The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed 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 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 contained 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 statements under "Risk Factors" set forth in our Form 10-K for the fiscal year ended December 31, 2007 and other filings with the Securities and Exchange Commission (the "SEC"). The forward-looking statements regarding industry trends, product development and liquidity and future business activities should be considered in light of these factors. We undertake no 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.

We make available through our internet website free of charge our 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 us with the SEC, as soon as practicable after we electronically file such reports and filings with the SEC. Our 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, accordingly, all amounts are approximations.

Critical Accounting Policies

For the nine months ended September 30, 2008, there were no changes to our critical accounting policies as identified in our annual report of Form 10-K for the year ended December 31, 2007.

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,
                                        2007            2008         2007           2008
Revenue:
Products                                    83.9 %         78.8 %        63.5 %        73.6 %
Services                                    16.1           21.2          36.5          26.4
                                           100.0          100.0         100.0         100.0
Cost of Revenues:
Cost of products                            41.8           38.8          32.0          35.7
Cost of services                             8.4           10.2          19.2          13.3

Gross Profit                                50.2           51.1          48.8          50.9

Selling, general and
administrative expenses                     61.4           41.9          87.6          65.1
Research and development expenses           12.7            7.2          15.9          10.9

(Loss) income from operations              (24.3 )          2.0         (54.7 )       (25.1 )
Interest income, net                        12.0            4.6          17.5           9.7
Other income                                 0.2              -           0.6             -

Net (loss) income                          (12.1 )%         6.6 %       (36.6 )%      (15.4 )%

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

REVENUES. Revenues increased by $2.8 million, or 43.2%, to $9.3 million in the three months ended September 30, 2008.

Revenues from products increased by $1.9 million, or 34.6%, to $7.4 million in the three months ended September 30, 2008 from $5.5 million in the same period in 2007. The increase in revenues was primarily attributable to the increase in shipments to Wal-Mart Stores, Inc., the majority of which occurred in September 2008.

Revenues from services increased by $925 thousand, or 87.9%, to $2.0 million in the three months ended September 30, 2008 from $1.1 million in the same period in 2007. The increase in revenues was primarily attributable to the increase in service revenue from the United States Postal Service.

COST OF REVENUES. Cost of revenues increased by $1.3 million, or 39.7%, to $4.6 million in the three months ended September 30, 2008. The increase was attributable to the increase in revenue in the three months ended September 30, 2008. Gross profit was $4.8 million in 2008 compared to $3.2 million in 2007. As a percentage of revenues, gross profit increased to 51.1% in 2008 from 49.8% in 2007.

Cost of products increased by $897 thousand, or 32.9%, to $3.6 million in the three months ended September 30, 2008 from $2.7 million in the same period in 2007. The increase is attributable to the increase in revenue in the three months ended September 30, 2008. Gross profit for products was $3.7 million in 2008 compared to $2.7 million in 2007. As a percentage of product revenues, gross profit increased to 50.8% in 2008 from 50.1% in 2007.

Cost of services increased by $402 thousand, or 73.6%, to $948 thousand in the three months ended September 30, 2008 from $546 thousand in the same period in 2007. Gross profit for services was $1.0 million in 2008 compared to $506 thousand in 2007. As a percentage of service revenues, gross profit increased to 52.0% in 2008 from 48.1% in 2007. The increase was primarily attributable to the fact that during the three months ended September 30, 2008, the Company had higher service revenue from services that typically produce higher gross margins.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $94 thousand, or 2.3%, to $3.9 million in the three months ended September 30, 2008 compared to $4.0 million in the same period in 2007. The decrease was primarily attributable to a decrease in stock based compensation in connection with a June 2006 restricted stock grant. The restricted stock granted in June 2006 was fully vested as of June 2008, therefore no expense was recognized for the three month period ended September 2008. As a percentage of revenues, selling, general and administrative expenses decreased to 41.9% in the three months ended September 30, 2008 from 61.4% in the same period in 2007 due to an increase in revenue.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased $156 thousand, or 18.8%, to $672 thousand in the three months ended September 30, 2008 from $828 thousand in the same period in 2007. The decrease was primarily attributable to additional expenses incurred in the three month period ended September 30, 2007 for work performed relating to the development of European compliant products. As a percentage of revenues, research and development expenses decreased to 7.2% in the three months ended September 30, 2008 from 12.7% in the same period in 2007 due primarily to an increase in revenue.

INTEREST INCOME. Interest income decreased $350 thousand, or 44.6%, to $434 thousand in the three months ended September 30, 2008 from $784 thousand in the same period in 2007. The decrease was attributable to a decrease in interest rates as well as a decrease in the amount of cash, cash equivalents and marketable securities in 2008.

OTHER INCOME. Other income of $13 thousand in the three months ended September 30, 2007 reflects rental income earned from a sublease arrangement. In July 2007, the Company released the sublessee from the sublease and reassumed the space.

NET (LOSS) INCOME. Net income was $619 thousand, or $0.6 per basic and diluted share, for the three months ended September 30, 2008 as compared to net loss of $790 thousand, or $(0.7) per basic and diluted share, for the same period in 2007. The increase in net income was due primarily to the reasons described above.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

REVENUES. Revenues increased by $5.8 million, or 43.1%, to $19.1 million in the nine months ended September 30, 2008.

Revenues from products increased by $5.6 million, or 66.1%, to $14.1 million in the nine months ended September 30, 2008 from $8.5 million in the same period in 2007. The increase in revenues was primarily attributable to the increase in shipments to the United States Postal Service and Wal-Mart Stores, Inc. The majority of the shipments to Wal-Mart Stores, Inc. occurred in September 2008.

Revenues from services increased by $160 thousand, or 3.3%, to $5.0 million in the nine months ended September 30, 2008 from $4.9 million in the same period in 2007.

COST OF REVENUES. Cost of revenues increased by $2.5 million, or 37.0%, to $9.4 million in the nine months ended September 30, 2008. The increase was attributable to the increase in revenue in the nine months ended September 30, 2008. Gross profit was $9.7 million in 2008 compared to $6.5 million in 2007. As a percentage of revenues, gross profit increased to 50.9% in 2008 from 48.8% in 2007.

Cost of products increased by $2.6 million, or 59.6%, to $6.8 million in the nine months ended September 30, 2008 from $4.3 million in the same period in 2007. Gross profit for products was $7.2 million in 2008 compared to $4.2 million in 2007. The increase was attributable to the increase in revenue in the nine months ended September 30, 2008. As a percentage of product revenues, gross profit increased to 51.5% in 2008 from 49.5% in 2007.

Cost of services decreased slightly by $19 thousand to $2.5 million in the nine months ended September 30, 2008 from $2.6 million in the same period in 2007. Gross profit for services was $2.5 million in 2008 compared to $2.3 million in 2007. As a percentage of service revenues, gross profit increased to 49.5% in 2008 from 47.5% in 2007. The increase was primarily attributable to the fact that during the three months ended September 30, 2008, the Company had higher service revenue from services that typically produce higher gross margins.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $741 thousand, or 6.3%, to $12.4 million in the nine months ended September 30, 2008 compared to $11.7 million in the same period in 2007. This increase was attributable primarily to an increase in payroll and payroll related expenses due to the hiring of additional staff within our sales and customer service departments. As a percentage of revenues, selling, general and administrative expenses decreased to 65.1% in the nine months ended September 30, 2008 from 87.6% in the same period in 2007 due to an increase in revenue offset by an increase in selling, general and administrative expenses.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses remained flat at $2.1 million in the nine months ended September 30, 2008 as compared to the same period in 2007. As a percentage of revenues, research and development expenses decreased to 10.9% in the nine months ended September 30, 2008 from 15.9% in the same period in 2007 due primarily to an increase in revenue.

INTEREST INCOME. Interest income decreased $491 thousand to $1.9 million in the nine months ended September 30, 2008 from $2.3 million in the same period in 2007. This decrease was attributable primarily to the decrease in interest rates as well as a decrease in the amount of cash, cash equivalents and marketable securities in 2008.

OTHER INCOME. Other income of $89 thousand in the nine months ended September 30, 2007 reflects rental income earned from a sublease arrangement. In July 2007, the Company released the sublessee from the sublease and reassumed the space.

NET LOSS. Net loss was $2.9 million or $(0.27) per basic and diluted share for the nine months ended September 30, 2008 as compared to net loss of $4.9 million or $(0.43) per basic and diluted share for the same period in 2007. The decrease in net loss was due primarily to the reasons described above.

Liquidity and Capital Resources
Historically, our capital requirements have been funded primarily from the net proceeds from the sale of our securities, including the sale of our common stock upon the exercise of options and warrants and from cash flows generated from operations. As of September 30, 2008, we had cash, cash equivalents and marketable securities of $53.8 million and working capital of $26.3 million compared to $65.0 million and $31.9 million, respectively, as of December 31, 2007. Marketable securities includes auction rate securities which represent interests in collateralized pools of student loan receivables issued by agencies established by counties, cities, states and other municipal entities. In February 2008, these auction rate securities failed to sell at auction due to sell orders exceeding buy orders. Liquidity for these auction rate securities is typically provided by an auction process that resets the applicable interest rate every 28 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. As a result, as of September 30, 2008, the Company has classified these securities as long term. Based on broker-dealer calculated fair value, auction rate securities with an original par value of approximately $20.4 million were written down to an estimated value of approximately $18.4 million. Management believes that this impairment is temporary and as such, this write down charge of approximately $2.0 million has been reflected as an unrealized loss as of September 30, 2008. A decline in the value of these securities that is other than temporary could materially adversely affect our liquidity and income. In October 2008, we received an Auction Rate Securities Rights Offer from UBS AG pursuant to which, in return for a general release of claims (other than certain consequential damages claims) concerning our auction rate securities and the grant of a right to UBS AG to purchase our auction rate securities at any time for full par value, we would have the right to require UBS AG to purchase at par value our auction rate securities during the period from June 30, 2010 through July 2, 2012. In November 2008, we accepted UBS AG's Auction Rate Securities Rights Offer, and granted UBS AG the sole discretion and right to sell or dispose of, and/or enter orders in the auction process with respect to the eligible auction rate securities on our behalf without prior notification to us, as long as we receive a payment at par upon any sale or disposition.

Operating Activities:

Net cash used in operating activities was $5.8 million for the nine months ended September 30, 2008 compared to net cash used in operating activities of $2.0 million for the same period in 2007. The increase in cash used was due primarily to an increase in accounts receivable and unbilled receivables, partially offset by: (i) a decrease in net loss, and (ii) a decrease in accounts payable and accrued expenses. As of September 30, 2008, 91% of the Company's accounts receivable and unbilled receivables relate to two customers. Of the receivables outstanding to these customers, 99% were outstanding for fewer than 30 days.

Investing Activities:

Net cash provided by investing activities was $10.1 million for the nine months ended September 30, 2008 compared to net cash provided by investing activities of $837 thousand for the same period in 2007. The increase was due primarily to an increase in the maturities of investments, and an increase in the purchase of investments.

Financing Activities:

Net cash used in financing activities was $2.7 million for the nine months ended September 30, 2008 compared to net cash used in financing activities of $4.8 million for the same period in 2007. The decrease was due primarily to an increase in the proceeds received from the exercise of stock options and a decrease in the purchase of shares of our issued and outstanding common stock during 2008 pursuant to our share purchase program authorized by our Board of Directors in May 2007.

Capital Requirements

We believe that with the cash we have on hand and operating cash flows we expect to generate, we will have sufficient funds available to cover our capital requirements for at least the next 12 months.

Our 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 our 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 our business, financial condition and results of operations. We may determine in the future that we require additional funds to meet our long-term strategic objectives, including completing potential acquisitions. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve significant restrictive covenants, and we cannot assure you that such financing will be extended on terms acceptable to us or at all.

Impact of Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment to SFAS No. 115" ("SFAS No. 159") which is effective for fiscal years beginning after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reporting earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurements, which is consistent with the FASB's long-term measurement objectives for accounting for financial instruments. The Company chose not to elect the fair value option as prescribed by SFAS No. 159 for its financial assets and liabilities that had not been previously carried at fair value, as such SFAS No. 159 has not had a material impact on the Company's financial statements. Therefore, material financial assets and liabilities not carried at fair value, such as the Company's accounts receivables and payables are still reported at their carrying value.

In October 2008, the FASB issued FSP FAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." The FSP clarifies the application of SFAS No. 157, "Fair Value Measurements," when the market for a financial asset is not active. The FSP was effective upon issuance, including reporting for prior periods for which financial statements have not been issued. The adoption of the FSP for reporting as of September 30, 2008 did not have a material impact on the Company's financial statements.

In December 2007, the FASB issued SFAS No. 141R,"Business Combinations" ("SFAS No. 141R"), which replaces SFAS No. 141. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008, which for the Company will be for any business combinations occurring after January 1, 2009. Earlier adoption is prohibited. The impact, if any, that the implementation of SFAS No. 141R will have on the Company's results of operations or financial condition, will, in the future, be dependent on future acquisition activity, occurring after the effective date, if any.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidated date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company has not yet determined the impact, if any, that the implementation of SFAS No. 160 will have on its results of operations or financial condition.

In March 2008, the FASB issued FASB No. 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133" ("SFAS No. 161"), this statement requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. This statement has the same scope as Statement 133. This statement applies to all derivative instruments, including bifurcated derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 37 and 42 of Statement 133) and related hedged items accounted for under Statement 133 and its related interpretations. The Company has not yet determined the impact, if any, that the implementation of SFAS No. 161 will have on its results of operations or financial condition.

In April 2008, the FASB issued FSP FAS No. 142-3, "Determination of the Useful Life of Intangible Assets." The FSP amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, "Goodwill and Other Intangible Assets." The FSP must be applied prospectively to intangible assets acquired after the effective date. The Company will apply the guidance of the FSP to intangible assets acquired after January 1, 2009.