amount of $1.7 million during the three months ended September 30, 2009, partially offset by increased maintenance revenue from other customers.

COST OF REVENUES. Cost of revenues decreased by $3.6 million, or 79.4%, to $942,000 in the three months ended September 30, 2009 from $4.6 million for the same period in 2008. The decrease is attributable to the decrease in revenue in 2009. Gross profit was $899,000 in 2009 compared to $4.7 million in 2008. As a percentage of revenues, gross profit decreased to 48.8% in 2009 from 51.1% in 2008.

Cost of products decreased by $3.0 million, or 83.4%, to $603,000 in the three months ended September 30, 2009 from $3.6 million in the same period in 2008. Gross profit for products was $615,000 in 2009 compared to $3.7 million in 2008. As a percentage of product revenues, gross profit of 50.5% in 2009 was consistent with the gross profit of 50.8% in 2008.

Cost of services decreased by $609,000, or 64.2%, to $339,000 in the three months ended September 30, 2009 from $948,000 in the same period in 2008. Gross profit for services was $284,000 in 2009 compared to $1.0 million in 2008. As a percentage of service revenues, gross profit decreased to 45.6% in 2009 from 52.1% in 2008. The gross margin decrease was primarily due to a reduction in service revenue with fixed costs remaining constant, driving the margin down.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $266,000, or 6.8%, to $3.6 million in the three months ended September 30, 2009 compared to $3.9 million in the same period in 2008. This decrease was primarily attributable to decreases in non-payroll selling expenses, recruiting costs, commissions and stock-based compensation partially offset by increases in professional fees. As a percentage of revenues, selling, general and administrative expenses increased to 197.9% in the three months ended September 30, 2009 from 41.9% in the same period in 2008 primarily due to the decrease in revenue in the three months ended September 30, 2009.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased by $30,000, or 4.5%, to $642,000 in the three months ended September 30, 2009 from $672,000 in the same period in 2008. As a percentage of revenues, research and development expenses increased to 34.9% in the three months ended September 30, 2009 from 7.2% in the same period in 2008 due primarily to a decrease in revenue in the three months ended September 30, 2009, as discussed above.

INTEREST INCOME. Interest income decreased by $150,000 to $284,000 in the three months ended September 30, 2009 from $434,000 in the same period in 2008. This decrease was attributable primarily to the decrease in the rate of interest earned on the Company's cash and investments.

INTEREST EXPENSE Interest expense increased by $44,000 in the three months ended September 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 borrowing facility which was not in place during 2008.

OTHER INCOME. Other income of $110,000 in the three months ended September 30, 2009 reflects the change in the fair value of the Company's investment in auction rate securities and the auction rate securities right.

NET LOSS. Net loss was $3.0 million, or $(0.27) per basic and diluted share, for the three months ended September 30, 2009 as compared to net income of $619,000, or $0.06 per basic and diluted share, for the same period in 2008. The difference from net income to net loss was due primarily to the reasons described above.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

REVENUES. Revenues decreased by $11.7 million, or 61.0%, to $7.5 million in the nine months ended September 30, 2009.

Revenues from products decreased by $9.7 million, or 69.0%, to $4.4 million in the nine months ended September 30, 2009 from $14.1 million in the same period in 2008. The decrease in revenues was primarily attributable to the decrease in revenue from the United States Postal Service in the amount of $4.6 million due to a spending freeze and from Wal-Mart Stores, Inc. in the amount of $5.9 million, partially offset by increases in revenue from other customers.

Revenues from services decreased by $1.9 million, or 38.6%, to $3.0 million in the nine months ended September 30, 2009 from $5.0 million in the same period in 2008. The decrease in service revenue is primarily attributable to a decrease in the amount of services rendered to the United States Postal Service in the amount of $2.9 million during the nine months ended September 30, 2009, partially offset by increased maintenance revenue from other customers.

COST OF REVENUES. Cost of revenues decreased by $5.9 million, or 62.7%, to $3.5 million in the nine months ended September 30, 2009. The decrease was attributable to the decrease in revenue in 2009. Gross profit was $4.0 million in 2009 compared to $9.7 million in 2008. As a percentage of revenues, gross profit increased to 53.1% in 2009 from 51.0% in 2008.

Cost of products decreased by $4.5 million, or 66.5%, to $2.3 million in the nine months ended September 30, 2009 from $6.8 million in the same period in 2008. Gross profit for products was $2.1 million in 2009 compared to $7.2 million in 2008. As a percentage of product revenues, gross profit decreased to 47.5% in 2009 from 51.5% in 2008. The decrease in gross profit was due to lower revenue in 2009 resulting in fixed expenses having a greater negative impact on the gross profit percentage in 2009.

Cost of services decreased by $1.3 million, or 52.5%, to $1.2 million in the nine months ended September 30, 2009 from $2.5 million in the same period in 2008. Gross profit for services was $1.9 million in 2009 compared to $2.5 million in 2008. As a percentage of service revenues, gross profit increased to 60.1% in 2009 from 49.5% in 2008. The gross margin increase was due to a mix in service revenue. During the nine months ended September 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 $400,000, or 73%, in the nine months ended September 30, 2009 compared to September 30, 2008.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $830,000, or 6.7%, to $11.6 million in the nine months ended September 30, 2009 compared to $12.4 million in the same period in 2008. This decrease was primarily attributable to decreases in non-payroll selling expenses, recruiting costs, commissions and stock-based compensation partially offset by increases in professional fees. As a percentage of revenues, selling, general and administrative expenses increased to 155.8% in the nine months ended September 30, 2009 from 65.1% in the same period in 2008 due to a decrease in revenue.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased $69,000, or 3.3%, to $2.0 million in the nine months ended September 30, 2009 from $2.1 million in the same period in 2008. As a percentage of revenues, research and development expenses increased to 27.1% in the nine months ended September 30, 2009 from 10.9% in the same period in 2008 due primarily to a decrease in revenue in the nine months ended September 30, 2009, as discussed above.

INTEREST INCOME. Interest income decreased $940,000 to $913,000 in the nine months ended September 30, 2009 from $1.9 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 $87,000 in the nine months ended September 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 borrowing facility which was not in place during 2008.

OTHER INCOME. Other income of $422,000 in the nine months ended September 30, 2009 reflects the change in the fair value of the Company's investment in auction rate securities and the auction rate securities right.

NET LOSS. Net loss was $8.4 million, or $(0.77) per basic and diluted share, for the nine months ended September 30, 2009 as compared to net loss of $2.9 million, or $(0.27) 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 for our line of credit borrowing of $12.9 million in the first quarter of 2009, 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. As of September 30, 2009, the Company had cash and marketable securities of $64.3 million and working capital of $49.4 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 $4.4 million for the nine months ended September 30, 2009, compared to net cash used in operating activities of $5.8 million for the same period in 2008. The net cash used in operating activities for the nine months ended September 30, 2009 reflects a net loss of $8.4 million and includes non-cash charges of $1.6 million for stock-based compensation and $0.4 million for depreciation and amortization expense. Changes in working capital items included:
· a decrease in accounts receivable of $6.3 million resulting from increased cash collections and the overall decrease in revenue;

· a increase in inventory of $2.3 million; and

· a decrease in accounts payable and accrued expenses of $1.6 million primarily due to the timing of the payments to our vendors.

Investing Activities

Net cash used by investing activities was $6.3 million for the nine months ended September 30, 2009, compared to net cash provided by investing activities of $10.1 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 by financing activities was $12.6 million for the nine months ended September 30, 2009, compared to net cash used in financing activities of $2.7 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 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 September 30, 2009, the Company held approximately $20.4 million par value in auction rate securities ("ARS") ($20.5 million fair value including the ARSR described below, which was valued at $1.8 million at September 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 $12,643,000 at September 30, 2009. This line of credit facility is payable on demand. The Company is paying interest on this obligation based upon the methodology described above, which is 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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

As of September 30, 2009, there have been no material charges in contractual obligations as disclosed under the caption "Contractual Obligations" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Inflation

Inflation has not had, nor is it expected to have, a material impact on our consolidated financial results.

Impact of Recently Issued Accounting Pronouncements

In May 2009, the FASB issued ASC 855 (formerly Statement of Financial Accounting Standards (SFAS) No. 165), "Subsequent Events" ("ASC 855"). ASC 855 establishes general standards of accounting for and disclosure of events that occur after . . .