The following discussion and analysis of the financial condition and results of operations of I.D. Systems, Inc. (the "Company," "we" or "us") 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 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 three months ended March 31, 2009, we generated revenues of $2.9 million, and the U.S. Postal Service, Wal-Mart Stores, Inc. and NACCO Materials Handling Group accounted for 37%, 22% and 12% of our revenues, respectively. During the three months ended March 31, 2008, we generated revenues of $4.3 million, and the U.S. Postal Service accounted for 83% 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 revenue 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 three months ended March 31, 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
                                                      March 31,
                                                 2008           2009
Revenue:
Products                                            75.2 %        47.0 %
Services                                            24.8          53.0
                                                   100.0         100.0
Cost of Revenues:
Cost of products                                    35.5          27.2
Cost of services                                    15.7          18.6

Gross Profit                                        48.8          54.2

Selling, general and administrative expenses        98.5         143.5
Research and development expenses                   16.4          23.5

Loss from operations                               (66.1 )      (112.9 )
Net interest income                                 19.1          11.8
Other income                                          --          (3.7 )

Net loss                                           (47.0 )%     (104.7 )%

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

REVENUES. Revenues decreased by $1.4 million, or 32.2%, to $2.9 million in the three months ended March 31, 2009.

Revenues from products decreased by $1.9 million or 57.6%, to $1.4 million in the three months ended March 31, 2009 from $3.3 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 partially offset by an increase in revenue from other customers. Revenue from the United States Postal Service decreased by $2.5 million in the three months ended March 31, 2009, compared to the three months ended March 31, 2008.

Revenues from services increased by $481,000 or 44.7%, to $1.6 million in the three months ended March 31, 2009 from $1.1 million in the same period in 2008. The increase in service revenue is primarily attributable to more implementation services rendered, increased service revenue rates on a new contract, and increased maintenance revenue.

COST OF REVENUES. Cost of revenues decreased by $871,000, or 39.3%, to $1.3 million in the three months ended March 31, 2009 from $2.2 million for the same period in 2008. The decrease is attributable to the decrease in revenue in 2009. Gross profit was $1.6 million in 2009 compared to $2.1 million in 2008. As a percentage of revenues, gross profit increased to 54.2% in 2009 from 48.8% in 2008. The gross margin increase was attributable to an increased gross margin on service revenue due to a combination of increased maintenance revenue which has higher margins than implementation services and the effect of a renewed contract with increased rates for services.

Cost of products decreased by $738,000, or 48.0%, to $798,000 in the three months ended March 31, 2009 from $1.5 million in the same period in 2008. Gross profit was $580,000 in 2009 compared to $1.7 million in 2008. As a percentage of product revenues, gross profit decreased to 42.0% in 2009 from 52.8% in 2008. During 2009, approximately $96,000 of non-customer specific materials and obsolete inventory sold for a minimal amount (not previously reserved for) negatively impacted the margin for products for the three months ended March 31, 2009.

Cost of services decreased by $133,000, or 19.6%, to $547,000 in the three months ended March 31, 2009 from $680,000 in the same period in 2008. Gross profit was $1.0 million in 2009 compared to $395,000 in 2008. As a percentage of service revenues, gross profit increased to 64.8% in 2009 from 36.7% in 2008. An increase in maintenance service revenue of $106,000 in the first quarter of 2009 as compared to the same period in 2008 partially added to the increased gross margin since maintenance revenue has a higher gross margin than implementation services. In addition, the effect of a renewed contract with increased revenue rates for services also provided for increased gross profit on service revenue.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $50,000, or 1.2%, to $4.2 million in the three months ended March 31, 2009 compared to $4.3 million in the same period in 2008. This decrease was negligible and cannot be attributed to any specific expense item. As a percentage of revenues, selling, general and administrative expenses increased to 143.5% in the three months ended March 31, 2009 from 98.5% in the same period in 2008 primarily due to the decrease in revenue in the three months ended March 31, 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 $22,000, to $689,000 in the three months ended March 31, 2009 from $711,000 in the same period in 2008. As a percentage of revenues, research and development expenses increased to 23.5% in the three months ended March 31, 2009 from 16.4% in the same period in 2008 due primarily to a decrease in revenue in the three months ended March 31, 2009.

INTEREST INCOME. Interest income decreased by $479,000 to $347,000 in the three months ended March 31, 2009 from $826,000 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.

OTHER EXPENSE. Other expense of $108,000 in the three months ended March 31, 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 $3.1 million or $(0.28) per basic and diluted share for the three months ended March 31, 2009 as compared to net loss of $2.0 million or $(0.19) 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 March 31, 2009, the Company had cash and marketable securities of $66.9 million and working capital of $22.3 million compared to $56.0 million and $30.1 million, respectively, as of December 31, 2008.

Operating Activities:

Net cash used in operating activities was $1.6 million for the three months ended March 31, 2009 compared to net cash used by operating activities of $3.6 million for the same period in 2008. The change was due primarily to a decrease in accounts receivable of $2.8 million and an increase in deferred revenue of $475,000 partially offset by an increase in inventory of $1.2 million.

Investing Activities:

Net cash used by investing activities was $4.9 million for the three months ended March 31, 2009 compared to net cash provided by investing activities of $17.3 million for the same period in 2008. The decrease was due primarily to an increase in the purchase of investments which was partially offset by a decrease in maturities of investments.

Financing Activities:

Net cash provided in financing activities was $12.7 million for the three months ended March 31, 2009 compared to net cash used in financing activities of $2.3 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 as well complete its stock repurchase program for at least the next 12 months.

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 you that such financing will be extended on terms acceptable to it or at all.

At March 31, 2009, the Company held approximately $20.4 million par value in auction rate securities ("ARS") ($19.9 million fair value including the ARSR described below, which was valued at $1.8 million at March 31, 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 $12,740,000 at March 31, 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 auction rate securities 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 auction rate securities 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. Also, as a condition of accepting the auction rate securities rights, 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 auction rate securities, other than claims for consequential damages.

Impact of Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement relating to financial assets is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 did not have a material impact on our financial statements. The provisions of SFAS 157 related to other non-financial assets and liabilities were effective on January 1, 2009, and are being applied prospectively. The adoption of these additional SFAS 157 provisions did not have any impact on the Company's financial statements.

In June 2008, the FASB issued Staff Position EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1"), which is effective for financial statements issued for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 clarifies that share-based payment awards that entitle holders to receive non-forfeitable dividends before they vest will be considered participating securities and included in the basic earning per share calculation. The adoption of FSP EITF 03-6-1 did not have any effect on the Company's financial statements.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141R, Business Combinations. This Statement replaces FASB SFAS No. 141. SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In April 2009, the FASB issued FSP 141(R)-1 which modified the guidance in SFAS No. 141R related to contingent assets and liabilities. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effect of these changes will be applicable to acquisitions after January 1, 2009.

In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets ("FSP FAS 142-3"). FSP FAS 142-3 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". This guidance for determining the useful life of a recognized intangible asset applies prospectively to intangible assets acquired individually or with a group of other assets in either an asset acquisition or business combination. FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008, earlier adoption is prohibited. The adoption of FSP FAS 142-3 did not have any effect on the Company's financial statements.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. In addition to the amendments to ARB 51, this Statement amends FASB Statement No. 128, Earnings per Share; so that earnings-per-share data will continue to be calculated the same way those data were calculated before this Statement was issued. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this pronouncement did not have any impact on the Company's financial statements.

In March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This new standard enhances disclosure requirements for derivative instruments in order to provide users of financial statements with an enhanced understanding of (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is to be applied prospectively for the first annual reporting period beginning on or after November 15, 2008. The Company believes that the adoption of SFAS 161 will not have a material impact on the Company's financial statement disclosures since the Company does not have any derivative instruments.

On April 9, 2009, the FASB simultaneously issued the following three FSPs:

· FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidance to companies for determining fair values of financial instruments for which there is no active market or quoted prices may represent distressed transactions. The guidance includes a reaffirmation of the need to use judgment in certain circumstances.

· FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, requires companies to provide additional fair value information for certain financial instruments in interim financial statements, similar to what is currently required to be disclosed on an annual basis

· FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends the existing guidance regarding impairments for investments in debt securities. Specifically, it changes how companies determine if an impairment is considered to be other-than-temporary and the related accounting. This standard also provides for increased disclosures.

These FSPs apply to both interim and annual periods and will be effective for us beginning April 1, 2009. We have evaluated these standards and believe they will have no impact on our financial condition and results of operations.