---

---

UNITED
STATESSECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549

FORM
10-K

(Mark One)

x         ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934for the fiscal year ended December
31, 2005.

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934for the transition period from
_______ to _______.

Commission
File Number: 1-15087

I.D.
SYSTEMS, INC. (Exact name of registrant
as specified in its charter)

|                                                                    |  |                                     
|------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                            |  | 22-3270799                          
|(State or other
  jurisdiction of 
  incorporation or organization) |  | (IRS Employer 
  identification No.)
|                                                                    |  |                                     
|One
  University Plaza, Hackensack, New Jersey                      |  | 07601                               
|(Address of principal
  executive offices)                          |  | (Zip Code)                          

(201)
996-9000(Registrants telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act:Common Stock, par value $0.01 per share
(Title of class)

Indicate by checkmark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes o or No x

Indicate by checkmark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes o or No x

Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. 
Yes x
or No o

Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o

---

---



Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Securities Exchange Act of 1934. Large accelerated filer o
              Accelerated filer x           Non-accelerated
o

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Securities Exchange Act of
1934).  Yes o or No x

The aggregate market value of the registrants common
stock, par value $0.01 per share (Common Stock), held by non-affiliates
is $108,074,000 million, computed by reference to the price at which the Common
Stock was last sold on June 30, 2005, as reported on the Nasdaq National Market.

The number of shares of Common Stock outstanding as of
February 17, 2006 was 7,871,219 shares.

---



PART I.

In
addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act)) that
involve risks and uncertainties. See Risk Factors - Cautionary Note Regarding
Forward-Looking Statements. I.D. Systems, Inc. has, or has applied for,
trademark protection for I.D. Systems, Inc., Vehicle Asset Communicator®,
Battery ChaMP and Wireless Asset Net. This Annual Report on Form 10-K also
contains additional trade names, trademarks and service marks of ours and of
other companies. All trademarks and trade names appearing in this Annual Report
on Form 10-K are the property of their respective holders.

|        |         
|------- | --------
|Item 1. | Business

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 radio frequency
identification, or RFID, technology, addresses the needs of organizations to
control, track, monitor and analyze their assets. Our solutions enable
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 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 process. 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
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. Based on revenues,
our top customers are:

| |   |                                      
| | - | -------------------------------------
| |  | U.S. Postal Service;                 
| |   |                                      
| |  | Ford Motor Company;                  
| |   |                                      
| |  | Walgreen Co.; and                    
| |   |                                      
| |  | U.S. Department of Homeland Security.

During the quarter ended December 31, 2005, we entered
into contracts with Rite Aid Corporation and Wal-Mart Stores, Inc. for the initial implementation of our
system. We work closely with customers like these to help maximize the
utilization and benefits of our system and demonstrate the value of
enterprise-wide deployments.

1

---



Interest
in, and customer adoption of, RFID-based technologies have increased
substantially in recent years. Our differentiated technology and targeted
solutions have allowed us to benefit from this marketplace growth. We have
increased our revenues from $923,000 in the fiscal year ended December 31, 2001
to $19.0 million in the fiscal year ended December 31, 2005, representing a
compounded annual growth rate of 113%.

Our Solution

We
design and implement solutions that focus primarily on the closed-loop asset
management and security segment of the market for RFID and other wireless-based technologies.
In this segment, RFID-based devices that provide on-board control, location
tracking and data processing are integrated with enterprise assets to provide
real-time visibility of, and two-way communications with, such assets. Our Wireless Asset Net system provides architectural and functional advantages
that differentiate it from systems used for inventory and logistics tracking.
For example, while inventory tracking systems rely on consistent radio
frequency, or RF, connectivity to perform core functions, our system requires
only periodic RF communications, and our on-asset devices perform their
core functions autonomously. Unlike logistics tracking systems, which typically
require substantial monthly expenditures for cellular or satellite communications,
our system does not require customers to incur wireless communications costs
and can track mobile assets indoors, where global positioning system, or GPS,
receivers typically do not work.

Our
Wireless Asset Net tracking and management system consists of three principal
elements:

| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | miniature wireless programmable computers attached
  to assets;                                                                                                                               
| |   |                                                                                                                                                                                               
| |  | fixed-position communication infrastructure
  consisting of network computers with two-way RF capabilities, RF-based
  location-emitting beacons and application-specific network servers; and
| |   |                                                                                                                                                                                               
| |  | proprietary software, which is a user-friendly,
  Windows-based graphical user interface that utilizes client-server
  architecture and a database.                                           

Each
of these system elements processes and stores information independently to
create a unique, patented system of distributed intelligence, which mitigates
the risk that a single point of failure could compromise system integrity or
data and asset security. Our on-asset hardware stores information locally so
that it can autonomously and automatically control the asset and monitor asset
activity regardless of the status or availability of other system components.
Our on-asset hardware performs its functions even when outside the RF range of
any other system component or if the facility computer network is unavailable.
Our communication infrastructure independently processes data and executes
programmable application logic, in addition to linking monitored mobile asset
data automatically to our systems database. Our server software populates the
database and is designed to mitigate the effects of any computer outages that
could affect real-time availability of the database. Finally, our client
software interfaces only with the database, not directly with our communication
infrastructure or on-asset hardware, which restricts access to, and limits
corruption of, system information and minimizes network bandwidth usage.

We
have focused our business activities on two primary applications  industrial
fleet management and security and rental fleet management. In addition to
focusing on these core applications, we have adapted, and intend to continue to
adapt, our wireless solutions to meet our customers broader asset management
needs.

2

---



Industrial Fleet Management and Security

Our
solution for industrial fleet management and security allows fleet operators to
reduce operating costs and capital expenditures, comply with certain safety
regulations and enhance security.

To
analyze and benchmark vehicle utilization and operator productivity, our system
automatically records a wide range of activity and enables detailed performance
comparisons to help management make informed decisions about vehicle and
manpower allocations. This can lead to fleet and personnel reductions as well
as increases in productivity from existing fleets. The system also provides
real-time and historical visibility of vehicle movements.

To
help reduce fleet maintenance costs, our system can automate and enforce
preventative maintenance scheduling by:

| |                                                                                       |                                                                                                                                                                                  
| | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                      | wirelessly uploading usage data from each vehicle;                                                                                                                               
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | automatically prioritizing maintenance events based
  on weighted, user-defined variables;                                                                                       
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | automatically sending reminders to individual
  vehicles or operators via the systems text messaging module;                                                                    
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | enabling remote lock-out of vehicles overdue for
  maintenance; and                                                                                                              
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | allowing maintenance personnel to locate and
  retrieve vehicles due for service via the systems graphical viewer software.                                                     
| |                                                                                       |                                                                                                                                                                                  
| | To help improve fleet safety and security, our
  system provides, among other things:
| |                                                                                      
| |                                                                                      | compatibility with a variety of technologies that
  verify driver identity;                                                                                                      
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | wireless vehicle access control to ensure that only
  trained and authorized personnel use equipment as required by the
  Occupational Safety and Health Administration, or OSHA;
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | electronic vehicle inspection checklists for
  paperless proof of OSHA compliance;                                                                                               
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | automatic reporting of emerging vehicle safety
  issues;                                                                                                                         
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | automatic on-vehicle intervention, such as alarms
  and the disabling of equipment, in response to user-definable safety and
  security parameters;                              
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | remote vehicle deactivation capabilities, allowing a
  vehicle to be shut down manually or automatically under defined conditions;                                               
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | impact sensing to assign responsibility for abusive
  driving;                                                                                                                   
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | geo-fencing to restrict vehicles from operating in
  prohibited areas or issue alerts upon unauthorized entry to such areas; and                                                 
| |                                                                                       |                                                                                                                                                                                  
| |                                                                                      | a graphical, icon-based view of vehicle
  safety/security/operational status on a facility map, filterable by a variety
  of conditions, both historically and in real time.     

A
specialized application of our solution in the industrial fleet management and
security market is vehicle security, particularly at airports, seaports and
other areas of critical infrastructure. The Transportation Security Act of 2001
mandates security for aircraft servicing equipment, including aircraft tow
tractors, baggage tugs, cargo loaders, catering vehicles and fuel trucks. As
    of December 31, 2005, we had received more than $4.0 million in grants from
    the U.S. Department of Homeland Security for developing and deploying a version
of our Wireless Asset Net system to address this mandate.

3

---



Rental Fleet Management

Our
solution for rental fleet management is designed both to enhance the consumers
rental experience and benefit the rental company by providing information that
can be used to increase revenues, reduce costs and improve customer service.
Our system automatically uploads vehicle identification number, mileage and
fuel data as a vehicle enters and exits the rental lot, which can significantly
expedite the rental process for travelers and provide the rental company with
more timely inventory status, more accurate billing data that can generate
higher fuel-related revenue, and an opportunity to utilize customer service
personnel for more productive activities, such as inspecting vehicles for
damage. Avis, our first customer in this market, has implemented our system for
its rental fleet in Puerto Rico.

Products and Services

We
offer our customers integrated wireless solutions to control, monitor, track
and analyze their enterprise assets. Our solutions are comprised of hardware
and software, as well as maintenance, support and consulting services.

Principal Products

On-Asset
Hardware. With a variety of mounting and user-interface
options, our on-asset hardware is designed to be installed quickly and easily
and provide an autonomous means of asset control and monitoring. Our on-asset
hardware:

| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | contains an integrated, programmable computer and an
  advanced wireless transceiver with a communication range of up to one-half
  mile;
| |   |                                                                                                                                          
| |  | controls equipment access with a variety of
  electronic interface options;                                                              
| |   |                                                                                                                                          
| |  | is compatible with many existing facility access
  security systems;                                                                     
| |   |                                                                                                                                          
| |  | generates paperless electronic safety checklists via
  a built-in display and keypad;                                                    
| |   |                                                                                                                                          
| |  | wirelessly and automatically uploads and downloads
  data to and from other system components;                                           
| |   |                                                                                                                                          
| |  | performs monitoring functions at all times,
  independent of RF or network connectivity; and                                             
| |   |                                                                                                                                          
| |  | incorporates a multi-voltage power supply designed
  to control electrical anomalies.                                                    

Gateways.
Each of our Wireless Asset Net system deployments requires at least one
fixed-position communication device, which we refer to as a gateway, to link
the mobile assets being monitored with the customers computer network. Our
gateways conduct two-way RF communications with the assets being monitored and
are compatible with either a local or wide area network. Gateways offer
flexible configuration options and scalability. A single gateway is enough to
operate an entire asset management system. For expanded, real-time data
communication and location tracking, gateways can be added incrementally as
needed. Gateways can allow system settings to be changed without physically
interfacing with on-asset hardware, which can save significant time and money.

Each
of our gateways:

| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | incorporates an integrated, programmable computer
  and an advanced wireless transceiver with a communication range of up to
  one-half mile;

4

---



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | accommodates an unlimited number of on-asset
  hardware devices;               
| |   |                                                                                
| |  | automatically uploads and downloads data to and from
  other system components;
| |   |                                                                                
| |  | employs built-in self-diagnostic capabilities; and                             
| |   |                                                                                
| |  | is configurable to achieve a wide range of asset
  management goals.           

Server
Software. Each of our Wireless Asset Net system deployments
requires at least one installation of our server software, which automatically
manages data communications between the systems database and the gateways. Our
server software:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | is Windows compatible;                                                                                  
| |   |                                                                                                         
| |  | automatically processes data between our gateways
  and system databases;                               
| |   |                                                                                                         
| |  | actively polls gateways to retrieve data on demand;                                                     
| |   |                                                                                                         
| |  | supports passive listening to allow remote systems
  to dial in for data download;                      
| |   |                                                                                                         
| |  | automates event scheduling, including data
  downloads, database archiving and diagnostic notifications;
| |   |                                                                                                         
| |  | interfaces with certain existing systems, including
  maintenance and training systems;                 
| |   |                                                                                                         
| |  | supports remote control/management of event processes;                                                  
| |   |                                                                                                         
| |  | automatically performs diagnostics on system
  components; and                                          
| |   |                                                                                                         
| |  | automatically e-mails event alerts.                                                                     

Client
Software. Our client software, referred to as the Wireless
Asset Net console, provides an intuitive, easy-to-use, Windows-based interface.
The console is deployed in a standard client-server network architecture. The
console interfaces only with the database, not directly with our communication
infrastructure or on-asset hardware, which restricts access to, and limits corruption
of, system information and minimizes network bandwidth usage. An unlimited
number of consoles can be used on a network at any given time.

The
Wireless Asset Net console:

| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | shows the location, status and inventory of vehicles
   in real time and historically  in each area of a facility;                  
| |   |                                                                                                                                       
| |  | allows real-time, two-way text communications,
  including broadcast text paging to all operators simultaneously;                     
| |   |                                                                                                                                       
| |  | searches, sorts and analyzes assets by drive time,
  idle time, location, status, group, maintenance condition and other
  parameters;
| |   |                                                                                                                                       
| |  | displays and prints predefined and ad hoc reports;
  and                                                                              
| |   |                                                                                                                                       
| |  | allows remote usage by management, customers and
  vendors through the Internet.                                                      

Additional Products

Battery
ChaMP. Our Battery Charger Monitoring Point, which we refer
to as Battery ChaMP, tracks data on industrial battery fast-charge systems. The
Battery ChaMP provides automatic data uploads, real-time system visibility and
data collection for electric vehicle batteries and chargers. The Battery ChaMP:

5

---



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | tracks vehicle operator compliance with battery
  charging requirements;
| |   |                                                                         
| |  | enforces critical equalization charging schedules;                      
| |   |                                                                         
| |  | monitors data necessary for battery warranty
  compliance; and          
| |   |                                                                         
| |  | simplifies battery life management.                                     

AC
Power Control Module. Our AC Power Control Module was
developed to support installation of our Wireless Asset Net system on complex
machinery, such as cranes. The
AC Power Control Module is designed to:

| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | accommodate virtually any power input, from 6 volts
  DC to 480 volts AC;
| |   |                                                                          
| |  | monitor up to four motors on a single machine; and                       
| |   |                                                                          
| |  | collect data for maintenance management and asset
  utilization analysis.

Machine
Asset Communicator. Our Machine Asset Communicator provides
wireless monitoring and control of fixed machinery, such as adhesive-dispensing
robots, rather than mobile assets. Our Machine Asset Communicator is designed
to provide:

| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | automatic quality control checks;                                
| |   |                                                                  
| |  | real-time alerts on out-of-specification machine
  parameters;   
| |   |                                                                  
| |  | automatic machine shut-down based on user-defined
  criteria; and
| |   |                                                                  
| |  | electronic maintenance checklists.                               

Services

Maintenance
Services. We provide a warranty on all hardware and software
components of our system. During the warranty period, we either replace or
repair defective hardware. We also make extended maintenance contracts
available to customers and offer ongoing maintenance and support on a time and
materials basis. Pricing for our extended maintenance and support contracts is
dependent upon the level of service we expect to provide. Our maintenance
and support services typically include remote system monitoring, help desk
technical support, escalation procedure development and routine diagnostic data
analysis.

Customer
Support and Consulting Services. We have developed a
framework for the various phases of system training and support that offers our
customers both structure and flexibility. Major training phases include
hardware installation and troubleshooting, software installation and
troubleshooting, train-the-trainer training on asset hardware operation,
preliminary software user training, system administrator training, information
technology issue training, ad hoc training during system launch and advanced
software user training. These services are priced based on the extent of
training that the customer requests.

Following
system launch and advanced training, we make additional, refresher training
available for a fee, either at the customers site or at our offices. The
customer may also elect to purchase additional training as part of a larger
extended maintenance contract.

To
help our customers derive the most benefit from our system, we supply a broad
range of support documentation and provide initial post-launch data consulting.
Our support documentation

6

---



includes hardware user guides, software manuals,
vehicle installation overviews, troubleshooting guides and issue escalation
procedures. Our initial data consulting is intended to help the customer
determine which reports and charts are most meaningful to different system
users and which specific data may represent cost-saving or
productivity-enhancing opportunities.

We
have provided our consulting services on a limited basis, both as a stand-alone
service to study the potential benefits of implementing a wireless fleet
management system, and as part of the system implementation itself.

Sales and Marketing

Our
sales and marketing objective is to achieve broad market penetration, with an
emphasis both on expanding business opportunities with existing customers and
on securing new customers. As of January 31, 2006, we had eight employees
devoted to sales and marketing and currently are expanding our direct sales
force to develop additional sales and marketing initiatives, including
penetration of international markets.

We
primarily market our systems directly to commercial and government organizations.
To market to government organizations, we also pursue contract solicitations,
capitalizing on tools such as our U.S. General Services Administration
contract, which enables us to sell our products on an off-the-shelf basis to
federal governmental agencies without further competitive bidding. To
complement our direct sales activities, we recently began to sell through
indirect sales channels, such as industrial equipment dealers. In addition, we
are actively pursuing strategic relationships with key companies in our target
markets  including original equipment manufacturers, complementary hardware
and software vendors, and service providers  to further penetrate these
markets by embedding our products in the assets our systems monitor and
integrating our solutions with other systems.

We
sell our systems to both executive and division-level management. Typically,
our initial system deployment serves as a basis for potential expansion across
the customers organization. Ford, Walgreens, the U.S. Postal Service and
Target are all examples of this progression.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ford initially implemented our system at one plant
  in 1999, which led to a blanket purchase order to deploy our system across
  its North American operations. As of December 31, 2005, we had implemented
  our system on an aggregate of approximately 4,700 vehicles at 38 Ford
  facilities.                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Walgreens initially deployed our system at a single
  distribution center in 2003 and, as of December 31, 2005, had deployed our
  system at six distribution centers covering an aggregate of approximately 600
  vehicles.                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The U.S. Postal Service used the implementation of
  our system at one of its facilities in Buffalo, New York in 2003 to form the
  basis of a solicitation for competitive bids for a powered vehicle management
  system. Based on our proposal for that program, the U.S. Postal Service
  awarded us a national contract in 2004 to deploy our system at up to 460 U.S.
  Postal Service facilities nationwide. As of December 31, 2005, the U.S. Postal
Service had placed orders for deployment of our system in 28 of its facilities.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Beginning in 2003, Target utilized our system on a
  limited number of vehicles at one of its facilities. After testing our
  product, Target entered into a contract with us to implement our system on
  more than 450 vehicles in Targets distribution facilities across the United
  States.                                                                                                                                                                                                                                           

During
the quarter ended December 31, 2005, we entered into contracts with Rite Aid
and Wal-Mart for the initial implementation of our system. We work closely with
customers like these to help

7

---



maximize the utilization and benefits of our system and
demonstrate the value of enterprise-wide deployments.

Customers

We
market and sell our wireless 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.
Customers that have implemented our system include:

| |                                      |                                               
| | ------------------------------------ | ----------------------------------------------
| | 3M Company                           | Meijer, Inc.                                  
| | Advanced Technology Institute        | Northrop Grumman
  Corporation                
| | AeroVironment, Inc.                  | Premier Manufacturing
  Support Services, Inc.
| | American Axle & Manufacturing, Inc.  | Rite Aid Corporation                          
| | Archer Daniels Midland
  Company     | Target Corporation                            
| | Avis Rent A Car System,
  Inc.       | Toyota Motor
  Manufacturing Kentucky, Inc.   
| | Canadian Tire
  Corporation, Limited | U.S. Department of
  Homeland Security        
| | DaimlerChrysler Corp.                | U.S. Navy                                     
| | Deere & Company                      | U.S. Postal Service                           
| | Ford Motor Company                   | Walgreen Co.                                  
| | General Dynamics
  Corporation       | Wal-Mart Stores, Inc.                         
| | Golub Corporation                    | WinCo Foods, Inc.                             
| | Longview Fibre Company               | .                                             

During
the year ended December 31, 2005, the U.S. Postal Service and Ford accounted
for 45.1% and 17.8% of our revenues, respectively. During the year ended
December 31, 2004, Ford, Target and the U.S. Department of Homeland Security
accounted for 49.1%, 15.0% and 11.7% of our revenues, respectively. No other
customer accounted for greater than 10% of our net revenues during these
periods.

We
strive to establish long-term relationships with our customers in order to maximize
opportunities for new application development and increased sales. Our
relationship with the U.S. Department of Homeland Security, summarized below,
illustrates this effort.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2002, our Wireless Asset Net system passed tests
  conducted by the National Safe Skies Alliance, which demonstrated that our
  systems could be used safely at U.S. airports without interfering with
  existing RF systems.                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | In 2003, we finalized system design modifications,
  integrated new functionality, completed laboratory testing and initiated
  deployment of our system at Newark Liberty International Airport with the
  support of the Port Authority of New York and New Jersey.                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | In 2004, the U.S. Department of Homeland Security
  completed a key phase of initial system testing at Newark Liberty
  International Airport and subsequently entered into an agreement with us to
  fund further system deployment at the Jacksonville, Florida seaport.                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | In 2005, the U.S. Department of Homeland Security
  completed its final report on our wireless vehicle tracking/fleet management
  project at Newark Liberty International Airport, which concluded that our
  Wireless Asset Net system is an effective tool for securing and managing
  vehicles in the RF-rich environment of a major U.S. airport. Under the
  project, more than 100 distinct system elements were tested without a single
  requirement failure.

8

---



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Also in 2005, the U.S. Department of Homeland
  Security awarded us a grant to integrate RFID-based cargo tracking
  capabilities into our Wireless Asset Net system.

As of December 31, 2005, the U.S. Department of
Homeland Security had awarded us grants of more than $4.0 million.

Competition

The
market for RFID solutions is rapidly evolving, highly competitive and
fragmented. Our target markets are also subject to quickly changing product
technologies, shifting customer needs, regulatory requirements and frequent
introductions of new products and services. A significant number of companies
have developed or are developing and marketing software and hardware for
RFID-based and other wireless products that currently compete or will compete
directly with our solutions. We compete with organizations varying in size,
including many small, start-up companies as well as large, well capitalized
organizations. While some of our competitors focus exclusively on providing
RFID solutions, many are involved in RFID technology as an extension of a more
expansive business strategy. Many of our larger competitors are able to
dedicate extensive financial resources to the research and development and
deployment of RFID solutions. As government and commercial entities expand the
use of RFID technologies, we expect that competition will continue to increase
within our target markets.

We
distinguish ourselves from our competitors by focusing on two distinct
applications  industrial fleet management and security and rental fleet
management. This focus has enabled us to direct product development efforts
specifically suited for our target markets. Our on-asset device for industrial
fleet management and security is designed to operate independently of other
system components, allowing for continuous asset control and data gathering
even when the vehicle is out of RF communication range. We believe that our
proprietary technology as well as our experience in designing and developing
products for our target markets distinguishes us within these markets.

In
each of our markets, we encounter different competitors due to the competitive
dynamics of each segment. In the industrial fleet management and security
market, the wireless control, tracking and management of enterprise assets is
relatively new. Although we are not aware of any current competitors that
provide the precise capabilities of our systems, we are aware of competitors
that offer subsets of our system capabilities or alternate approaches to the
needs our products address. Those companies include both emerging companies
with limited operating histories, such as WhereNet, Media Recovery and Access
Control Group, and companies with longer operating histories, greater name
recognition and/or significantly greater financial, technical and marketing
resources than ours, such as Savi Technology, Symbol Technologies and Intermec,
Inc.

In
the rental fleet management market, we compete primarily against handheld
device companies that currently provide the solutions used by vehicle rental
companies. Currently, our principal competitors in this market are handheld
device providers, such as Motorola and Symbol Technologies, and other
RFID-focused companies, such as WhereNet. Although handheld device providers
currently control the majority of the rental fleet market, we believe a shift
to RFID represents a compelling opportunity for vehicle rental companies, given
the potential for increased customer satisfaction and efficiency resulting from
the use of an RFID system. Because of these potential benefits, we believe our
focused RFID product development strategy, portfolio of intellectual property
and proven system efficacy are key competitive advantages in this market.

9

---



Research and Development

As
of January 31, 2006, in addition to our executive vice president of
engineering, our research and development group was comprised of 12 full-time
employees. These employees have expertise in areas such as software and
hardware design, wireless communications and mechanical and electrical
engineering.

We
have focused our research and development efforts on the evolution of our
Wireless Asset Net system as a universal system to promote more widespread
use of our technology for a broader range of equipment, with easier
installations, maintenance and support, and with fewer configuration concerns.
Using our universal platform, we have adapted our technology to meet the needs
of several emerging markets, including rental fleet management, airport vehicle
security, industrial battery charging management and remote automated machine
monitoring. As a result of what we believe to be the end-user benefits inherent
in these developments, including the important security implications of our
technology in the airport environment, we have received funding from our
customers, including the U.S. Department of Homeland Security, for programs
that required adaptations of our system.

Our
current research and development efforts are focused on:

| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | continuing to improve the functionality and reduce
  the costs of our system; and
| |   |                                                                                  
| |  | adapting our technology to capitalize on emerging
  market opportunities.        

We
spent $1.6 million, $1.2 million and $891,000 for research and development
during years ended December 31, 2005, 2004 and 2003, respectively.

Intellectual Property

Patents

We
attempt to protect our technology and products through the pursuit of patent
protection in the United States and certain foreign jurisdictions. We have
built a portfolio of patents and patent applications relating to aspects of our
technology and products. We have two U.S. patents and eight pending U.S. patent
applications. With the timely payment of all maintenance fees, our U.S. patent
that covers our Wireless Asset Net system (U.S. Patent Number 5,682,142)
expires on October 28, 2014, and our U.S. patent that covers our rental car
fleet management system (U.S. Patent Number 6,898,493) expires on April 6,
2020.

U.S.
Patent Number 5,682,142, entitled Electronic Control System/Network, is
directed toward a network of programmable, location marking and processing,
movable tag nodes and a fixed position tag node. The movable and fixed tag
nodes communicate directly and are capable of location identification and
logical control of environmental conditions without requiring a central
processor.

U.S.
Patent Number 6,898,493, entitled Fully Automated Vehicle Rental System, is
directed toward an automated vehicle rental system. The system uses vehicle
monitors mounted in each rental vehicle for keeping track of vehicle data, such
as mileage, fuel level and location of the vehicle. The system transmits the
vehicle data to a central database for automatically completing the checkout
of the vehicle.

We
have foreign patents in China, South Korea, Australia and Mexico covering our
Wireless Asset Net system. We also have a patent application for our Wireless
Asset Net system pending in Japan.

10

---



Because of the differences in patent laws and laws
concerning proprietary rights, the extent of protection provided by U.S.
patents or proprietary rights owned by us may differ from that of their foreign
counterparts.

Trademarks

We
have a federally registered trademark for the Vehicle Asset Communicator. We
currently have pending with the U.S. Patent & Trademark Office, an
application for trademark registration for each of Battery ChaMP,
Intelli-Listening, TrueUse and Wireless Asset Net.

We
attempt to avoid infringing known proprietary rights of third parties in our
product development and sales efforts. However, it is difficult to proceed with
certainty in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential at the
time of the application filing, with regard to similar technologies. If we were
to discover that our products violate third-party proprietary rights, we may
not be able to:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | obtain licenses to continue offering such products
  without substantial reengineering;                 
| |   |                                                                                                         
| |  | reengineer our products successfully to avoid
  infringement;                                           
| |   |                                                                                                         
| |  | obtain licenses on commercially reasonable terms, if
  at all; or                                       
| |   |                                                                                                         
| |  | litigate an alleged infringement successfully or
  settle without substantial expense and damage awards.

Any
claims against us relating to the infringement of third-party proprietary
rights, even if without merit, could result in the expenditure of significant
financial and managerial resources or in injunctions preventing us from
distributing certain products. Such claims could materially adversely affect
our business, financial condition and results of operations.

Our
software products are susceptible to unauthorized copying and uses that may go
undetected, and policing such unauthorized use is difficult. In general, our
efforts to protect our intellectual property rights through patent, copyright,
trademark and trade secret laws and contractual safeguards may not be effective
to prevent misappropriation of the technology, or to prevent the development
and design by others of products or technologies similar to or competitive with
those developed by us. Our failure or inability to protect our proprietary
rights could materially adversely affect our business, financial condition and
results of operations.

Manufacturing

We
outsource our hardware manufacturing operations to leading contract
manufacturers, including Flextronics International Ltd. and Jabil Circuit, Inc.
This strategy enables us to focus on our core competencies  designing hardware
and software systems and delivering solutions to customers  and avoid
investing in capital-intensive electronics manufacturing infrastructure.
Outsourcing also provides us with the ability to ramp up deliveries to meet
increases in demand without increasing fixed expenses.

Our
manufacturers are responsible for obtaining the necessary components and
supplies to manufacture our products. While components and supplies are
generally available from a variety of sources, manufacturers generally depend
on a limited number of suppliers. In the past, unexpected demand for
communication products caused worldwide shortages of certain electronic parts
and

11

---



allocation of such parts by suppliers that had an
adverse impact on the ability of manufacturers to deliver products as well as
on the cost of producing such products.

Due
to the general availability of manufacturers for our products, we do not
believe that the loss of either of our manufacturers would have a long-term
material adverse effect on our business, although there could be a short-term
adverse effect on our business.

We
generally attempt to maintain sufficient inventory to meet customer demand for
products, as well as to meet anticipated sales levels. If our
product mix changes in unanticipated ways, or if sales for particular products
do not materialize as anticipated, we may have excess inventory or inventory
that becomes obsolete. In such cases, our operating results could be negatively
affected.

Government Regulations

The
use of radio emissions are subject to regulation in the United States by
various federal agencies including the FCC and OSHA. Various state agencies
also have promulgated regulations which concern the use of lasers and
radio/electromagnetic emissions standards.

Regulatory
changes in the United States and other countries in which we may operate in the
future could require modifications to some of our products for us to continue
manufacturing and marketing our products.

Our
products intentionally transmit radio signals, including narrow band and spread
spectrum signals, as part of their normal operation. We have obtained
certification from the FCC for our products that require certification. Users
of these products in the United States do not require any license from the FCC
to use or operate our products.

In
addition, some of our operations use substances regulated under various
federal, state and local laws governing the environment and worker health and
safety, including those governing the discharge of pollutants into the ground,
air and water, the management and disposal of hazardous substances and wastes
and the cleanup of contaminated sites. Certain of our products are subject to
various federal, state and local laws governing chemical substances in
electronic products.

The
adoption of unfavorable regulations, or unfavorable interpretations of existing
regulations by courts or regulatory bodies, could require us to incur
significant compliance costs, cause the development of the affected markets to
become impractical or otherwise adversely affect our ability to produce or
market our products.

Employees

As
of January 31, 2006, we had 61 full-time employees, of which 20 are engaged in
customer satisfaction, 13 in product development (which includes engineering),
seven in operations, 11 in sales and marketing, and 10 in finance and
administration. None of our employees are represented by union or collective
bargaining agreements. We believe that our relationships with our employees are
good.

Available
Information

Our
website is www.id-systems.com. We make available on this website free of
charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as

12

---



reasonably practicable after we electronically file
such material with, or furnish such information to, the Securities and Exchange
Commission (SEC).

|         |             
|-------- | ------------
|Item 1A. | Risk Factors

We have incurred significant losses and have a substantial
accumulated deficit. If we cannot maintain our profitability, the market price
of our common stock could decline significantly.

Although
we generated net income of approximately $851,000 and $398,000 for the years
ended December 31, 2005 and 2004, respectively, we incurred net losses of
approximately $1.2 million for the year ended December 31,
2003 and have incurred additional net losses since inception. At December 31,
    2005, we had an accumulated deficit of approximately $10.5 million. Our ability
    to increase our revenues from the sale of our products will depend on our
    ability to successfully implement our growth strategy and the continued expansion
    of our markets. If our revenues do not continue to grow as they have in the
    past, or if our operating expenses exceed our expectations, we may not be
    able to maintain our profitability and the market price of our common stock
    could decline significantly.

We are highly dependent upon sales of our Wireless Asset Net
system to a few customers. The loss of any of these customers, or any material
reduction in the amount of our products they purchase, could materially and
adversely affect our financial condition and results of operations.

During
the year ended December 31, 2005, the U.S. Postal Service and Ford accounted
for 45.1% and 17.8% of our revenues, respectively. During the year ended
December 31, 2004, Ford, Target and the U.S. Department of Homeland Security
accounted for 49.1%, 15.0% and 11.7% of our revenues, respectively. Some of
these and other customers operate in markets that have suffered business
downturns in the past few years or may so suffer in the future. The loss of or
any material reduction in the amount of our products that these customers
purchase, or 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.

If the market for our technology does not continue to develop
or become sustainable, expands more slowly than we expect or becomes saturated,
our revenues will decline and our financial condition and results of operations
could be materially and adversely affected.

Our
success is highly dependent on the continued market acceptance of our Wireless
Asset Net system. The market for our wireless products and services is new and
rapidly evolving. If the market for our products and services does not continue
to develop or become sustainable, expands more slowly than we expect or becomes
saturated with competing products or services, our revenues will decline and
our financial condition and results of operations could be materially and
adversely affected.

If we are unable to keep up with rapid technological change,
we may be unable to meet the needs of our customers, which could materially and
adversly affect our financial condition and results of operations and reduce
our ability to grow our market share.

Our
market is characterized by rapid technological change and frequent new product
announcements. Significant technological changes could render our existing
technology obsolete. We are active in the research and development of new
products and technologies and in enhancing our current products. However,
research and development in our industry is complex and filled with
uncertainty. For example, it is common for research and development projects to
encounter delays due to unforeseen

13

---



problems, resulting in low initial volume production,
fewer product features than originally considered desirable and higher
production costs than initially budgeted, any of which may result in lost
market opportunities. In addition, these new products may not adequately meet
the requirements of the marketplace and may not achieve any significant degree
of market acceptance. If our efforts do not lead to the successful development,
marketing and release of new products that respond to technological
developments or changing customer needs and preferences, our revenues and
market share could be materially and adversely affected. We may expend a
significant amount of resources in unsuccessful research and development
efforts. In addition, new products or enhancements by our competitors may cause
customers to defer or forego purchases of our products. Any of the foregoing
could materially and adversely affect our financial condition and results of
operations and reduce our ability to grow our market share.

If we are unable to effectively manage our growth, our
business may become inefficient and we may not be able to effectively compete,
increase our revenues or control our expenses.

We
have grown our business rapidly over the past few years. Between the fiscal
years ended December 31, 2001 and 2005, our revenues increased at a compounded
annual growth rate of 113%. We plan to significantly increase our operating
expenses to expand our sales and marketing capabilities, broaden our customer
support capabilities and fund greater levels of research and development. Our
rapid growth has placed, and is expected to continue to place, a significant
strain on our managerial, technical, operational and financial resources. To
manage our expected growth, we will have to:

| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | retain existing personnel;                                                                                                                                           
| |   |                                                                                                                                                                      
| |  | hire, train, manage and retain additional qualified
  personnel, including sales and marketing and research and development
  personnel;                             
| |   |                                                                                                                                                                      
| |  | implement additional operational controls, reporting
  and financial systems and procedures; and                                                                     
| |   |                                                                                                                                                                      
| |  | effectively manage and expand our relationships with
  customers, subcontractors and other third parties responsible for
  manufacturing and delivering our products.

The long and variable sales cycles for our solutions may
cause our revenues and operating results to vary significantly from quarter to
quarter, which could adversely affect the market price of our common stock.

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

14

---



lead times, may cause our revenue and results of
operations to vary significantly and unexpectedly from quarter to quarter.
These variations could materially and adversely affect the market price of our
common stock.

If we are unable to protect our intellectual property rights,
our financial condition and results of operations could be materially and
adversely affected.

We
rely on a combination of patents, copyrights, trademarks, trade secrets and
contractual measures to protect our intellectual property rights. Third parties
may seek to challenge, invalidate, circumvent or render unenforceable any
patents or proprietary rights owned by us. If such challenges are successful,
our business will be materially and adversely affected.

Our
employees, consultants and advisors enter into confidentiality agreements with
us that prohibit the disclosure or use of our confidential information. We also
have entered into confidentiality agreements to protect our confidential
information delivered to third parties for research and other purposes. Despite
these efforts, we cannot assure you that we will be able to effectively enforce
these agreements or our confidential information will not be disclosed, that
others will not independently develop substantially equivalent confidential
information and techniques or otherwise gain access to our confidential
information or that we can meaningfully protect our confidential information.

Disputes
may arise in the future with respect to the ownership of rights to any
technology developed with advisors or collaborators. These and other possible
disagreements could lead to delays in the collaborative research, development
or commercialization of our systems, or could require or result in costly and
time-consuming litigation that may not be decided in our favor. Any such event
could materially and adversely affect our financial condition and results of
operations.

Policing
the unauthorized use of our intellectual property is difficult, and we cannot
assure you that the steps we have taken will prevent unauthorized use of our
technology or other intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. Accordingly, we may not be able to protect our proprietary rights
against unauthorized third party copying or use. If we are unsuccessful in
protecting our intellectual property, we may lose any technological advantages
we have over competitors and our financial condition and results of operations
could be materially and adversely affected.

We may become involved in an intellectual property dispute
that could subject us to significant liability, divert the time and attention
of our management and prevent us from selling our products, any of which could
materially and adversely affect our financial condition and results of
operations.

In
recent years, there has been significant litigation in the United States and
internationally involving claims of alleged infringement of patents and other
intellectual property rights. Litigation may be necessary to enforce our
intellectual property rights, defend ourselves against alleged infringement and
determine the scope and validity of our intellectual property rights.

Any
such litigation, whether or not successful, could result in substantial costs,
divert the time and attention of our management and prevent us from selling our
products. If a claim of patent infringement was decided against us, we could be
required to:

| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | pay substantial damages to the party making such
  claim;                                                               
| |   |                                                                                                                         
| |  | stop selling, making, having made or using products
  or services that incorporate the challenged intellectual property;

15

---



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtain from the holder of the infringed intellectual
  property right a license to sell, make or use the relevant technology, which
  license may not be available on commercially reasonable terms, or at all; or
| |   |                                                                                                                                                                                                                   
| |  | redesign those products or services that incorporate
  such intellectual property.                                                                                                                                

The
failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products and could materially and
adversely affect our financial condition and results of operations.

The U.S. governments right to use technology developed by us
with government funds could limit our intellectual property rights.

We
have developed, and may in the future develop, improvements to our technology
that are funded in part by the U.S. government. As a result, we do not have the
right to prohibit the U.S. government from using certain technologies developed
by us with such government funds or to prohibit third parties from using those
technologies to provide products and services at the request of the U.S.
government. Although such government rights do not affect our ownership of the
technology developed using such funds, the U.S. government has the right to
royalty-free use of technologies that we have developed under such contracts.
We are free to commercially exploit those government funded technologies and
may assert our intellectual property rights to seek to block other
non-government users thereof, but we cannot assure you that we can successfully
do so.

We rely on subcontractors to manufacture and deliver our
products. Any quality or performance failures by our subcontractors or changes
in their financial condition could disrupt our ability to supply quality
products to our customers in a timely manner, resulting in business
interruptions, increased costs, claims for damages, reputational damage and reduced revenue.

In
order to meet the requirements under our contracts, we rely on subcontractors
to manufacture and deliver our products to our customers. For example, during
the year ended December 31, 2005, we relied on Flextronics International Ltd.
for the purchase of approximately 46.5% of our components and finished goods.
Any quality or performance failures by our subcontractors or changes in their
financial or business condition could disrupt our ability to supply quality
products to our customers in a timely manner. If we are unable to fulfill
orders from our customers in a timely manner, we could experience business
interruption, increased costs, damage to our reputation and loss of our
customers. In addition, we may be subject to claims from our customers for
failing to meet our contractual obligations. Although we have several sources
for production, the inability to provide our products to our customers in a
timely manner could result in the loss of customers and our revenues could be
materially reduced. In addition, there is great competition for the most
qualified and competent subcontractors. If we are unable to hire qualified
subcontractors, the quality of our services and products could decline.
Furthermore, third-party manufacturers in the electronic component industry are
consolidating. The consolidation of third-party manufacturers may give
remaining manufacturers greater leverage to increase the prices that they
charge, thereby increasing our manufacturing costs. If we are unable to pass
the increased costs onto our customers, our profitability could be materially
and adversely affected.

16

---



We rely on a limited number of suppliers for several
significant components and raw materials in our products. If we are unable to
obtain these components or raw materials on a timely basis, we will be unable
to meet our customers orders, which could reduce our revenues, subject us to
claims for damages and adversely affect our relationships with our customers.

We
rely on a limited number of suppliers for the components and raw materials used
in our products, including Flextronics. Although there are many suppliers for
most of our component parts and raw materials, we are dependent on a limited
number of suppliers for many of our significant components and raw materials.
This reliance involves a number of significant risks, including:

| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unavailability of materials and interruptions in
  delivery of components and raw materials from our suppliers, which could
  result in manufacturing delays; and
| |   |                                                                                                                                                                  
| |  | fluctuations in the quality and price of components
  and raw materials.                                                                                         

We
currently do not have any long-term or exclusive purchase commitments with any
of our suppliers. In addition, our suppliers may enter into exclusive
arrangements with our competitors, be acquired by our competitors, stop selling
their products or components to us at commercially reasonable terms or at all.
We may not be able to develop alternative sources for the components and raw
materials. Even if alternate suppliers are available to us, identifying them is
often difficult and time consuming. If we are unable to obtain ample supply of
product or raw materials from our existing suppliers or alternative sources of
supply, we may be unable to satisfy our customers orders, which could reduce
our revenues, subject us to claims for damages and adversely affect our
relationships with our customers.

If we lose our executive officers, or are unable to recruit
additional personnel, our ability to manage our business could be materially
and adversely affected.

We
are dependent on the continued employment and performance of our executive
officers, particularly Jeffrey M. Jagid, Chief Executive Officer, Kenneth S.
Ehrman, Chief Operating Officer, Ned Mavrommatis, Chief Financial Officer,
Michael Ehrman, Executive Vice President Engineering and Frederick Muntz,
Executive Vice President Sales, Marketing and Customer Satisfaction. We currently do not have
employment agreements with any of our executive officers. Like other companies
in our industry, we face intense competition for qualified personnel. Many of
our competitors have greater resources than we have to hire qualified
personnel. Accordingly, if we are not successful in attracting or retaining
qualified personnel in the future, our ability to manage our business could be
materially and adversely affected.

The industry in which we operate is highly competitive, and
competitive pressures from existing and new companies could have a material
adverse effect on our financial condition and results of operations.

The
industry in which we operate is highly competitive and influenced by the
following:

| |   |                                                
| | - | -----------------------------------------------
| |  | advances in technology;                        
| |   |                                                
| |  | new product introductions;                     
| |   |                                                
| |  | evolving industry standards;                   
| |   |                                                
| |  | product improvements;                          
| |   |                                                
| |  | rapidly changing customer needs;               
| |   |                                                
| |  | intellectual property invention and protection;

17

---



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | marketing and distribution capabilities;                       
| |   |                                                                
| |  | competition from highly capitalized companies;                 
| |   |                                                                
| |  | entrance of new competitors;                                   
| |   |                                                                
| |  | ability of customers to invest in information
  technology; and
| |   |                                                                
| |  | price competition.                                             

The
products marketed by us and our competitors are becoming more complex. As the
technological and functional capabilities of future products increase, these
products may begin to compete with products being offered by traditional
computer, network and communications industry participants that have
substantially greater financial, technical, marketing and manufacturing
resources than we do.

Although
we are not aware of any current competitors that provide the precise
capabilities of our systems, we are aware of competitors that offer subsets of
our system capabilities or alternate approaches to the needs our products
address. Those companies include both emerging companies with limited operating
histories, such as WhereNet Corp., Media Recovery, Inc. and Access Control
Group L.L.C., and companies with longer operating histories, greater name
recognition and/or significantly greater financial, technical and marketing resources
than ours, such as Savi Technology, Inc., Symbol Technologies, Inc., Motorola,
Inc. and Intermec, Inc.

If
we do not keep pace with product and technology advances, including the
development of superior products by our competitors, or if we are unable to
otherwise compete successfully against our competitors, there could be a
material adverse effect on our competitive position, revenues and prospects for
growth. As a result, our financial condition and results of operations could be
materially and adversely affected.

The federal government or independent standards organizations
may implement significant regulations or standards that could adversely affect
our ability to produce or market our products.

Our
products transmit radio frequency waves, the transmission of which is governed
by the rules and regulations of the Federal Communications Commission, or FCC,
as well as other federal and state agencies. Our ability to design, develop and
sell our products will continue to be subject to these rules and regulations
for the foreseeable future. In addition, our products and services may become
subject to independent industry standards. The implementation of unfavorable
regulations or industry standards, or unfavorable interpretations of existing
regulations by courts or regulatory bodies, could require us to incur
significant compliance costs, cause the development of the affected products to
become impractical or otherwise adversely affect our ability to produce or market
our products. The adoption of new industry standards applicable to our products
may require us to engage in rapid product development efforts that would cause
us to incur higher expenses than we anticipated. In some circumstances, we may
not be able to comply with such standards, which could materially and adversely
affect our ability to generate revenues through the sale of our products.

Because our products are complex, they may have undetected
errors or failures when they are introduced that could seriously harm our
business.

Technical
products like ours often contain undetected errors or failures when first
introduced. Despite our efforts to eliminate these flaws, there still may be
flaws in our products, even after the commencement of commercial shipments.
Because our products are used in business-critical applications, we could be
subject to product liability claims if our systems fail to perform as intended.
Even

18

---



unsuccessful claims against us could result in costly
litigation and the diversion of managements time and resources and could
damage our reputation and impair the marketability of our systems. Although we
maintain insurance, we cannot assure you that:

| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | our insurance will provide adequate coverage against
  potential liabilities if our products cause harm or fail to perform as
  promised; or
| |   |                                                                                                                                             
| |  | adequate product liability insurance will continue
  to be available to us in the future on commercially reasonable terms or at
  all.      

If
our insurance is insufficient to pay any product liability claim, our financial
condition and results from operations could be materially and adversely
affected. In addition, any such claims could permanently injure our reputation.

We may need to obtain additional capital to fund our operations
that could have negative consequences on our business.

We
may require additional capital in the future to develop and commercialize
additional products and technologies or take advantage of other opportunities
that may arise, including potential acquisitions. We may seek to raise the
necessary funds through public or private equity offerings, debt financings or
strategic alliances and licensing arrangements. To the extent we raise
additional capital by issuing equity securities, our existing stockholders may
experience substantial dilution. If additional capital is raised through debt,
such debt may subject us to significant restrictive covenants that could affect
our ability to operate our business. In addition, we may be required to relinquish
rights to our technologies or systems, or grant licenses on terms that are not
favorable to us in order to raise additional funds through alliance, joint
venture and licensing arrangements. If adequate funds are not available, we may
be required to delay, reduce the scope of or eliminate one or more of our
development programs, and our business, financial condition, results of
operations and stock price could be materially and adversely affected.

If we do not adequately anticipate and respond to the risks
inherent in growing our business internationally, our operating results and the
market price of our common stock could be materially and adversely effected.

We
have not generated significant revenues outside of North America. As part of
our growth strategy, we may seek to expand our operations outside of North
America by establishing relationships with global distributors to market and
sell our systems internationally. There are a number of risks inherent in doing
business in such markets, including:

| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | unexpected legal or regulatory changes;                                                     
| |   |                                                                                             
| |  | unfavorable political or economical factors;                                                
| |   |                                                                                             
| |  | less developed infrastructure;                                                              
| |   |                                                                                             
| |  | difficulties in recruiting and retaining personnel,
  and managing international operations;
| |   |                                                                                             
| |  | fluctuations in foreign currency exchange rates;                                            
| |   |                                                                                             
| |  | lack of sufficient protection for intellectual
  property rights; and                       
| |   |                                                                                             
| |  | potentially adverse tax consequences.                                                       

We
currently do not have any operations outside of North America, and we do not
have experience establishing or operating businesses outside of North America.
If we do not adequately

19

---



anticipate and respond to the risks inherent in
international operations, our operating results and the market price of our
common stock could be materially and adversely affected. In addition, although
we intend to expand our business outside of North America, there are risks
associated with conducting an international operation, including the risks
listed above, and such expansion may not be successful or have a positive
effect on our financial condition and results of operations.

We have
never made any acquisitions of any businesses and cannot assure you that we
will be able to successfully integrate any businesses, products, technologies
or personnel that we might acquire in the future.

We
may, from time to time, consider investments in complementary companies,
products or technologies. In the event of any future acquisitions, we could:

| |                                                                                       |                                                                                              
| | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------
| |                                                                                      | issue stock that would dilute our current stockholders
  percentage ownership;              
| |                                                                                       |                                                                                              
| |                                                                                      | incur debt;                                                                                  
| |                                                                                       |                                                                                              
| |                                                                                      | assume liabilities;                                                                          
| |                                                                                       |                                                                                              
| |                                                                                      | incur expenses related to the impairment of
  goodwill; or                                   
| |                                                                                       |                                                                                              
| |                                                                                      | incur large and immediate write-offs.                                                        
| |                                                                                       |                                                                                              
| | Our operation of any acquired business will also
  involve numerous risks, including:
| |                                                                                      
| |                                                                                      | problems combining the acquired operations,
  technologies or products;                      
| |                                                                                       |                                                                                              
| |                                                                                      | unanticipated costs;                                                                         
| |                                                                                       |                                                                                              
| |                                                                                      | diversion of managements time and attention from
  our core business;                       
| |                                                                                       |                                                                                              
| |                                                                                      | adverse effects on existing business relationships
  with suppliers and customers;           
| |                                                                                       |                                                                                              
| |                                                                                      | risks associated with entering markets in which we
  have no or limited prior experience; and
| |                                                                                       |                                                                                              
| |                                                                                      | potential loss of key employees, particularly those
  of acquired companies.                 

We
have never made any acquisitions of any businesses and cannot assure you that
we will be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future. Any failure to
do so could have a material adverse effect on our financial condition and
results of operations.

The concentration of common stock ownership among our
executive officers and directors could limit your ability to influence the
outcome of corporate transactions or other matters submitted for stockholder
approval.

As
    of January 31, 2006, our executive officers and directors beneficially owned,
    in the aggregate, 11.4% of our outstanding common stock, not including 1,944,508
    shares of common stock that our executive officers and directors may acquire
    upon the exercise of outstanding options or if they otherwise acquire additional
shares of common stock in the future. As a

20

---



result, our officers and directors will have the
ability to influence the outcome of all corporate actions requiring stockholder
approval, irrespective of how our other stockholders may vote, including the
following actions:

| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | the election of directors;                                                                                                            
| |   |                                                                                                                                       
| |  | adoption of stock option plans;                                                                                                       
| |   |                                                                                                                                       
| |  | the amendment of our organizational documents; and                                                                                    
| |   |                                                                                                                                       
| |  | the approval of certain mergers and other
  significant corporate transactions, including a sale of substantially all of
  our assets.

Changes in stock option accounting rules will materially
increase our operating expenses from historical levels, resulting in reduced
net income and net income per share.

We
have historically used broad-based employee stock option programs to hire,
incent and retain our workforce. As of January 31, 2006, options to purchase
2,725,919 shares of our common stock were outstanding, with a weighted average
exercise price of $7.05 per share. As of such date, 748,685 shares of our
common stock were available for future issuance under our option plans. We may
elect to increase the number of shares available for issuance under these
plans.

In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment, which
requires all companies to measure compensation cost for all share-based
payments, including employee stock options, at fair value. The SEC has issued
rules requiring us to adopt SFAS No. 123R in the first quarter of our 2006
fiscal year, and we will implement the new standard on a prospective basis. We currently
use the intrinsic value method to measure compensation expense for stock-based
awards to our employees. Under this standard, we generally do not consider
stock option grants issued under our employee stock option plans to be
compensation when the exercise price of the stock option is equal to or greater
than the fair market value on the date of grant. For our fiscal year ending
December 31, 2006 and thereafter, we will be required to take a compensation
charge as stock options or other stock-based compensation awards are issued or
as they vest, including the unvested portion of options that were granted on or
prior to December 31, 2005. This compensation charge will be based on a
calculated value of the option or other stock-based award using a complex
methodology that may not correlate to the current market price of our stock.
The calculations required under the new accounting rules are complicated.
Although we are currently unable to estimate the actual effect of such
compensation expense, the expense will materially increase our operating
expenses from historical levels, resulting in reduced net income and net income
per share. As of December 31, 2005, there was $4,899,000 of total unrecognized
compensation expense related to unvested stock options
granted under our stock option plans. The cost is expected to be recognized over
the six-year weighted-average remaining contractual life of our outstanding options. The total fair value of shares vested
during the years ended December 31, 2003, 2004 and 2005 was $677,000, $740,000
and $807,000, respectively.

The unpredictability of our quarterly operating results could
adversely affect the market price of our common stock.

Our
revenues and operating results may vary significantly from quarter to quarter
due to a number of factors, many of which are outside of our control and any of
which could adversely affect the market price of our common stock. The main
factors that may affect us include the following:

| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | variations in the sales of our products to our
  significant customers;                                                  
| |   |                                                                                                                          
| |  | variations in the mix of products and services
  provided by us;                                                         
| |   |                                                                                                                          
| |  | the timing and completion of initial programs and
  larger or enterprise-wide purchases of our products by our customers;

21

---



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | the length and variability of the sales cycle for
  our products;                                  
| |   |                                                                                                    
| |  | the timing and size of sales;                                                                      
| |   |                                                                                                    
| |  | changes in market and economic conditions, including
  fluctuations in demand for our products; and
| |   |                                                                                                    
| |  | announcements of new products by our competitors.                                                  

As a result of these and other factors, revenues for
any quarter are subject to significant variation that could adversely affect
the market price for our common stock.

Future sales of our common stock, including sales of our
common stock acquired upon the exercise of outstanding options, may cause the
market price of our common stock to decline.

The
market price of our common stock could decline as a result of sales by our
existing stockholders of shares of common stock in the market, or sales of our
common stock acquired upon the exercise of outstanding options, or the perception
that these sales could occur. These sales also may make it more difficult for
us to sell equity securities at a time and price that we deem appropriate.

We
have 7,870,523 shares of common stock outstanding as of January 31, 2006, of
which 6,973,173 shares are freely transferable without restriction and 897,350
shares are eligible for future sale, subject to the applicable volume, manner
of sale, holding period and other limitations of Rule 144. In addition, as of
January 31, 2006, options to purchase 2,725,919 shares of our common stock were
issued and outstanding, of which 1,381,831 were vested. The remaining options
will vest ratably over a five-year period measured from the date of grant. The
weighted-average exercise price of such stock options is $7.05, which is
substantially lower than the current market price of our common stock. We also
may issue additional shares of stock in connection with our business,
including in connection with acquisitions, and may grant additional stock
options to our employees, officers, directors and consultants under our stock
option plans or warrants to third parties. If a significant portion of these
shares were sold in the public market, the market value of our common stock
could be adversely affected.

Provisions of Delaware law or our charter documents could
delay or prevent an acquisition of our company, even if the acquisition would
be beneficial to our stockholders, and could make it more difficult for you to
change management.

Provisions
of our certificate of incorporation and bylaws may discourage, delay or prevent
a merger, acquisition or other change in control that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive
a premium for their shares. This is because these provisions may prevent or
frustrate attempts by stockholders to replace or remove our current management
or members of our board of directors. These provisions, among other things:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | permit our board of directors to issue, without
  further action by our stockholders, up to 5,000,000 shares of preferred
  stock, with any rights, preferences and privileges as they may designate,
  including the right to approve an acquisition or other change in control;                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | provide that special meetings of stockholders may be
  called only by (i) our board of directors pursuant to a resolution adopted by
  a majority of the entire board of directors, either upon motion of a director
  or upon written request by the holders of at least 50% of the voting power of
  all the shares of our capital stock entitled to vote in the election of directors,
  voting as a single class, or (ii) our Chairman of the Board or President; and

22

---



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require the affirmative vote of at least 75% of the
  voting power of all the shares of our capital stock entitled to vote in the
  election of directors, voting as a single class, to amend or repeal the
  provisions dealing with meetings of stockholders.

In
addition, Section 203 of the Delaware General Corporation Law prohibits us from
engaging in a business combination with any of our interested stockholders for
three years after such stockholder became an interested stockholder unless
certain specified conditions are met. As a result, these provisions and
Delaware law could limit the price that investors are willing to pay in the
future for shares of our common stock.

Cautionary
Note Regarding Forward-Looking Statements.

This
Annual Report on Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act.

Forward-looking
statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, assumptions, estimates, intentions, and
future performance, and involve known and unknown risks, uncertainties and
other factors, which may be beyond our control, and which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by such
forward-looking statements.

All
statements other than statements of historical fact are statements that could
be forward-looking statements. You can identify these forward-looking
statements through our use of words such as may, will, can, anticipate,
assume, should, indicate, would, believe, contemplate,
expect,
seek, estimate, continue, plan, point to, project,
predict,
could, intend, target, potential, and other similar words and
expressions of the future. These forward-looking statements may not be realized
due to a variety of factors, including, without limitation:

| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | future economic and business conditions;                                                                                                     
| |   |                                                                                                                                              
| |  | the loss of any of our key customers or reduction in
  the purchase of our products by any such customers;                                   
| |   |                                                                                                                                              
| |  | the failure of the market for our products to
  continue to develop;                                                                         
| |   |                                                                                                                                              
| |  | our inability to protect our intellectual property;                                                                                          
| |   |                                                                                                                                              
| |  | our inability to manage our growth;                                                                                                          
| |   |                                                                                                                                              
| |  | the effects of competition from a wide variety of
  local, regional, national and other providers of wireless solutions;                     
| |   |                                                                                                                                              
| |  | changes in laws and regulations, including tax and
  securities laws and regulations and interstate and regulations promulgated by
  the FCC;
| |   |                                                                                                                                              
| |  | changes in accounting policies, rules and practices;                                                                                         
| |   |                                                                                                                                              
| |  | changes in technology or products, which may be more
  difficult or costly, or less effective than anticipated; and                          
| |   |                                                                                                                                              
| |  | the other factors listed under this Item 1A - Risk
  Factors.                                                                              

All forward-looking statements are expressly qualified
in their entirety by this cautionary notice. You are cautioned not to place
undue reliance on any forward-looking statements, which speak only as of the
date of this Annual Report on Form 10-K. We have no obligation, and expressly
disclaim any obligation, to update, revise or correct any of the
forward-looking statements, whether as a result of new information,

23

---



future events or otherwise. We have expressed our
expectations, beliefs and projections in good faith and we believe they have a
reasonable basis. However, we cannot assure you that our expectations, beliefs
or projections will result or be achieved or accomplished.

|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments

None.

24

---



|        |           
|------- | ----------
|Item 2. | Properties

Our
executive and administrative offices are located in Hackensack, New Jersey. In
November 1999, we entered into a lease for this facility, covering
approximately 22,500 square feet, that expires on March 31, 2010. The rent is
currently $34,825 per month. During 2003, we entered into an agreement to
sublease to a third party 6,270 square feet through the end of the lease. The
sublease provides for monthly payments of $11,619, subject to adjustments for
increases in real estate taxes and certain operating expenses.

Although
we believe that our existing facilities are adequate for our current needs, if
we expand our sales force and establish customer support and consulting
services, as contemplated, we expect to lease or purchase additional space.

|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

As
of February 17, 2006, we were not involved in any material litigation.

|        |                                                      
|------- | -----------------------------------------------------
|Item 4. | Submission of Matters to a Vote of
  Security Holders

None.

25

---



PART II.

|        |                                                                                                               
|------- | --------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common
  Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)
Market Information. Until November 7, 2004, our common stock was quoted
on the Nasdaq Capital Market (formerly known as the SmallCap Market). Since
then, our common stock has been quoted on the Nasdaq National Market under the
symbol IDSY. The following table sets forth, for the periods indicated, the
high and low sales price for our common stock as reported on such quotation
systems.

|                   |  |   |       |  |     |       | 
|------------------ |  | - | ----- |  | --- | ----- | 
|Quarter Ending:    |  |   | High  |  | Low |      
|                   |  |   |       |  |     |      
|                  
|2004               |  |   |       |  |     |       | 
|March 31, 2004     |  | $ | 8.50  |  | $   | 6.05  | 
|June 30, 2004      |  |   | 16.18 |  |     | 6.35  | 
|September 30, 2004 |  |   | 16.54 |  |     | 10.48 | 
|December 31, 2004  |  |   | 19.96 |  |     | 13.47 | 
|                   |  |   |       |  |     |       | 
|2005               |  |   |       |  |     |       | 
|March 31, 2005     |  |   | 18.50 |  |     | 9.25  | 
|June 30, 2005      |  |   | 15.97 |  |     | 10.00 | 
|September 30, 2005 |  |   | 20.05 |  |     | 15.15 | 
|December 31, 2005  |  |   | 23.96 |  |     | 16.09 | 

(b)
Holders. As of February 17, 2006, there were 20 registered holders of our
common stock.

(c)
Dividends. We have never paid a cash dividend on our common stock and do
not expect to pay a cash dividend in the near future. We currently intend to
retain future earnings, if any, to finance our operations and expand our
business. Any future determination to pay cash dividends will be at the
discretion of our board of directors and will depend upon our financial
condition, operating results, capital requirements and any other factors our
board of directors deems relevant. In addition, our agreements with our lenders
may, from time to time, restrict our ability to pay dividends.

(d)
Sales of Unregistered Securities.

None.

(e)
Share Repurchases.

None.

26

---



|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The
following table sets forth selected financial data for each of the five years
ended December 31, 2005 derived from our audited financial statements. You
should read the information in the table below together with the section of
this Annual Report on Form 10-K entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations, our financial statements and
related notes and the other financial data included elsewhere in this Annual
Report on Form 10-K.

|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|------------------------------------------------------ |  | ----------------------- | ---------- | ---- | - | ---------- | - | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                       |  | Year Ended December 31, |           
|                                                       |  |                         |           
|                                                       |  | 2001                    |            | 2002 |   | 2003       |   | 2004 |            | 2005 |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |  
|Statement of Operations Data:                          |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Revenues                                               |  | $                       | 923,000    |      | $ | 5,544,000  |   | $    | 7,959,000  |      | $ | 13,741,000 |   | $ | 19,004,000 |  
|Cost of revenues                                       |  |                         | 548,000    |      |   | 2,430,000  |   |      | 4,075,000  |      |   | 6,509,000  |   |   | 9,708,000  |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Gross profit                                           |  |                         | 375,000    |      |   | 3,114,000  |   |      | 3,884,000  |      |   | 7,232,000  |   |   | 9,296,000  |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Operating
  expenses:                                  |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Selling, general
  and administrative                  |  |                         | 3,552,000  |      |   | 3,835,000  |   |      | 4,456,000  |      |   | 5,879,000  |   |   | 7,140,000  |  
|Research and
  development                             |  |                         | 1,038,000  |      |   | 938,000    |   |      | 891,000    |      |   | 1,234,000  |   |   | 1,625,000  |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Income (loss)
  from operations                        |  |                         | (4,215,000 | )    |   | (1,659,000 | ) |      | (1,463,000 | )    |   | 119,000    |   |   | 531,000    |  
|Interest income                                        |  |                         | 310,000    |      |   | 279,000    |   |      | 269,000    |      |   | 195,000    |   |   | 222,000    |  
|Interest expense                                       |  |                         | (3,000     | )    |   | (4,000     | ) |      | (59,000    | )    |   | (63,000    | ) |   | (53,000    | )
|Other income                                           |  |                         |           |      |   |           |   |      | 54,000     |      |   | 147,000    |   |   | 151,000    |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Net income
  (loss)                                    |  | $                       | (3,908,000 | )    | $ | (1,384,000 | ) | $    | (1,199,000 | )    | $ | 398,000    |   | $ | 851,000    |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Net income
  (loss) per share  basic                  |  | $                       | (0.67      | )    | $ | (0.21      | ) | $    | (0.17      | )    | $ | 0.05       |   | $ | 0.11       |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Net income
  (loss) per share  diluted                |  | $                       | (0.67      | )    | $ | (0.21      | ) | $    | (0.17      | )    | $ | 0.05       |   | $ | 0.09       |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Weighted average
  common shares outstanding  basic   |  |                         | 5,840,000  |      |   | 6,711,000  |   |      | 6,905,000  |      |   | 7,455,000  |   |   | 7,771,000  |  
|                                                       |  |                         |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Weighted average
  common shares outstanding  diluted |  |                         | 5,840,000  |      |   | 6,711,000  |   |      | 6,905,000  |      |   | 8,783,000  |   |   | 9,332,000  |  

27

---



|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and
  Analysis of Financial Condition and Results of Operations

The
following discussion is intended to assist you in understanding our financial
condition and results of operations and should be read in conjunction with the
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K. Many of the amounts and percentages in this section have been
rounded for convenience of presentation, but actual recorded amounts have been
used in computations. Accordingly, some information may appear not to compute
accurately.

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
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. Ford, Walgreens, the U.S. Postal Service and Target
are all examples of this progression.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ford initially implemented our system at one plant
  in 1999, which led to a blanket purchase order to deploy our system across
  its North American operations. As of December 31, 2005, we had implemented
  our system on an aggregate of approximately 4,700 vehicles at 38 Ford
  facilities.                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Walgreens initially deployed our system at a single
  distribution center in 2003 and, as of December 31, 2005, had deployed our
  system at six distribution centers covering an aggregate of approximately 600
  vehicles.                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The U.S. Postal Service used the implementation of
  our system at one of its facilities in Buffalo, New York in 2003 to form the
  basis of a solicitation for competitive bids for a powered vehicle management
  system. Based on our proposal for that program, the U.S. Postal Service
  awarded us a national contract in 2004 to deploy our system at up to 460 U.S.
  Postal Service facilities nationwide. As of December 31, 2005, the U.S. Postal
Service had placed orders for deployment of our system in 28 of its facilities.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Beginning in 2003, Target utilized our system on a
  limited number of vehicles at one of its facilities. After testing our
  product, Target entered into a contract with us to implement our system on
  more than 450 vehicles in Targets distribution facilities across the United
  States.                                                                                                                                                                                                                                           

During the quarter ended December 31, 2005, we entered
into contracts with Rite Aid and Wal-Mart for the initial implementation of our
system. We work closely with customers like these to help maximize the
utilization and benefits of our system and demonstrate the value of
enterprise-wide deployments.

Although
we generated net income of $851,000 and $398,000 for the years ended December
31, 2005 and 2004, respectively, we incurred net losses of $1.2 million
for the year ended December 31, 2003 and have incurred additional net losses
since inception. At December 31, 2005, we had an accumulated deficit of $10.5 million.

28

---



During
the year ended December 31, 2005, we generated revenues of $19.0 million, and
the U.S. Postal Service and Ford accounted for 45.1% and 17.8% of our revenues,
respectively. During the year ended December 31, 2004, we generated revenues of
$13.7 million, and Ford, Target and the U.S. Department of Homeland Security accounted
for 49.1%, 15.0% and 11.7% of such revenues, respectively.

Our
ability to increase our revenues and continue to generate net income will
depend on a number of factors, including 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 And Estimates

We
have adopted various accounting policies that govern the application of
accounting principles generally accepted in the United States in the
preparation of our financial statements. Our significant accounting policies
are described in Note B to our financial statements. Certain accounting
policies involve significant judgments and assumptions by our management that
can have a material impact on the carrying value of certain assets and liabilities.
We consider such accounting policies to be our critical accounting policies.
The judgments and assumptions used by our management in these critical
accounting policies are based on historical experience and other factors that
our management believes to be reasonable under the circumstances. Because of
the nature of these judgments and assumptions, actual results could differ
significantly from these judgments and estimates, which could have a material
impact on the carrying values of our assets and liabilities and our results of
operations. Our critical accounting policies are described below.

Revenue Recognition

We
derive our revenues from: (i) sales of our Wireless Asset Net system, which
includes training and technical support; (ii) post-contract maintenance and
support agreements; and (iii) leasing arrangements. Our system consists of
on-asset hardware, communication infrastructure and software. Revenue from the
sale of our system is not recognized until all necessary components of the system
are delivered to enable the system to function. When there are no undeliverable
elements that are essential to the functionality of the systems, revenues are
recognized as each element is delivered based on the relative selling price of
each element. Thereafter, revenue attributable to additional units is
recognized upon delivery, provided all other conditions for revenue
recognition have been met. Our system is typically implemented by the customer
or a third party and, as a result, revenues are recognized when title and risk
of loss passes to the customer, which usually is upon delivery of the system,
pervasive evidence of an arrangement exists, sales price is fixed and
determinable, collectability is reasonably assured and contractual obligations
have been satisfied. In some instances, we are also responsible for providing
installation services. The additional installation services, which could be
performed by third parties, are considered another element in a multi-element
deliverable and revenue for installation services is recognized at the time the
installation is provided. Revenues from training and technical support are
recognized as such services are provided.

In
most of our contracts, we invoice customers once certain milestones are met. As
the systems are delivered, services are performed and all of the criteria for
revenue recognition are satisfied, we recognize revenue for such systems. The
difference between revenue recognized for financial reporting purposes and
amounts invoiced is recorded as unbilled receivables or deferred revenue.
Should a contract

29

---



contain customer acceptance terms, we do not recognize
any revenue on that contract until such terms have been met as described in the
agreement.

We
also enter into post-contract maintenance and support agreements. Revenues are
recognized over the service period and the cost of providing these services is
expensed as incurred.

We
also derive revenue under leasing arrangements. Such arrangements provide for
monthly payments covering the system sale, maintenance, support and interest.
These arrangements meet the criteria to be accounted for as sales-type leases.
Accordingly, the system sale is recognized upon delivery of the system, provided
all other revenue recognition criteria are met as described above. Upon the
recognition of revenue, an asset is established for the investment in
sales-type leases. Maintenance revenues and interest income are recognized
monthly over the lease term.

During
2002, we entered into a contract to implement our system on a portion of a
customers fleet of vehicles. Under the contract, we are entitled to issue
sixty monthly invoices of up to $40,000 per month, each of which is contingent
upon certain conditions being met. Costs directly attributable to this
contract, consisting principally of engineering and manufacturing costs, were
deferred until implementation of the system was completed. The deferred costs
are being charged to cost of revenue in accordance with the cost recovery
method. Under the cost recovery method, the deferred contract costs are reduced
in each period by an amount equal to the revenues recognized by us in that
period until all of the deferred costs are written-off, at which time we will
recognize a gross profit, if any. We continue to evaluate the carrying amount
of the deferred costs.

Stock-Based Compensation

We
account for stock-based employee compensation under Accounting Principles
Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. We have adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure.

In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), Share-Based Payment, which replaces SFAS 123 and
supersedes APB Opinion No. 25. Under the provisions of SFAS 123R, companies are
generally required to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which an employee
is required to provide service in exchange for the award, usually the vesting
period. The statement is effective as of the beginning of the first annual
reporting period that begins after June 15, 2005 and, accordingly, will be
adopted by us in the first quarter of calendar year 2006. SFAS 123R requires
that compensation expense be recognized for the unvested portions of existing
options granted prior to its effective date and the cost of options granted to
employees after the effective date based on the fair value of the stock options
at grant date. The adoption of SFAS 123R will materially increase our operating
expenses from historical levels, resulting in reduced net income and net income
per share, but will not impact our cash flows. However, the actual impact of
adoption of SFAS 123R cannot be fully predicted at this time because it will
depend on levels of share-based payments granted in the future. As of December
31, 2005, there was $4,899,000 of total unrecognized compensation expense related
to unvested stock options granted under our stock option
plans. The cost is expected to be recognized over the weighted-average remaining
contractual life of our outstanding options. The total fair value of shares
vested during the years ended December 31, 2003, 2004 and 2005 was $677,000,
$740,000 and $807,000, respectively.

30

---



Results of Operations

The
following table sets forth certain items related to our statement of operations
as a percentage of revenues for the periods indicated and should be read in
conjunction with our financial statements and the related notes included
elsewhere in this Annual Report on Form 10-K. A detailed discussion of the material changes in
our operating results is set forth below.



|                                    |  |                         |       |    |  |       |   |  |       |  
|----------------------------------- |  | ----------------------- | ----- | -- |  | ----- | - |  | ----- | -
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  |                         | 2003  |    |  | 2004  |   |  | 2005  |  
|                                    |  |                         |       |    |  |       |   |  |       |  
|Revenues                            |  |                         | 100.0 | %  |  | 100.0 | % |  | 100.0 | %
|Cost of revenues                    |  |                         | 51.2  |    |  | 47.4  |   |  | 51.1  |  
|                                    |  |                         |       |    |  |       |   |  |       |  
|                                    |  |                         |       |    |  |       |   |  |       |  
|Gross profit                        |  |                         | 48.8  |    |  | 52.6  |   |  | 48.9  |  
|                                    |  |                         |       |    |  |       |   |  |       |  
|Operating expenses:                 |  |                         |       |    |  |       |   |  |       |  
|Selling, general and administrative |  |                         | 56.0  |    |  | 42.8  |   |  | 37.6  |  
|Research and development            |  |                         | 11.2  |    |  | 9.0   |   |  | 8.6   |  
|                                    |  |                         |       |    |  |       |   |  |       |  
|                                    |  |                         |       |    |  |       |   |  |       |  
|Income (loss) from operations       |  |                         | (18.4 | )  |  | 0.8   |   |  | 2.8   |  
|Interest income                     |  |                         | 3.4   |    |  | 1.4   |   |  | 1.2   |  
|Interest expense                    |  |                         | (0.7  | )  |  | (0.4  | ) |  | (0.3  | )
|Other income                        |  |                         | 0.7   |    |  | 1.1   |   |  | 0.8   |  
|                                    |  |                         |       |    |  |       |   |  |       |  
|Net income (loss)                   |  |                         | (15.1 | )% |  | 2.9   | % |  | 4.5   | %
|                                    |  |                         |       |    |  |       |   |  |       |  

Year Ended December 31, 2005 Compared to the Year Ended December 31,
2004

Revenues.
Revenues increased by $5.3 million, or 38.3%, to $19.0 million in 2005 from
$13.7 million in 2004. The increase in revenues was attributable primarily to
increased sales to our customers, including the U.S. Postal Service and Walgreens.
     The $19.0 million of revenues
in 2005 is comprised of product sales of $14.5 million and service revenues of
    $4.5 million.

Cost
of Revenues. Cost of revenues increased by $3.2 million,
or 49.1%, to $9.7 million in 2005 from $6.5 million in 2004. As a percentage
of revenues, cost of revenues was 51.1% in 2005 compared to 47.4% in 2004. Gross
profit was $9.3 million in 2005 compared to $7.2 million in 2004. As a
percentage of revenues, gross profit decreased to 48.9% in 2005 from 52.6% in
2004. The increase in cost of revenues was attributable primarily to increased
costs related to third-party installation services in connection with our contract
with the U.S. Postal Service. In addition, there was a $105,000 increase in our
inventory reserve during 2005 resulting from inventory that became obsolete during
the period. Included in costs of revenues in 2005 and 2004 was $480,000 and $400,000,
respectively, of amortized capitalized costs associated with the application
of the cost recovery method of revenue recognition. In accordance with the cost
recovery method, these capitalized contract costs were reduced dollar for dollar
by the amount of revenue recognized. Excluding the amortization of these capitalized
contract costs, gross profit as a percentage of revenues decreased to 50.2% in
2005 from 54.2% in 2004.

Selling,
General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 21.4%, to $7.1 million in
2005 compared to $5.9 million in 2004. This increase was attributable primarily
to increased payroll and related expenses as well as travel expenses due to the
hiring of additional personnel to support our continued growth and increased
sales and marketing efforts. Also included in selling, general and
administrative expenses in 2005 are costs related to
compliance with Section 404 of the Sarbanes-Oxley Act. As a percentage of
revenues, however, selling, general and administrative expenses decreased to
37.6% in 2005 from 42.8% in 2004 as a result of an increase in revenue.
We are currently expanding our direct sales force and intend to
 develop additional sales and marketing initiatives.
As a result of such expansion, we expect our selling, general and
administrative expenses to increase during 2006.

Research
and Development Expenses. Research and development
expenses increased $391,000, or 31.7%, to $1.6 million in 2005 from $1.2
million in 2004. This increase was attributable to increased payroll and
related expenses due to the hiring of additional personnel and $80,000 of
research and development expenses in 2004 that were capitalized under the cost
recovery method and included in deferred contract costs rather than expensed.
As a percentage of revenues, research and development expenses decreased to
8.6% in 2005 from 9.0% in 2004. We intend to expand our research and
development activities in order to continue to improve the functionality
and reduce the costs of our system and adapt our technology to capitalize
on emerging market opportunities. As a result of such activities, we expect
our research and development expenses to increase during 2006.

Interest
Income. Interest income increased $27,000, or 13.8%, to
$222,000 in 2005 from $195,000 in 2004. This increase was attributable
primarily to an increase in interest rates in 2005.

Interest
Expense. Interest expense decreased $10,000, or 15.9%, to
$53,000 in 2005 from $63,000 in 2004. The decrease was attributable to a
reduction in the principal amount of our outstanding debt in 2005.

Other
Income. Other income, which increased slightly to
$151,000 in 2005 from $147,000 in 2004, reflects rental income earned from a
sublease arrangement.

31

---



Net
Income. Net income increased $453,000, or 113.8%, to
$851,000 in 2005 from $398,000 in 2004. Net income per basic and diluted share
increased to $0.11 and $0.09, respectively, for the year ended December 31,
2005, compared to net income per basic and diluted share of $0.05 for the year
ended December 31, 2004. The increase in net income was due primarily to the
reasons described above.

Year ended December 31, 2004
Compared to the Year Ended December 31, 2003

Revenues.
Revenues increased $5.8 million, or 72.6%, to $13.7 million in 2004 from $8.0
million in 2003. The increase in revenues was attributable primarily to
increased sales to our customers, including Ford, Target and the U.S.
Department of Homeland Security.

Cost
of Revenues. Cost of revenues increased $2.4 million, or
59.7%, to $6.5 million in 2004 from $4.1 million in 2003. As a percentage of
revenues, cost of revenues decreased to 47.4% in 2004 from 51.2% in 2003. This
percentage decrease was attributable primarily to the sale of higher margin
services during 2004, cost reductions to the hardware components of our system,
as well as the write-off of approximately $150,000 of obsolete components
during 2003. Gross profit was $7.2 million in 2004 compared to $3.9 million in
2003. As a percentage of revenues, gross profit increased to 52.6% in 2004 from
48.8% in 2003. Included in costs of revenues in 2004 was $400,000 of amortized
capitalized costs associated with the application of the cost recovery method
of revenue recognition. In accordance with the cost recovery method, these
capitalized contract costs were reduced dollar for dollar by the amount of
revenue recognized. Excluding the amortization of these capitalized contract
costs, gross profit as a percentage of revenues was increased to 54.2% in 2004
from 48.8% in 2003.

Selling,
General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 31.9%, to $5.9 million in
2004 from $4.5 million in 2003. The increase was attributable primarily to the
hiring of additional personnel and increased travel expenses to support the
continued growth of the business. As a percentage of revenues, selling, general
and administrative expenses decreased to 42.8% in 2004 from 56.0% in 2003.

Research
and Development Expenses. Research and development
expenses increased $343,000, or 38.5%, to $1.2 million in 2004 from $891,000 in
2003. This increase was attributable primarily to increased payroll and related
expenses due to the hiring of additional personnel and $99,000 of additional
research and development expenses in 2004 that were capitalized under the cost
recovery method and included in deferred contract costs. As a percentage of
revenues, research and development expenses decreased to 9.0% in 2004 from
11.2% in 2003.

Interest
Income. Interest income decreased $74,000, or 27.5%, to
$195,000 in 2004 from $269,000 in 2003. This decrease was attributable
primarily to the assignment of certain sales-type leases to a third-party
leasing company. During 2003, we earned interest income in connection with
sales-type lease arrangements that we did not earn in 2004.

Interest
Expense. Interest expense increased $4,000, or 6.8%, to
$63,000 in 2004 from $59,000 in 2003. The increase was attributable to a slight
increase in the principal amount of our outstanding debt in 2004.

Other
Income. Other income increased $93,000, or 172.2%, to
$147,000 in 2004 from $54,000 in 2003. Other income reflects rental income
earned from a sublease arrangement that commenced in July 2003. The increase in
2004 was attributable to a full year of rental income under the sublease
arrangement.

32

---



Net
Income/Loss. Net income was $398,000 in 2004 compared to
a net loss of $1.2 million in 2003. Net income per basic and diluted share
increased to $0.05 in 2004 from a loss of $0.17 in 2003. This increase was due
primarily to the reasons described above.

Liquidity and Capital Resources

Historically,
our capital requirements have been funded from cash flow generated from our
business and net proceeds from the issuance of our securities, including the
    issuance of our common stock upon the exercise of options and warrants. As
    of December 31, 2005, we had cash, cash equivalents and short-term investments
    of $7.6 million and working capital of $13.9 million compared to $11.6 million
    and $12.7 million, respectively, as of December 31, 2004.

Operating Activities

Net
cash used in operating activities was $4.1 million for the year ended December
31, 2005 compared to net cash provided by operating activities of $1.6 million
for same period in 2004. The increase in net cash used in operating activities
was due primarily to an increase in accounts receivable resulting from an
increase in our revenues in 2005, unbilled receivables under our contract with the U.S. Postal Service
and an increase in inventory.

Net
cash provided by operating activities was $1.6 million for the year ended
December 31, 2004 compared to net cash used in operating activities of $237,000
for the same period in 2003. The change was due primarily to: (i) an increase
in net income attributable to increased revenue growth; (ii) an increase in
accounts payable and accrued expenses attributed to an increase in operating
expenses; (iii) a decrease in accounts receivable attributable to improved
collections; and (iv) the amortization of deferred contract costs, partially
offset by an increase in inventory attributable to increased finished goods to
support the continued growth of the business.

Investing Activities

Net
cash used in investing activities was $2.8 million for the year ended December
31, 2005 compared to net cash provided by investing activities of $1.7 million
for the same period in 2004. The increase in net cash used in investing activities
was due primarily to a $4.7 million increase in the purchase of investments in 2005 compared to
the same period in 2004, which was partially offset by an increase in the maturity of
investments.

Net
cash provided by investing activities was $1.7 million for the year ended
December 31, 2004 compared to net cash used in investing activities of $1.9
million for the same period in 2003. The increase was due primarily to a
significant decrease in the purchase of investments, partially offset by a
decrease in the maturity of investments in 2004 compared to the same period in
2003.

Financing Activities

Net
cash provided by financing activities was $544,000 for the year ended December
31, 2005 compared to $1.9 million for the same period in 2004. The decrease was
due primarily to a decrease in the proceeds received in connection with the
exercise of stock options and warrants in 2005 compared to the same period in
2004.

Net
cash provided by financing activities was $1.9 million for the year ended
December 31, 2004 compared to $1.6 million for the same period in 2003. The
increase was due primarily to an increase in

33

---



proceeds received in connection with the exercise of
stock options and warrants in 2004 compared to the same period in 2003, which
was partially offset by $1.0 million of proceeds we received in 2003 upon
entering into our five-year term loan.

Capital Requirements

We
believe that 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 to complete 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. We have filed a registration statement on
Forms S-3 with the SEC in connection with a proposed public offering of
2,500,000 shares of our common stock, subject to over-allotment option with
respect to an additional 375,000 shares of our common stock. However, we cannot
assure you as to the timing or the final terms of the offering, or whether or
not the offering will be consummated.

Line of Credit and Term Loan

We
have a working capital line of credit, with maximum borrowings of $500,000 and
interest at the 30-day LIBOR plus 1.75% that is payable monthly. As of December
31, 2005, we did not have any outstanding borrowings under this line of credit,
which expires on May 4, 2006.

In
January 2003, we closed on a five-year amortizing term loan for $1.0 million.
Interest accrues at the 30-day LIBOR plus 1.75% and is payable monthly, together
with principal. We have eliminated our exposure to fluctuations in interest
rates by entering into an interest rate swap agreement that fixed the rate of
interest on our term loan at 5.28% for the entire five-year term. As of
December 31, 2005, there was $449,000 outstanding on the loan. The loan is
collateralized by all of our assets and contains a liquidity covenant that was
permanently waived as of January 26, 2006. The loan agreement also contains certain
restrictive covenants including, among others, limitation on the incurrence of
    additional debt and the creation of encumbrances on our assets.
The fair value of the interest rate swap is not material to the
financial statements or results of operations.

As of December 31, 2005, maturities of long-term debt
were as follows:

| |  |  |      |  |   |         | 
| |  |  | ---- |  | - | ------- | 
| |  |  | 2006 |  | $ | 209,000 | 
| |  |  | 2007 |  |   | 221,000 | 
| |  |  | 2008 |  |   | 19,000  | 
| |  |  |      |  |   |         | 
| |  |  |      |  | $ | 449,000 | 
| |  |  |      |  |   |         | 

34

---



Contractual
Obligations and Commitments

The
following table summarizes our significant contractual obligations and
commitments as of December 31, 2005:

|                                   |  |                         |           |                         |   |                |  |                |           |                 |   |         |  |   |   | 
|---------------------------------- |  | ----------------------- | --------- | ----------------------- | - | -------------- |  | -------------- | --------- | --------------- | - | ------- |  | - | - | 
|                                   |  | Payment
  due by Period |          
|                                   |  |                         |          
|                                   |  | Total                   |           | Less than
  
  one year |   | 1 to 3
  years |  | 3 to 5
  years |           | After 5
  years |  
|                                   |  |                         |           |                         |   |                |  |                |           |                 |  
|Long-term debt obligations         |  | $                       | 449,000   |                         | $ | 209,000        |  | $              | 240,000   |                 | $ |        |  | $ |  | 
|Operating leases                   |  |                         | 1,776,000 |                         |   | 418,000        |  |                | 836,000   |                 |   | 522,000 |  |   |  | 
|                                   |  |                         |           |                         |   |                |  |                |           |                 |   |         |  |   |   | 
|Total contractual cash obligations |  | $                       | 2,225,000 |                         | $ | 627,000        |  | $              | 1,076,000 |                 | $ | 522,000 |  | $ |  | 
|                                   |  |                         |           |                         |   |                |  |                |           |                 |   |         |  |   |   | 

Purchase
orders or contracts for the purchase of raw materials and other goods and
services are not included in the table above. We are not able to determine the
aggregate amount of such purchase orders that represent contractual
obligations, as purchase orders may represent authorizations to purchase rather
than binding agreements. Although we have entered into contracts for services,
the obligations under these contracts were not significant and the contracts
generally contain clauses allowing for cancellation without significant
penalty.

The
expected timing or payment of obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be
different depending on changes to agreed upon amounts for some obligations.

Inflation

We
believe our operations have not been and, in the foreseeable future, will not
be materially and adversely affected by inflation or changing prices.

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, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.

Recently Issued Accounting Pronouncements

SFAS 123R

In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), Share-Based Payment, which replaces SFAS 123 and supersedes
APB Opinion No. 25. Under the provisions of SFAS 123R, companies are generally
required to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award, usually the vesting
period. The statement is effective as of the beginning of the first annual
reporting period that begins after June 15, 2005 and accordingly will be
adopted by us in the first quarter of calendar year 2006. SFAS 123R requires
that compensation expense be recognized for the unvested portions of existing
options granted prior to its effective date and the cost of options granted to
employees after the effective date based on the fair value of the stock options
at grant date. The adoption of SFAS 123R will materially increase our operating
expenses from historical levels, resulting in reduced net income and net income
per share, but will not impact our cash flows. However, the actual impact of

35

---



adoption of SFAS 123R cannot be fully predicted at
this time because it will depend on levels of share-based payments granted in
the future. As of December 31, 2005, there was $4,899,000 of total unrecognized
compensation expense related to unvested stock options
granted under the Companys stock option plans. The cost is expected to
be recognized over the six-year weighted-average remaining contractual life of
our  outstanding options. The total fair value of
shares vested during the years ended December 31, 2003, 2004 and 2005 was
$677,000, $740,000 and $807,000, respectively.

SFAS 151

In
November 2004, the Financial Accounting Standards Board issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends
ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) should be
recognized as current period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to the cost of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 was applicable
to us on September 1, 2005. We do not believe that the adoption of this
statement will have a material adverse effect on our financial statements.

SFAS 153

SFAS
No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29,
addresses the measurement of exchanges of nonmonetary assets. It eliminates the
exception from fair value accounting for nonmonetary exchanges of similar
productive assets and replaces it with an exception for exchanges that do not
have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange
has commercial substance if the future cash flows of an entity are expected to
change significantly as a result of the exchange. This statement is effective
beginning on October 1, 2006. We do not believe that the adoption of this
statement will have a material adverse effect on our financial statements.

SFAS 154

In
May 2005, the Financial Accounting Standards Board issued SFAS No. 154,
Accounting Changes and Error Corrections,  a replacement of APB Opinion No.
20 and FASB Statement No. 3. SFAS No. 154 establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements
specific to the newly adopted accounting principle. The provisions of SFAS No.
154 are effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We do not believe that the adoption
of this statement will have a material adverse effect on our financial
statements.

|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative
  Disclosures About Market Risk.

We
are subject to market risks in the form of interest rate changes and changes in
corporate tax rates. Both risks are currently immaterial to us.

36

---



|        |                                                                                                        |     
|------- | ------------------------------------------------------------------------------------------------------ | ----
|Item 8. | Financial Statements and
  Supplementary Data                                                          |     
|        |                                                                                                        |     
|        | Index to Financial Statements as of
  December 31, 2003, 2004 and 2005                                 | Page
|        |                                                                                                        |     
|        | Report
  of Independent Registered Public Accounting Firm                                              | F-2 
|        |                                                                                                        |     
|        | Balance
  Sheets as of December 31, 2004 and 2005                                                      | F-3 
|        |                                                                                                        |     
|        | Statements of
Operations for
  the Years Ended 
  December 31, 2003, 2004 and 2005                     | F-4 
|        |                                                                                                        |     
|        | Statements of
Changes in
  Stockholders Equity
  for the Years Ended December 31, 2003, 2004 and 2005 | F-5 
|        |                                                                                                        |     
|        | Statements of
Cash Flows for
  the Years Ended
  December 31, 2003, 2004 and 2005                      | F-6 
|        |                                                                                                        |     
|        | Notes
  to the Financial Statements                                                                    | F-7 



F-1

---



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Board of
Directors and Stockholders 
I.D. Systems, Inc.

We have
audited the accompanying balance sheets of I.D. Systems, Inc. as of
December 31, 2004 and 2005 and the related statements of operations,
changes in stockholders equity and cash flows for the years ended
December 31, 2003, 2004 and 2005. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our
opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of I.D. Systems, Inc. as of
December 31, 2004 and 2005 and the results of its operations and its cash
flows for the years ended December 31, 2003, 2004 and 2005, in conformity
with accounting principles generally accepted in the United States.

In connection
with our audits of the financial statements enumerated above, we audited
Schedule II - Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 2005. In our opinion, this schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly, in all material respects, the information stated therein.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of I.D. Systems, Inc.s
internal control over financial reporting as of December 31, 2005, based
on criteria established in the Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated February 7, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control
over financial reporting.

/s/ Eisner LLP
New York, New
York
February 7, 2006



F-2

---



I.D. SYSTEMS, INC.

Balance Sheets

|                                                                                                                                                                   |  |                    |             |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----------- | ---- | - | ----------- | -
|                                                                                                                                                                   |  | As of December 31, |            
|                                                                                                                                                                   |  |                    |            
|                                                                                                                                                                   |  | 2004               |             | 2005 |  
|                                                                                                                                                                   |  |                    |             |      |  
|ASSETS (Note G)                                                                                                                                                    |  |                    |             |      |   |             |  
|Current
  assets:                                                                                                                                                  |  |                    |             |      |   |             |  
|Cash and cash equivalents                                                                                                                                          |  | $                  | 8,440,000   |      | $ | 2,138,000   |  
|Investments available for sale                                                                                                                                     |  |                    | 3,195,000   |      |   | 5,463,000   |  
|Accounts receivable, net                                                                                                                                           |  |                    | 1,432,000   |      |   | 6,068,000   |  
|Unbilled receivables                                                                                                                                               |  |                    | 402,000     |      |   | 1,293,000   |  
|Inventory, net                                                                                                                                                     |  |                    | 1,739,000   |      |   | 2,952,000   |  
|Investment in sales-type leases                                                                                                                                    |  |                    | 39,000      |      |   | 34,000      |  
|Interest receivable                                                                                                                                                |  |                    | 50,000      |      |   |            |  
|Officer loan                                                                                                                                                       |  |                    | 10,000      |      |   | 11,000      |  
|Prepaid expenses and other current assets                                                                                                                          |  |                    | 225,000     |      |   | 140,000     |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Total current assets                                                                                                                                               |  |                    | 15,532,000  |      |   | 18,099,000  |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Fixed
  assets, net                                                                                                                                                |  |                    | 1,009,000   |      |   | 1,159,000   |  
|Investment
  in sales-type leases                                                                                                                                  |  |                    | 34,000      |      |   | 433,000     |  
|Officer loan                                                                                                                                                       |  |                    | 20,000      |      |   | 8,000       |  
|Deferred
  contract costs                                                                                                                                          |  |                    | 476,000     |      |   | 53,000      |  
|Other assets                                                                                                                                                       |  |                    | 88,000      |      |   | 88,000      |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Total assets                                                                                                                                                       |  | $                  | 17,159,000  |      | $ | 19,840,000  |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|LIABILITIES                                                                                                                                                        |  |                    |             |      |   |             |  
|Current
  liabilities:                                                                                                                                             |  |                    |             |      |   |             |  
|Accounts payable and accrued expenses                                                                                                                              |  | $                  | 2,541,000   |      | $ | 3,881,000   |  
|Long-term debt - current portion                                                                                                                                   |  |                    | 199,000     |      |   | 209,000     |  
|Deferred revenue                                                                                                                                                   |  |                    | 95,000      |      |   | 155,000     |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Total current liabilities                                                                                                                                          |  |                    | 2,835,000   |      |   | 4,245,000   |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Long-term
  debt (less current portion)                                                                                                                            |  |                    | 449,000     |      |   | 240,000     |  
|Deferred
  revenue                                                                                                                                                 |  |                    | 191,000     |      |   | 90,000      |  
|Deferred
  rent                                                                                                                                                    |  |                    | 112,000     |      |   | 99,000      |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Total
        liabilities                                                                                                                                          |  |                    | 3,587,000   |      |   | 4,674,000   |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Commitments
  and contingencies (Note J)                                                                                                                           |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|STOCKHOLDERS EQUITY                                                                                                                                               |  |                    |             |      |   |             |  
|Preferred
  stock; authorized 5,000,000 shares, $0.01 par value; none issued                                                                                       |  |                    |             |      |   |             |  
|Common stock; authorized 15,000,000 shares,
  $0.01 par value; issued and outstanding 7,690,000 and 7,851,000 shares at
  December 31, 2004 and 2005, respectively |  |                    | 77,000      |      |   | 79,000      |  
|Additional
  paid-in capital                                                                                                                                       |  |                    | 24,994,000  |      |   | 25,735,000  |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Accumulated deficit                                                                                                                                                |  |                    | (11,386,000 | )    |   | (10,535,000 | )
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    | 13,685,000  |      |   | 15,279,000  |  
|Treasury
  stock; 40,000 shares at cost                                                                                                                            |  |                    | (113,000    | )    |   | (113,000    | )
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Total stockholders' equity                                                                                                                                         |  |                    | 13,572,000  |      |   | 15,166,000  |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  
|Total
    liabilities and stockholders' equity                                                                                                                     |  | $                  | 17,159,000  |      | $ | 19,840,000  |  
|                                                                                                                                                                   |  |                    |             |      |   |             |  

|                                  | 
|--------------------------------- | 
|See notes to financial statements | 

---



I.D. SYSTEMS, INC.

Statements of Operations

|                                                       |  |                         |            |      |   |            |   |   |            |  
|------------------------------------------------------ |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                       |  | Year Ended December 31, |           
|                                                       |  |                         |           
|                                                       |  | 2003                    |            | 2004 |   | 2005       |  
|                                                       |  |                         |            |      |   |            |  
|                                                       |  |                         |            |      |   |            |  
|Revenue                                                |  | $                       | 7,959,000  |      | $ | 13,741,000 |   | $ | 19,004,000 |  
|Cost of
  revenue                                      |  |                         | 4,075,000  |      |   | 6,509,000  |   |   | 9,708,000  |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Gross profit                                           |  |                         | 3,884,000  |      |   | 7,232,000  |   |   | 9,296,000  |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Operating
  expenses:                                  |  |                         |            |      |   |            |   |   |            |  
|Selling, general and administrative                    |  |                         | 4,456,000  |      |   | 5,879,000  |   |   | 7,140,000  |  
|Research and development                               |  |                         | 891,000    |      |   | 1,234,000  |   |   | 1,625,000  |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         | 5,347,000  |      |   | 7,113,000  |   |   | 8,765,000  |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Income
  (loss) from operations                        |  |                         | (1,463,000 | )    |   | 119,000    |   |   | 531,000    |  
|Interest
  income                                      |  |                         | 269,000    |      |   | 195,000    |   |   | 222,000    |  
|Interest
  expense                                     |  |                         | (59,000    | )    |   | (63,000    | ) |   | (53,000    | )
|Other income                                           |  |                         | 54,000     |      |   | 147,000    |   |   | 151,000    |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Net income
  (loss)                                    |  | $                       | (1,199,000 | )    | $ | 398,000    |   | $ | 851,000    |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Net income
  (loss) per share - basic                  |  | $                       | (0.17      | )    | $ | 0.05       |   | $ | 0.11       |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Net income
  (loss) per share - diluted                |  | $                       | (0.17      | )    | $ | 0.05       |   | $ | 0.09       |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Weighted
  average common shares outstanding - basic   |  |                         | 6,905,000  |      |   | 7,455,000  |   |   | 7,771,000  |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|                                                       |  |                         |            |      |   |            |   |   |            |  
|Weighted
  average common shares outstanding - diluted |  |                         | 6,905,000  |      |   | 8,783,000  |   |   | 9,332,000  |  
|                                                       |  |                         |            |      |   |            |   |   |            |  

|                                  | 
|--------------------------------- | 
|See notes to financial statements | 

---



I.D. SYSTEMS, INC.

Statements of Changes in Stockholders Equity

|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  
|--------------------------------------------------- |  | -------------------- | --------- | ------------------------------ | - | --------------------- |  | ---------------- | ---------- | ---------------------- | - | ----------- | - | - | -------- | - | - | ---------- | -
|                                                    |  | Common
  Stock       |           |                                |   |                       |  |                  |            |                        |  
|                                                    |  |                      |           | Additional
  Paid-in
  Capital |   | Accumulated
  Deficit |  | Treasury
  Stock |            | Stockholders
  Equity |  
|                                                    |  | Number
  of
  Shares |           | Amount                         |   |                       |  |                  |           
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |  
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |  
|Balance - January 1, 2003                           |  |                      | 6,799,000 |                                | $ | 68,000                |  | $                | 22,042,000 |                        | $ | (10,585,000 | ) | $ | (113,000 | ) | $ | 11,412,000 |  
|Shares issued pursuant to exercise of stock options |  |                      | 298,000   |                                |   | 3,000                 |  |                  | 762,000    |                        |   |             |   |   |          |   |   | 765,000    |  
|Net loss for the year ended December 31, 2003       |  |                      |           |                                |   |                       |  |                  |            |                        |   | (1,199,000  | ) |   |          |   |   | (1,199,000 | )
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  
|Balance - December 31, 2003                         |  |                      | 7,097,000 |                                |   | 71,000                |  |                  | 22,804,000 |                        |   | (11,784,000 | ) |   | (113,000 | ) |   | 10,978,000 |  
|Shares issued pursuant to exercise of stock options |  |                      | 444,000   |                                |   | 4,000                 |  |                  | 1,167,000  |                        |   |             |   |   |          |   |   | 1,171,000  |  
|Shares issued pursuant to exercise of warrants      |  |                      | 149,000   |                                |   | 2,000                 |  |                  | 1,023,000  |                        |   |             |   |   |          |   |   | 1,025,000  |  
|Net income for the year ended December 31, 2004     |  |                      |           |                                |   |                       |  |                  |            |                        |   | 398,000     |   |   |          |   |   | 398,000    |  
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  
|Balance - December 31, 2004                         |  |                      | 7,690,000 |                                |   | 77,000                |  |                  | 24,994,000 |                        |   | (11,386,000 | ) |   | (113,000 | ) |   | 13,572,000 |  
|Shares issued pursuant to exercise of stock options |  |                      | 161,000   |                                |   | 2,000                 |  |                  | 741,000    |                        |   |             |   |   |          |   |   | 743,000    |  
|Net income for the year ended December 31, 2005     |  |                      |           |                                |   |                       |  |                  |            |                        |   | 851,000     |   |   |          |   |   | 851,000    |  
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  
|Balance - December 31, 2005                         |  |                      | 7,851,000 |                                | $ | 79,000                |  | $                | 25,735,000 |                        | $ | (10,535,000 | ) | $ | (113,000 | ) | $ | 15,166,000 |  
|                                                    |  |                      |           |                                |   |                       |  |                  |            |                        |   |             |   |   |          |   |   |            |  

|                                  | 
|--------------------------------- | 
|See notes to financial statements | 

---



I.D. SYSTEMS, INC.

Statements of Cash Flows

|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------------------------------ |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                                 |  | Year Ended December 31, |           
|                                                                                                 |  |                         |           
|                                                                                                 |  | 2003                    |            | 2004 |   | 2005       |  
|                                                                                                 |  |                         |            |      |   |            |  
|Cash flows from operating activities:                                                            |  |                         |            |      |   |            |   |   |            |  
|Net income (loss)                                                                                |  | $                       | (1,199,000 | )    | $ | 398,000    |   | $ | 851,000    |  
|Adjustments to reconcile net income (loss) to cash
(used in) provided
  by operating activities: |  |                         |            |      |   |            |   |   |            |  
|Inventory reserve                                                                                |  |                         |            |      |   |            |   |   | 105,000    |  
|Accrued interest income                                                                          |  |                         | 172,000    |      |   | 119,000    |   |   | 42,000     |  
|Depreciation and amortization                                                                    |  |                         | 173,000    |      |   | 255,000    |   |   | 362,000    |  
|Deferred rent expense                                                                            |  |                         | 23,000     |      |   | 23,000     |   |   | (13,000    | )
|Deferred revenue                                                                                 |  |                         | 348,000    |      |   | (88,000    | ) |   | (41,000    | )
|Bad debt expense                                                                                 |  |                         | 20,000     |      |   | (12,000    | ) |   | 20,000     |  
|Deferred contract costs                                                                          |  |                         | (675,000   | )    |   | 199,000    |   |   | 423,000    |  
|Changes in:                                                                                      |  |                         |            |      |   |            |   |   |            |  
|Accounts receivable                                                                              |  |                         | (1,110,000 | )    |   | 784,000    |   |   | (4,656,000 | )
|Unbilled receivables                                                                             |  |                         |           |      |   | (402,000   | ) |   | (891,000   | )
|Inventory                                                                                        |  |                         | 715,000    |      |   | (1,063,000 | ) |   | (1,318,000 | )
|Prepaid expenses and other assets                                                                |  |                         | 28,000     |      |   | (87,000    | ) |   | 85,000     |  
|Investment in sales type leases                                                                  |  |                         | 571,000    |      |   | 37,000     |   |   | (394,000   | )
|Installment receivable                                                                           |  |                         | 867,000    |      |   |            |   |   |            |  
|Other liabilities                                                                                |  |                         | (100,000   | )    |   |            |   |   |            |  
|Accounts payable and accrued expenses                                                            |  |                         | (70,000    | )    |   | 1,485,000  |   |   | 1,340,000  |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Net
  cash (used in) provided by operating activities                                            |  |                         | (237,000   | )    |   | 1,648,000  |   |   | (4,085,000 | )
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Cash flows from investing activities:                                                            |  |                         |            |      |   |            |   |   |            |  
|Purchase of fixed assets                                                                         |  |                         | (339,000   | )    |   | (419,000   | ) |   | (512,000   | )
|Purchase of investments                                                                          |  |                         | (5,698,000 | )    |   | (1,235,000 | ) |   | (5,963,000 | )
|Maturities of investments                                                                        |  |                         | 4,084,000  |      |   | 3,385,000  |   |   | 3,703,000  |  
|Collection of officer loan                                                                       |  |                         | 10,000     |      |   | 11,000     |   |   | 11,000     |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Net
  cash (used in) provided by investing activities                                            |  |                         | (1,943,000 | )    |   | 1,742,000  |   |   | (2,761,000 | )
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Cash flows from financing activities:                                                            |  |                         |            |      |   |            |   |   |            |  
|Proceeds from term loan                                                                          |  |                         | 1,000,000  |      |   |            |   |   |            |  
|Repayment of term loan                                                                           |  |                         | (164,000   | )    |   | (188,000   | ) |   | (199,000   | )
|Repayment of line of credit                                                                      |  |                         |            |      |   | (137,000   | ) |   |            |  
|Proceeds from exercise of stock options                                                          |  |                         | 765,000    |      |   | 1,171,000  |   |   | 743,000    |  
|Proceeds from exercise of warrants                                                               |  |                         |            |      |   | 1,025,000  |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Net
  cash provided by financing activities                                                      |  |                         | 1,601,000  |      |   | 1,871,000  |   |   | 544,000    |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Net (decrease) increase in cash and cash
equivalents                                             |  |                         | (579,000   | )    |   | 5,261,000  |   |   | (6,302,000 | )
|Cash and cash equivalents - beginning of period                                                  |  |                         | 3,758,000  |      |   | 3,179,000  |   |   | 8,440,000  |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Cash and cash equivalents - end of period                                                        |  | $                       | 3,179,000  |      | $ | 8,440,000  |   | $ | 2,138,000  |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Supplemental disclosure of cash flow
  information:                                              |  |                         |            |      |   |            |   |   |            |  
|Cash
    paid for interest:                                                                      |  | $                       | 59,000     |      | $ | 63,000     |   | $ | 53,000     |  
|                                                                                                 |  |                         |            |      |   |            |   |   |            |  

|                                  | 
|--------------------------------- | 
|See notes to financial statements | 

---



I.D. SYSTEMS, INC.

Notes to
Financial Statements
December 31, 2003, 2004 and 2005

NOTE A - THE
COMPANY

I.D. Systems,
Inc. (the Company) designs, develops and produces wireless monitoring and
tracking products that utilize its patented radio-frequency-based system. The
Companys products provide features enabling users to improve operating
efficiencies and reduce costs by monitoring the use of corporate assets. The
Company outsources its hardware manufacturing operations to contract
manufacturers. The Company was incorporated in Delaware in 1993 and commenced
operations in January 1994.

NOTEB - SUMMARY
OF SIGNIFICANTACCOUNTINGPOLICIES

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[1] | Use of estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The
  preparation of financial statements in conformity with accounting principles
  generally accepted in the United States of America requires management to
  make estimates and assumptions that affect the reported amounts of assets and
  liabilities and disclosure of contingent assets and liabilities at the date
  of the financial statements and the reported amounts of revenues and expenses
  during the reporting period. Actual results could differ from those
  estimates. These estimates include collectability of accounts receivable,
  sales returns, recoverability of inventory, realization of deferred tax
  assets, useful lives and impairment of tangible and intangible assets.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[2] | Cash and cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Company
  considers all highly liquid debt instruments purchased with an original
  maturity of three months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[3] | Inventory:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Inventory,
  which consists of components for the Companys products and finished goods to
  be shipped to customers under existing orders, is stated at the lower of cost
  or market using the first-in first-out method. As of December 31, 2004
  and 2005 the Companys inventory consisted of components of approximately
  $499,000 and $327,000 and finished goods of approximately $1,240,000 and
  $2,625,000, respectively.                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[4] | Unbilled receivables:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Under
  certain customer contracts the Company invoices progress billings once
  certain milestones are met. As the systems are delivered and services are
  performed, and all of the criteria for revenue recognition are satisfied, the
  Company recognizes revenue. The difference between revenue recognized for
  financial reporting purposes and amounts invoiced is recorded as unbilled
  receivables or deferred revenue. As of December 31, 2004 and 2005,
  unbilled receivables were $402,000 and $1,293,000, respectively, primarily
  relating to one customer. The Company expects to bill such amounts in 2006.                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[5] | Fixed assets and depreciation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Fixed assets
  are recorded at cost and depreciated using the straight-line method over the
  estimated useful lives of the assets which range from three to ten years.
  Leasehold improvements are amortized using the straight-line method over the
  terms of the respective leases, or their estimated useful lives, whichever is
  shorter.                                                                                                                                                                                                                                                                                                                                                                

F-7

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEB - SUMMARY
OFSIGNIFICANTACCOUNTINGPOLICIES (CONTINUED)

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[6]  | Long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The Company
  evaluates its long-lived assets in accordance with Statement of Financial
  Accounting Standards (SFAS) No. 144, Accounting for the Impairment
  or Disposal of Long-Lived Assets. In the evaluation, the Company compares
  values of such assets to the estimated undiscounted future cash flows
  expected from the use of the assets and their eventual disposition. When the
  estimated undiscounted future cash flows are less than the carrying amount,
  an impairment loss is recognized equal to the difference between the assets
  fair value and their carrying value. For the years ended December 31, 2003,
  2004 and 2005, the Company did not incur an impairment charge.                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|[7]  | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | Research and
  development costs are charged to expense as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|[8]  | Patent costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | Legal costs
  incurred in connection with patent rights are charged to expense as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|[9]  | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The
  Companys revenue is derived from contracts with multiple element
  arrangements, which include the Companys system, training and technical
  support. Revenue is recognized as each element is earned based on the selling
  price of each element and when there are no undelivered elements that are
  essential to the functionality of the delivered elements. The Companys
  system is typically implemented by the customer or a third party and, as a
  result, revenue is recognized when title and risk of loss passes to the
  customer, which usually is upon delivery of the system, pervasive evidence of
  an arrangement exists, sales price is fixed and determinable, collectibility
  is reasonably assured and contractual obligations have been satisfied.
  Training and technical support revenue are generally recognized at time of
  performance.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The Company
  also enters into post-contract maintenance and support agreements. Revenue is
  recognized over the service period and the cost of providing these services
  is expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The Company
  also derives revenue under leasing arrangements. Such arrangements provide
  for monthly payments covering the system sale, maintenance and interest.
  These arrangements meet the criteria to be accounted for as sales-type
  leases. Accordingly, the system sale is recognized upon delivery of the
  system, provided all other revenue recognition criteria are met as described
  above. Upon the recognition of revenue, an asset is established for the
  investment in sales-type leases. Maintenance revenue and interest
  income are recognized monthly over the lease term.                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|[10] | Deferred contract costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | During 2002,
  the Company entered into a contract with a customer pursuant to which the
  Companys system was implemented on a portion of the customers fleet of
  vehicles. The Company is entitled to issue sixty monthly invoices of up to
  $40,000 per month, each of which is contingent upon certain conditions being
  met. Costs directly attributable to this contract, consisting principally of
  engineering and manufacturing costs, were deferred until implementation of
  the system was completed. The deferred costs will be charged to cost of
  revenue in accordance with the cost recovery method, pursuant to which the
  deferred contract costs will be reduced in each period by an amount equal to
  the revenue recognized until all of the deferred costs are written off at
  which time the Company will recognize a gross profit, if any.      

F-8

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEB - SUMMARY
OFSIGNIFICANTACCOUNTINGPOLICIES (CONTINUED)

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[10] | Deferred contract costs: (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | As of
  December 31, 2004 and 2005, the Company deferred $876,000 and $933,000,
  respectively, of such contract costs and amortized $400,000 and $480,000 of
  such costs for the years ended December 31, 2004 and 2005, respectively.
  The implementation of the system is substantially completed and additional
  contract costs are not anticipated to be significant.                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | The Company
  will continue to evaluate the realizability of the carrying amount of the
  deferred contract costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|[11] | Benefit plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | The Company
  maintains a retirement plan under Section 401(k) of the Internal Revenue
  Code, which covers all eligible employees. The Company did not make any
  contributions to the plan during the years ended December 31, 2004 and
  2005.                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|[12] | Rent expense:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | Expense
  related to the Companys facility lease is recorded on a straight-line basis
  over the lease term. The difference between rent expense incurred and the
  amounts required to be paid in accordance with the lease term is recorded as
  deferred rent and is amortized over the lease term.                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|[13] | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | The Company
  accounts for stock-based employee compensation under Accounting Principles
  Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
  related interpretations. The Company has adopted the disclosure-only
  provisions of SFAS No. 123, Accounting for Stock-Based Compensation and
  SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
  Disclosure. The following table illustrates the effect on net income (loss)
  and earnings (loss) per share if the fair value based method had been applied
  to all awards.

|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                                             |  | Year Ended December 31, |           
|                                                                                                             |  |                         |           
|                                                                                                             |  | 2003                    |            | 2004 |   | 2005       |  
|                                                                                                             |  |                         |            |      |   |            |  
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Reported net income (loss)                                                                                   |  | $                       | (1,199,000 | )    | $ | 398,000    |   | $ | 851,000    |  
|Stock-based employee compensation expense
  included in reported net loss, net of related tax effects        |  |                         |           |      |   |           |   |   |           |  
|Stock-based employee compensation
  determined under the fair value based method, net of related tax effects |  |                         | (862,000   | )    |   | (1,187,000 | ) |   | (1,612,000 | )
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Pro forma net loss                                                                                           |  | $                       | (2,061,000 | )    | $ | (789,000   | ) | $ | (761,000   | )
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Net income (loss) per share basic:                                                                           |  |                         |            |      |   |            |   |   |            |  
|As reported                                                                                                  |  | $                       | (0.17      | )    | $ | 0.05       |   | $ | 0.11       |  
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Pro forma                                                                                                    |  | $                       | (0.30      | )    | $ | (0.11      | ) | $ | (0.10      | )
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Net income (loss) per share diluted:                                                                         |  |                         |            |      |   |            |   |   |            |  
|As reported                                                                                                  |  | $                       | (0.17      | )    | $ | 0.05       |   | $ | 0.09       |  
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Pro forma                                                                                                    |  | $                       | (0.30      | )    | $ | (0.11      | ) | $ | (0.10      | )
|                                                                                                             |  |                         |            |      |   |            |   |   |            |  

F-9

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEB - SUMMARY
OF SIGNIFICANTACCOUNTINGPOLICIES (CONTINUED)

|     |                                                                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[13] | Stock-based compensation: (continued)                                                                                                                                          
|     |                                                                                                                                                                                
|     | The fair
  value of each option grant on the date of grant is estimated using the
  Black-Scholes option-pricing model reflecting the following weighted average
  assumptions:

|                           |  |                           |         |      |  |         |  |  |         | 
|-------------------------- |  | ------------------------- | ------- | ---- |  | ------- |  |  | ------- | 
|                           |  | Year Ended December
  31, |        
|                           |  |                           |        
|                           |  | 2003                      |         | 2004 |  | 2005    | 
|                           |  |                           |         |      |  |         | 
|                           |  |                           |         |      |  |         |  |  |         | 
|Volatility                 |  |                           | 44%     |      |  | 52%     |  |  | 51%     | 
|Expected
  life of options |  |                           | 5 years |      |  | 5 years |  |  | 5 years | 
|Risk free
  interest rate  |  |                           | 3%      |      |  | 3%      |  |  | 4%      | 
|Dividend
  yield           |  |                           | 0%      |      |  | 0%      |  |  | 0%      | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | The weighted
  average fair value of options granted during the years ended
  December 31, 2003, 2004 and 2005 were $2.20, $3.74 and $7.02, respectively.                                                                                                                                                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|[14] | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | The Company
  uses the asset and liability method of accounting for deferred income taxes.
  Deferred income taxes are measured by applying enacted statutory rates to net
  operating loss carryforwards and to the differences between the financial
  reporting and tax bases of assets and liabilities. Deferred tax assets are
  reduced, if necessary, by a valuation allowance if it is more likely than not
  that some portion or all of the deferred tax assets will not be realized.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|[15] | Net income (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                             |  |                           |            |      |   |           |  |   |           | 
|-------------------------------------------- |  | ------------------------- | ---------- | ---- | - | --------- |  | - | --------- | 
|                                             |  | Year Ended December
  31, |           
|                                             |  |                           |           
|                                             |  | 2003                      |            | 2004 |   | 2005      | 
|                                             |  |                           |            |      |   |           | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|Basic earnings (loss) per share:             |  |                           |            |      |   |           |  |   |           | 
|Net income (loss)                            |  | $                         | (1,199,000 | )    | $ | 398,000   |  | $ | 851,000   | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|Weighted average shares outstanding          |  |                           | 6,905,000  |      |   | 7,455,000 |  |   | 7,771,000 | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|Basic earnings (loss) per share              |  | $                         | (0.17      | )    | $ | 0.05      |  | $ | 0.11      | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|Diluted earnings (loss) per share:           |  |                           |            |      |   |           |  |   |           | 
|Net income (loss)                            |  | $                         | (1,199,000 | )    | $ | 398,000   |  | $ | 851,000   | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|Weighted average shares outstanding          |  |                           | 6,905,000  |      |   | 7,455,000 |  |   | 7,771,000 | 
|Dilutive effect of stock options             |  |                           |           |      |   | 1,328,000 |  |   | 1,561,000 | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|Weighted average shares outstanding,
diluted |  |                           | 6,905,000  |      |   | 8,783,000 |  |   | 9,332,000 | 
|                                             |  |                           |            |      |   |           |  |   |           | 
|Diluted earnings (loss) per share            |  | $                         | (0.17      | )    | $ | 0.05      |  | $ | 0.09      | 
|                                             |  |                           |            |      |   |           |  |   |           | 

Basic income
(loss) per share is based on the weighted average number of common shares
outstanding during each period. Diluted income (loss) per share reflects the
potential dilution assuming common shares were issued upon the exercise of
outstanding options and the proceeds thereof were used to purchase outstanding
common shares. For the year ended December 31, 2003, the basic and diluted
weighted average shares outstanding are the same since the effect from the
potential exercise of outstanding stock options and warrants of 2,436,000,
would have been anti-dilutive. Options to purchase 69,000 and 136,000 shares
of common stock were outstanding during the years ended December 31, 2004
and 2005, respectively, but were not included in the computation of diluted
earnings per share because the options exercise prices were greater than
the average market price of the common shares and, therefore, the effect would
be anti-dilutive.

F-10

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEB - SUMMARY
OF SIGNIFICANTACCOUNTINGPOLICIES (CONTINUED)

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[16] | Financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | The carrying
  amounts of cash equivalents, accounts receivable, investments and other
  liabilities approximate their fair values due to the short period to maturity
  of these instruments. The carrying amounts of investment in sales-type leases
  and installment receivable - noncurrent portion approximate their fair
  value due to the market rate of interest charged to customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[17] | Advertising and Marketing Expense:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | Advertising and marketing costs are expensed as incurred. Advertising and marketing expense
for the years ended December 31, 2003, 2004 and 2005 amounted to $49,000,
$99,000 and $143,000 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[18] | Reclassifications:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | Certain
  prior year amounts have been reclassified to conform with the current year
  presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[19] | Recently Issued Accounting Pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | SFAS123(R)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | In December
  2004, the Financial Accounting Standards Board (the FASB) issued
  Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
  Payment, (SFAS 123(R)) which replaces SFAS 123 and supersedes APB Opinion No.
  25. Under the provisions of SFAS 123(R), companies are required to measure
  the cost of employee services received in exchange for an award of equity
  instruments based on the grant-date fair value of the award (with limited
  exceptions). That cost will be recognized over the period during which an
  employee is required to provide service in exchange for the award, usually
  the vesting period. The statement is effective as of the beginning of the
  first annual reporting period that begins after June 15, 2005 and accordingly
  will be adopted by the company in the first quarter of calendar year 2006.
  SFAS 123(R) requires that compensation expense be recognized for the unvested
  portions of existing options granted prior to its effective date and the cost
  of options granted to employees after the effective date based on the fair
  value of the stock options at grant date. The impact of adoption of SFAS
  123(R) cannot be predicted at this time because it will depend on levels of
  share-based payments granted in the future. As of December 31, 2005 there was
$4,899,000 of total unrecognized compensation costs related to unvested stock
  options granted under the Companys stock option plans.
The cost is expected to be recognized over the six-year weighted-average remaining
  contractual life. The total fair value of shares vested during the years ended
  December 31, 2003, 2004 and 2005 was $677,000, $740,000 and $807,000, respectively.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | SFAS151                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | In November 2004, the
  Financial Accounting Standards Board (FASB) issued Statement of Financial
  Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB
  No. 43, Chapter 4. SFAS 151 amends ARB No. 43, Chapter 4, to clarify that
  abnormal amounts of idle facility expense, freight, handling costs, and
  wasted material (spoilage) should be recognized as current period charges. In
  addition. SFAS 151 requires that allocation of fixed production overhead to
  the cost of conversion be based on the normal capacity of the production
  facilities. The provision of SFAS 151 shall be effective for the Company
  beginning on September 1, 2005. The Company believes that the adoption
  of SFAS 151 will not have a material effect on its financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | SFAS153                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | SFAS No. 153 addresses the
  measurement of exchanges of nonmonetary assets. It eliminates the exception
  from fair value accounting for nonmonetary exchanges of similar productive
  assets and replaces it with an exception for exchanges that do not have
  commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
  commercial substance if the future cash flows of an entity are expected to
  change significantly as a result of the exchange. This statement is effective
  beginning on October 1, 2006 and is not expected to have a significant
  impact on the Company's financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-11

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEB - SUMMARY
OFSIGNIFICANTACCOUNTING POLICIES (CONTINUED)

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[18] | Recently Issued Accounting Pronouncements: (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | SFAS 154                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | In May 2005, the FASB
  issued SFAS No. 154, Accounting Changes and Error Corrections, - a
  replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement
  establishes, unless impracticable, retrospective application as the required
  method for reporting a change in accounting principle in the absence of
  explicit transition requirements specific to the newly adopted accounting
  principle. The provisions of this Statement are effective for accounting
  changes and corrections of errors made in fiscal years beginning after
  December 15, 2005. Early adoption is permitted for accounting changes and
  corrections of errors made in fiscal years beginning after the date this
  Statement is issued. The Company does not believe that the adoption of this
  Statement in 2006 will have a material impact on the Companys financial
  position or results of operation.

NOTEC - INVESTMENTSAVAILABLE FORSALE

Debt securities for which
the Company does not have the intent or ability to hold to maturity are
classified as available for sale along with the Companys investments in
certificate of deposits and mutual funds. Securities that are classified as
available for sale are carried at fair value, with the unrealized gains and
losses reported as a separate component of stockholders equity. Management
determines the appropriate classification of its investments at the time of purchase and reevaluates such
determination at each balance sheet date.

The estimated
fair value of debt, certificates of deposit and mutual funds are as follows as
of December 31, 2005:

| |                           |  |           |           | 
| | ------------------------- |  | --------- | --------- | 
| |                           |  | Estimated |          
| |                           |  | Fair      |          
| |                           |  | Value     |          
| |                           |  |           |          
| |                           |  |           |           | 
| | State bonds               |  | $         | 4,350,000 | 
| | Mutual funds              |  |           | 745,000   | 
| | Certificates
  of deposit |  |           | 368,000   | 
| |                           |  |           |           | 
| |                           |  |           |           | 
| |                           |  | $         | 5,463,000 | 
| |                           |  |           |           | 

The schedule
of maturities of state bonds and certificates of deposit are as follows as of
December 31, 2005:

| |                      |  |       |           | 
| | -------------------- |  | ----- | --------- | 
| |                      |  | Fair  |          
| |                      |  | Value |          
| |                      |  |       |          
| |                      |  |       |           | 
| | Due in:              |  |       |           | 
| | Less than
  one year |  | $     | 368,000   | 
| | 20 - 30
  years      |  |       | 1,400,000 | 
| | 30 - 40
  years      |  |       | 2,950,000 | 
| |                      |  |       |           | 
| |                      |  |       |           | 
| |                      |  | $     | 4,718,000 | 
| |                      |  |       |           | 

The interest
rate on the state bonds is reset on a monthly basis. The unrealized gains and
losses on investments available for sale was de minimis during the year ended
December 31, 2005.

F-12

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTED - FIXEDASSETS

Fixed assets
are stated at cost, less accumulated depreciation and amortization, and as of
December 31, 2004 and 2005, are summarized as follows:

|                                            |  |                      |           |      |   |           |  
|------------------------------------------- |  | -------------------- | --------- | ---- | - | --------- | -
|                                            |  | As of December
  31, |          
|                                            |  |                      |          
|                                            |  | 2004                 |           | 2005 |  
|                                            |  |                      |           |      |  
|                                            |  |                      |           |      |   |           |  
|Equipment                                   |  | $                    | 451,000   |      | $ | 648,000   |  
|Computer software                           |  |                      | 277,000   |      |   | 453,000   |  
|Computer
  hardware                         |  |                      | 335,000   |      |   | 383,000   |  
|Furniture
  and fixtures                    |  |                      | 237,000   |      |   | 206,000   |  
|Leasehold
  improvements                    |  |                      | 447,000   |      |   | 447,000   |  
|                                            |  |                      |           |      |   |           |  
|                                            |  |                      |           |      |   |           |  
|                                            |  |                      | 1,747,000 |      |   | 2,137,000 |  
|Accumulated
  depreciation and amortization |  |                      | (738,000  | )    |   | (978,000  | )
|                                            |  |                      |           |      |   |           |  
|                                            |  |                      |           |      |   |           |  
|                                            |  | $                    | 1,009,000 |      | $ | 1,159,000 |  
|                                            |  |                      |           |      |   |           |  

NOTEE - OFFICERLOAN

In June 2002,
the Company loaned $56,000 to an officer. The loan is payable together with
interest of 4% in semi-monthly installments of $500 through August 2007. As of
December 31, 2004 and 2005, $30,000 and $19,000 is due to the Company,
respectively, $11,000 of which is due in 2006. The loan is fully payable upon
demand and is due if the employee is terminated from the Company for any
reason. This loan was made prior to the enactment of the Sarbanes-Oxley Act of
2002. The Company is prohibited from making any loans to officers in the
future.

NOTEF - LINE
OF CREDIT

The Company
has a working capital line of credit, with maximum borrowings of $500,000, which
expires on May 4, 2006. Interest at the 30-day LIBOR Market Index Rate
plus 1.75% is payable monthly. As of  December 31, 2003, the Company owed
$137,000 under this line of credit all of which was repaid during the year
ended December 31, 2004. As of December 31, 2005, the Company did not
owe anything under this line of credit.

NOTEG - LONG-TERMDEBT

In January
2003, the Company closed on a five-year term loan for $1,000,000 with a
financial institution. Interest at the 30-day LIBOR plus 1.75% and principal
are payable monthly. To hedge the loans floating interest expense, the
Company entered into an interest rate swap contemporaneously with the closing
of the loan and fixed the rate of interest at 5.28% for the five-year term. The
loan is collateralized by all the assets of the Company and contains a liquidity
covenant that was permanently waived as of January 25, 2006. The loan also
provides certain restrictive covenants such as a limitation on additional
borrowings, the inability to assume or create other encumbrances on the Company's
assets and the inability to guarantee obligations of any other person or persons
in excess of a specified amount. The fair value of the interest rate swap is
not material to the financial statements or results of operations.

F-13

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEG - LONG-TERMDEBT (CONTINUED)

Maturities of
long-term debt are as follows:

| |               |  |   |         | 
| | ------------- |  | - | ------- | 
| | Year
  Ending |  |   |         | 
| | December 31,  |  |   |         | 
| |               |  |   |         | 
| |               |  |   |         | 
| | 2006          |  | $ | 209,000 | 
| | 2007          |  |   | 221,000 | 
| | 2008          |  |   | 19,000  | 
| |               |  |   |         | 
| |               |  |   |         | 
| |               |  | $ | 449,000 | 
| |               |  |   |         | 

NOTE H - STOCKHOLDERS
EQUITY

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[1] | Preferred stock:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company
  is authorized to issue 5,000,000 shares of $0.01 par value preferred stock.
  The Companys Board of Directors has the authority to issue shares of
  preferred stock and to determine the price and terms of those shares.                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|[2] | Stock options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company
  has adopted the 1995 Stock Option Plan, pursuant to which the Company may
  grant options to purchase up to an aggregate of 1,250,000 shares of common
  stock. The Company also has adopted the 1999 Stock Option Plan and the 1999
  Director Option Plan, pursuant to which the Company may grant options to
  purchase up to 2,813,000 and 300,000 shares of common stock, respectively.
  The Plans are administered by the Board of Directors, which has the authority
  to determine the term during which an option may be exercised (not more than
  10 years), the exercise price of an option and the vesting provisions.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | A summary of
  the status of the Companys stock option plans as of December 31, 2003,
  2004 and 2005 and changes during the years ended on those dates, is presented
  below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |      |  |  |  |           |   |  
| | -------------------------------- |  | ------ | --------- | -------- | - | ------ |  | -------- |  | --------- | - | -------- | ---- |  |  |  | --------- | - | -
| |                                  |  | 2003   |           | 2004     |   | 2005   | 
| |                                  |  |        |           |          |   |        | 
| |                                  |  |        |           | Weighted |   |        |  | Weighted |  |           |   | Weighted |     
| |                                  |  |        |           | Average  |   |        |  | Average  |  |           |   | Average  |     
| |                                  |  |        |           | Exercise |   |        |  | Exercise |  |           |   | Exercise |     
| |                                  |  | Shares |           | Price    |   | Shares |  | Price    |  | Shares    |   | Price    |     
| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |     
| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |      |  |  |  |           |   |  
| | Outstanding at beginning of year |  |        | 2,200,000 |          | $ | 3.53   |  |          |  | 2,129,000 |   | $        | 3.74 |  |  |  | 2,291,000 |   | $
| | Granted                          |  |        | 485,000   |          |   | 4.81   |  |          |  | 713,000   |   |          | 7.85 |  |  |  | 677,000   |   |  
| | Exercised                        |  |        | (298,000  | )        |   | 2.57   |  |          |  | (444,000  | ) |          | 2.63 |  |  |  | (161,000  | ) |  
| | Forfeited                        |  |        | (258,000  | )        |   | 5.35   |  |          |  | (107,000  | ) |          | 7.96 |  |  |  | (77,000   | ) |  
| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |      |  |  |  |           |   |  
| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |      |  |  |  |           |   |  
| | Outstanding at end of year       |  |        | 2,129,000 |          | $ | 3.74   |  |          |  | 2,291,000 |   | $        | 5.04 |  |  |  | 2,730,000 |   | $
| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |      |  |  |  |           |   |  
| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |      |  |  |  |           |   |  
| | Exercisable at end of year       |  |        | 1,258,000 |          | $ | 2.89   |  |          |  | 1,100,000 |   | $        | 3.61 |  |  |  | 1,424,000 |   | $
| |                                  |  |        |           |          |   |        |  |          |  |           |   |          |      |  |  |  |           |   |  

F-14

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEH - STOCKHOLDERSEQUITY (CONTINUED)

|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|[2] | Stock options: (continued)                                                                 
|    |                                                                                            
|    | The
  following table summarizes information about stock options as of
  December 31, 2003:

| |          |              |                     |           |                     |  |          |         |             |  |          |      |  |  |           |         |  |      |      |  | 
| | -------- | ------------ | ------------------- | --------- | ------------------- |  | -------- | ------- | ----------- |  | -------- | ---- |  |  | --------- | ------- |  | ---- | ---- |  | 
| |          |              | Options Outstanding |           | Options Exercisable | 
| |          |              |                     |           |                     | 
| |          |              |                     |           | Weighted            |  |          |         |             |  |          |     
| |          |              |                     |           | Average             |  | Weighted |         |             |  | Weighted |     
| |          |              |                     |           | Remaining           |  | Average  |         |             |  | Average  |     
| | Exercise |              | Number              |           | Contractual         |  | Exercise |         | Number      |  | Exercise |     
| | Prices   |              | Outstanding         |           | Life                |  | Price    |         | Outstanding |  | Price    |     
| |          |              |                     |           |                     |  |          |         |             |  |          |     
| |          |              |                     |           |                     |  |          |         |             |  |          |     
| |          | $0.80        |                     |           | 133,000             |  |          | 2 years |             |  | $        | 0.80 |  |  |           | 133,000 |  | $    | 0.80 |  | 
| |          | 1.20         |                     |           | 652,000             |  |          | 4 years |             |  |          | 1.20 |  |  |           | 652,000 |  |      | 1.20 |  | 
| |          | 2.31 - 3.81  |                     |           | 203,000             |  |          | 7 years |             |  |          | 2.89 |  |  |           | 59,000  |  |      | 2.97 |  | 
| |          | 4.07 - 6.70  |                     |           | 787,000             |  |          | 8 years |             |  |          | 4.76 |  |  |           | 229,000 |  |      | 5.06 |  | 
| |          | 7.38 - 10.25 |                     |           | 354,000             |  |          | 7 years |             |  |          | 7.71 |  |  |           | 185,000 |  |      | 7.65 |  | 
| |          |              |                     |           |                     |  |          |         |             |  |          |      |  |  |           |         |  |      |      | 
| |          |              |                     |           |                     |  |          |         |             |  |          |      |  |  |           |         |  |      |      | 
| |          |              |                     | 2,129,000 |                     |  | 6 years  |         |             |  | 3.74     |      |  |  | 1,258,000 |         |  | 2.89 |      | 
| |          |              |                     |           |                     |  |          |         |             |  |          |      |  |  |           |         |  |      |      | 

The following
table summarizes information about stock options as of December 31, 2004:

| |          |              |                     |  |                     |  |          |         |             |  |          |      |  |  |  |           |  |   |      |  | 
| | -------- | ------------ | ------------------- |  | ------------------- |  | -------- | ------- | ----------- |  | -------- | ---- |  |  |  | --------- |  | - | ---- |  | 
| |          |              | Options Outstanding |  | Options Exercisable | 
| |          |              |                     |  |                     | 
| |          |              |                     |  | Weighted            |  |          |         |             |  |          |     
| |          |              |                     |  | Average             |  | Weighted |         |             |  | Weighted |     
| |          |              |                     |  | Remaining           |  | Average  |         |             |  | Average  |     
| | Exercise |              | Number              |  | Contractual         |  | Exercise |         | Number      |  | Exercise |     
| | Prices   |              | Outstanding         |  | Life                |  | Price    |         | Outstanding |  | Price    |     
| |          |              |                     |  |                     |  |          |         |             |  |          |     
| |          |              |                     |  |                     |  |          |         |             |  |          |     
| |          | 1.20         |                     |  | 542,000             |  |          | 3 years |             |  | $        | 1.20 |  |  |  | 542,000   |  | $ | 1.20 |  | 
| |          | 2.31 - 3.81  |                     |  | 151,000             |  |          | 6 years |             |  |          | 2.93 |  |  |  | 80,000    |  |   | 3.02 |  | 
| |          | 4.07 - 7.05  |                     |  | 1,198,000           |  |          | 8 years |             |  |          | 5.71 |  |  |  | 258,000   |  |   | 5.32 |  | 
| |          | 7.56 - 18.90 |                     |  | 400,000             |  |          | 6 years |             |  |          | 9.02 |  |  |  | 220,000   |  |   | 7.77 |  | 
| |          |              |                     |  |                     |  |          |         |             |  |          |      |  |  |  |           |  |   |      |  | 
| |          |              |                     |  |                     |  |          |         |             |  |          |      |  |  |  |           |  |   |      |  | 
| |          |              |                     |  | 2,291,000           |  |          | 5 years |             |  |          | 5.04 |  |  |  | 1,100,000 |  |   | 3.61 |  | 
| |          |              |                     |  |                     |  |          |         |             |  |          |      |  |  |  |           |  |   |      |  | 

The following
table summarizes information about stock options as of December 31, 2005:

---

| |          |              |                     |  |                     |  |          |         |             |  |          |       |  |  |  |           |  |   |      |  | 
| | -------- | ------------ | ------------------- |  | ------------------- |  | -------- | ------- | ----------- |  | -------- | ----- |  |  |  | --------- |  | - | ---- |  | 
| |          |              | Options Outstanding |  | Options Exercisable | 
| |          |              |                     |  |                     | 
| |          |              |                     |  | Weighted            |  |          |         |             |  |          |      
| |          |              |                     |  | Average             |  | Weighted |         |             |  | Weighted |      
| |          |              |                     |  | Remaining           |  | Average  |         |             |  | Average  |      
| | Exercise |              | Number              |  | Contractual         |  | Exercise |         | Number      |  | Exercise |      
| | Prices   |              | Outstanding         |  | Life                |  | Price    |         | Outstanding |  | Price    |      
| |          |              |                     |  |                     |  |          |         |             |  |          |      
| |          |              |                     |  |                     |  |          |         |             |  |          |       |  |  |  |           |  |   |      |  | 
| |          | 1.20         |                     |  | 525,000             |  |          | 2 years |             |  | $        | 1.20  |  |  |  | 525,000   |  | $ | 1.20 |  | 
| |          | 2.31 - 3.81  |                     |  | 103,000             |  |          | 5 years |             |  |          | 2.86  |  |  |  | 80,000    |  |   | 2.97 |  | 
| |          | 4.07 - 7.05  |                     |  | 1,070,000           |  |          | 7 years |             |  |          | 5.70  |  |  |  | 410,000   |  |   | 5.49 |  | 
| |          | 7.56 - 20.37 |                     |  | 1,032,000           |  |          | 8 years |             |  |          | 11.56 |  |  |  | 409,000   |  |   | 9.32 |  | 
| |          |              |                     |  |                     |  |          |         |             |  |          |       |  |  |  |           |  |   |      |  | 
| |          |              |                     |  |                     |  |          |         |             |  |          |       |  |  |  |           |  |   |      |  | 
| |          |              |                     |  | 2,730,000           |  |          | 6 years |             |  |          | 6.94  |  |  |  | 1,424,000 |  |   | 4.87 |  | 
| |          |              |                     |  |                     |  |          |         |             |  |          |       |  |  |  |           |  |   |      |  | 

F-15

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEH - STOCKHOLDERS
EQUITY (CONTINUED)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[3] | Warrants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | In
  connection with the Companys initial public offering in June 1999, warrants
  to purchase 200,000 shares of common stock were issued to the underwriter for
  nominal consideration. The warrants were exercisable for a period of four
  years, commencing in June 2000, at a price of $11.55 per share. The warrants
  were exercised during 2004 on a cashless basis in accordance with their
  original terms. In connection with the exercise the Company issued 42,000
  shares.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | In
  connection with the Companys private placement in January 2002, warrants
  to purchase 107,000 shares of common stock were issued to the placement agent
  and a finder. The warrants were exercisable for a period of five years,
  commencing in January 2002 at a price of $9.58 per share. The warrants were
  exercised during 2004. In connection with the exercise, the Company received
  proceeds of $1,025,000.                                                             

NOTEI - INCOMETAXES

The Company
has a deferred tax asset of approximately $6,313,000 and $6,442,000 as of
December 31, 2004 and 2005, respectively, primarily relating to net
operating loss carryforwards. The Company has a net operating loss carryforward
of approximately $16,304,000 for federal income tax purposes, substantially all
of which expires from 2020 through 2025, and certain state and local net
operating loss carryforwards. There were no significant timing differences
between financial and tax reporting. The increase in the deferred tax asset is
primarily attributed to the tax compensation charge for stock options of
approximately 1,327,000 for the year ended December 31, 2005.

$4,775,000 and
$6,102,000 of the net operating loss carryforwards as of December 31, 2004
and 2005, respectively, relates to stock options for which there were no compensation
charges for financial reporting. Accordingly, any future benefit would be
credited to additional paid-in capital. Future stock issuances may subject the
Company to annual limitations on the utilization of its net operating loss
carryforwards. The Company has provided a valuation allowance, which increased
during 2003, 2004 and 2005 by $789,000, $1,045,000 and $129,000, respectively,
against the full amount of its deferred tax asset, since the likelihood of
realization cannot be determined.

The difference
between income taxes at the statutory federal income tax rate and income taxes
reported in the statements of operations are attributable to the following:

|                                                               |  |                           |          |      |   |            |   |   |          |  
|-------------------------------------------------------------- |  | ------------------------- | -------- | ---- | - | ---------- | - | - | -------- | -
|                                                               |  | Year Ended
  December 31, |         
|                                                               |  |                           |         
|                                                               |  | 2003                      |          | 2004 |   | 2005       |  
|                                                               |  |                           |          |      |   |            |  
|                                                               |  |                           |          |      |   |            |  
|Income tax
  benefit at the federal statutory rate             |  | $                         | (408,000 | )    | $ | 135,000    |   | $ | 289,000  |  
|State and
  local income taxes, net of effect on federal taxes |  |                           | (59,000  | )    |   | (129,000   | ) |   | (20,000  | )
|Increase in
  valuation allowance                              |  |                           | 789,000  |      |   | 1,045,000  |   |   | 129,000  |  
|Stock
  options                                                |  |                           | (302,000 | )    |   | (1,031,000 | ) |   | (451,000 | )
|Other                                                          |  |                           | (20,000  | )    |   | (20,000    | ) |   | 53,000   |  
|                                                               |  |                           |          |      |   |            |   |   |          |  
|                                                               |  |                           |          |      |   |            |   |   |          |  
|                                                               |  | $                         |         |      | $ |           |   | $ |         |  
|                                                               |  |                           |          |      |   |            |   |   |          |  

F-16

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEJ - COMMITMENTS,
CONTINGENCIES ANDOTHERMATTERS

|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[1] | Operating leases:                                                                                                                                                                             
|    |                                                                                                                                                                                               
|    | The Company
  is obligated under operating leases for its facility, which it occupied in
  March 2000. The Companys operating leases provide for minimum annual rental
  payments as follows:

| |                |  |   |           | 
| | -------------- |  | - | --------- | 
| | Year
  Ending  |  |   |           | 
| | December
  31, |  |   |           | 
| |                |  |   |           | 
| |                |  |   |           | 
| | 2006           |  | $ | 418,000   | 
| | 2007           |  |   | 418,000   | 
| | 2008           |  |   | 418,000   | 
| | 2009           |  |   | 418,000   | 
| | 2010           |  |   | 104,000   | 
| |                |  |   |           | 
| |                |  |   |           | 
| |                |  | $ | 1,776,000 | 
| |                |  |   |           | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | The office
  lease, which expires in 2010, also provides for escalations relating to
  increases in real estate taxes and certain operating expenses. Expenses
  relating to operating leases aggregated approximately $499,000, $409,000 and
  $398,000 for the years ended December 31, 2003, 2004 and 2005,
  respectively.                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | During 2003,
  the Company entered into an agreement to sublease a portion of its space
  through the end of the lease. The sublease provides for monthly payments of
  approximately $12,000 and also provides for escalations relating to increases
  in real estate taxes and certain operating expenses. Other income of $54,000,
    $147,000 and $151,000 for the years ended December 31, 2003, 2004 and
    2005, respectively reflects rent received by the Company under the sublease.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|[2] | Concentration of customers:                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Two
  customers accounted for 45% and 18%, respectively, of the Companys revenue
  during the year ended December 31, 2005. One of these customers
  accounted for 71% of the Companys accounts receivable and unbilled
  receivables as of December 31, 2005.                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Three
  customers accounted for 49%, 15%, and 12%, respectively, of the Companys
  revenue during the year ended December 31, 2004. Two of those customers
  accounted for 31% and 21% of the Companys account and unbilled receivables
  as of December 31, 2004.                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | One
  customer, accounted for 58% of the Companys revenue during the year ended
  December 31, 2003 and 54% of the Companys accounts receivable as of
  December 31, 2003.                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|[3] | Concentration of vendor:                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | One vendor
  accounted for 47% of the Companys purchases which constituted 68% of the
  cost of revenue during the year ended December 31, 2005. The same vendor
  accounted for 51% of the Companys accounts payable as of December 31,
  2005.                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|[4] | Officers Bonus:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Board
  has awarded a discretionary bonus of approximately $295,000 to certain
  officers for the year ended December 31, 2005. The bonus is based on
  certain operating criteria, and is in addition to their base salary.                                                                                                                                                                                                                                                                

F-17

---



I.D. SYSTEMS, INC.

Notes to Financial Statements
December 31, 2003, 2004 and 2005

NOTEK - PROPOSED OFFERING

On January 18, 2006, the Company
signed a letter of intent with an underwriter to sell up to 2,500,000 shares of
common stock on a firm commitment basis. There is no assurance that such offering
will be consummated. In connection therewith, the Company anticipates incurring
substantial costs, which, if the offering is not consummated, will be charged
to expense. The letter of intent was approved by the Board of Directors of the
Company in January 2006.

NOTEL - QUARTERLYSELECTEDFINANCIALDATA (UNAUDITED)

The following
tables contain selected quarterly financial data for each quarter of the years ended 2005 and
2004. We believe the following information reflects all normal recurring
adjustments necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for any future periods.

| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | --------------------------------------------- |  | ------------------------------ | --------- | ------------- | - | ------------- |  | ------------- | --------- |  | - | --------- | 
| |                                               |  | Year Ended
  December 31, 2005 |          
| |                                               |  |                                |          
| |                                               |  | 1st
  Quarter                  |           | 2nd
  Quarter |   | 3rd
  Quarter |  | 4th
  Quarter |          
| |                                               |  |                                |           |               |   |               |  |               |          
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Revenue                                       |  | $                              | 3,033,000 |               | $ | 4,198,000     |  | $             | 5,742,000 |  | $ | 6,031,000 | 
| | Gross profit                                  |  |                                | 1,527,000 |               |   | 2,117,000     |  |               | 2,588,000 |  |   | 3,064,000 | 
| | Selling,
  general and administrative expense |  |                                | 1,853,000 |               |   | 1,451,000     |  |               | 1,624,000 |  |   | 2,212,000 | 
| | Research and
  development expense            |  |                                | 395,000   |               |   | 342,000       |  |               | 398,000   |  |   | 490,000   | 
| | Other income
  and expense                    |  |                                | 86,000    |               |   | 88,000        |  |               | 75,000    |  |   | 71,000    | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Net
  income (loss)                           |  | $                              | (635,000  | )             | $ | 412,000       |  | $             | 641,000   |  | $ | 433,000   | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Income (loss)
  per share - basic             |  | $                              | (0.08     | )             | $ | 0.05          |  | $             | 0.08      |  | $ | 0.06      | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Income (loss)
  per share - diluted           |  | $                              | (0.08     | )             | $ | 0.05          |  | $             | 0.07      |  | $ | 0.05      | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 

| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | --------------------------------------------- |  | ------------------------------ | --------- | ------------- | - | ------------- |  | ------------- | --------- |  | - | --------- | 
| |                                               |  | Year Ended
  December 31, 2004 |          
| |                                               |  |                                |          
| |                                               |  | 1st
  Quarter                  |           | 2nd
  Quarter |   | 3rd
  Quarter |  | 4th
  Quarter |          
| |                                               |  |                                |           |               |   |               |  |               |          
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Revenue                                       |  | $                              | 2,705,000 |               | $ | 3,764,000     |  | $             | 3,289,000 |  | $ | 3,983,000 | 
| | Gross profit                                  |  |                                | 1,450,000 |               |   | 1,897,000     |  |               | 1,822,000 |  |   | 2,063,000 | 
| | Selling,
  general and administrative expense |  |                                | 1,273,000 |               |   | 1,434,000     |  |               | 1,470,000 |  |   | 1,702,000 | 
| | Research and
  development expense            |  |                                | 155,000   |               |   | 283,000       |  |               | 372,000   |  |   | 424,000   | 
| | Other income
  and expense                    |  |                                | 73,000    |               |   | 62,000        |  |               | 65,000    |  |   | 79,000    | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Net income                                    |  | $                              | 95,000    |               | $ | 242,000       |  | $             | 45,000    |  | $ | 16,000    | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Income per
  share - basic                    |  | $                              | 0.01      |               | $ | 0.03          |  | $             | 0.01      |  | $ | 0.00      | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 
| | Income per
  share - diluted                  |  | $                              | 0.01      |               | $ | 0.03          |  | $             | 0.01      |  | $ | 0.00      | 
| |                                               |  |                                |           |               |   |               |  |               |           |  |   |           | 

F-18

---



Item 9.     Changes
In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item
9A.     Controls and Procedures

Evaluation
of Disclosure Controls and Procedures

During
the fourth quarter of our fiscal year ended December 31, 2005, our management,
including the principal executive officer and principal financial officer,
evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) related to the recording, processing,
summarization, and reporting of information in our reports that we file with
the SEC.  These disclosure controls and
procedures have been designed to ensure that material information relating to us
is made known to our management, including these officers, by other of our
employees, and that this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
SECs rules and forms.  Due to the
inherent limitations of control systems, not all misstatements may be
detected.  These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by
the individual acts of some persons, by collusion of two or more people, or by
management override of the control.  Our
controls and procedures can only provide reasonable, not absolute, assurance
that the above objectives have been met.

Based
on their evaluation as of December 31, 2005, our principal executive officer
and principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
are effective to reasonably ensure that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act,
is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms.

Managements
Report on Internal Control Over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f).  Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on our evaluation
under this framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2005.

Eisner
LLP, the independent registered accounting firm that audited our consolidated
financial statements included in this Annual Report on Form 10-K, has audited
managements assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005.
The report, which expresses unqualified opinions on managements
assessment and on the effectiveness of our internal control over financial
reporting as of December 31, 2005, is included below.

37

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

|To the Board of Directors and Stockholders ofI.D. Systems, Inc.
|---------------------------------------------------------------

We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that I.D. Systems, Inc. (the "Company") maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on
the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that I.D. Systems, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control - Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of I.D. Systems, Inc. as of December 31, 2005 and 2004, and the related
statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 7, 2006 expressed an unqualified opinion on those consolidated financial
statements.

|/s/ Eisner LLP
New York, New YorkFebruary 7, 2006
|-------------------------------------------------

38



---



Changes
in Internal Control Over Financial Reporting

There
have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

Item
9B.     Other Information

None.

39

---



PART
III.

Item
10.     Directors, Executive Officers, Promoters and
Control Persons, Compliance With Section 16(a) of the Exchange Act

Executive
Officers and Directors

Set
forth below are the names, ages and titles of our executive officers and
directors as of January 31, 2006.

|                           |  |     |  |                                                                         
|-------------------------- |  | --- |  | ------------------------------------------------------------------------
|Name                       |  | Age |  | Title                                                                   
|Jeffrey M. Jagid           |  | 36  |  | Chairman of the Board and Chief Executive Officer                       
|Kenneth S. Ehrman          |  | 36  |  | President, Chief Operating Officer and Director                         
|Ned Mavrommatis            |  | 35  |  | Chief Financial Officer, Treasurer and Corporate
  Secretary            
|Frederick F. Muntz         |  | 52  |  | Executive Vice President of Sales, Marketing and
  Customer Satisfaction
|Michael L. Ehrman          |  | 33  |  | Executive Vice President of Engineering                                 
|Lawrence Burstein(1)(2)(3) |  | 63  |  | Director                                                                
|Michael Monaco (1)(2)(3)   |  | 58  |  | Director                                                                
|Beatrice Yormark (1)(2)(3) |  | 61  |  | Director                                                                

---

|    |                                     
|--- | ------------------------------------
|(1) | Member of the Compensation Committee
|    |                                     
|(2) | Member of the Audit Committee       
|    |                                     
|(3) | Member of the Nominating Committee  

Our
executive officers are appointed at the discretion of the Board of Directors
with no fixed term.  The only familial
relationships between or among any of our executive officers or directors are as
follows: (i) Mr. Kenneth S. Ehrman and Mr. Michael L. Ehrman are brothers; and
(ii) Ms. Yormark is Mr. Jagids aunt.

The
biographies of each of our executive officers and directors are set forth
below.

Jeffrey M. Jagid has
been
our Chairman of the Board since June 2001 and our Chief Executive Officer since
June 2000. Prior thereto, he served as our Chief Operating Officer. Since he
joined us in 1995, Mr. Jagid also has served as a director as well as our
General Counsel. Mr. Jagid received a Bachelor of Business Administration from
Emory University in 1991 and a Juris Doctor degree from the Benjamin N. Cardozo
School of Law in 1994. Prior to joining us, Mr. Jagid was a corporate litigation
associate at the law firm of Tannenbaum Helpern Syracuse & Hirschtritt LLP
in New York City. He is a member of the Bar of the States of New York and New
Jersey. Mr. Jagid is also a director of Coining Technologies, Inc. Mr. Jagid is the nephew
of Beatrice Yormark, one of our directors.

Kenneth S. Ehrman is one
of our founders and has been our Chief Operating Officer since June 2000. Mr.
Ehrman also has served as a director as well as our President since our
inception in 1993. He graduated from Stanford University in 1991 with a
Bachelor of Science in Industrial Engineering. Upon his graduation, and until
our inception, Mr. Ehrman worked as a production manager with Echelon
Corporation. Mr. Ehrman is the brother of Michael L. Ehrman, our Executive Vice
President of Engineering.

40

---



Ned Mavrommatis has
served as our Chief Financial Officer since joining us in August 1999, as our
Treasurer since June 2001 and as our Corporate Secretary since November 2003.
Prior to joining us, he was a Senior Manager at the accounting firm of Eisner
LLP. Mr. Mavrommatis received a Master of Business Administration in finance
from New York Universitys Leonard Stern School of Business and a Bachelor of
Business Administration in accounting from Bernard M. Baruch College, The City
University of New York. Mr. Mavrommatis is also a Certified Public Accountant.

Frederick F. Muntz has
served as our Executive Vice President of Sales, Marketing and Customer
Satisfaction since joining us in January 2003. Prior to joining us, he was Vice
President of the Americas for InVision Technologies. Mr. Muntz managed the
introduction of explosives detection systems in Canada, South America, and to
the U.S. Federal Aviation Administration and the U.S. Department of Homeland
Security. Mr. Muntz has a successful, 25-year track record of introducing and
growing new technology products in a wide variety of markets. In medical
markets, Mr. Muntz was responsible for the commercialization of magnetic
resonance imaging with Technicare, a subsidiary of Johnson & Johnson. Mr.
Muntz received a Bachelor of Arts degree in Government and Law from Lafayette
College.

Michael L. Ehrman has
served as our Executive Vice President of Engineering since August 1999. Prior
to that, he served as our Executive Vice President of Software Development since
joining us in 1995. Mr. Ehrman graduated from Stanford University in 1994 with
a Master of Science in Engineering - Economics Systems as well as a Bachelor of
Science in Computer Systems Engineering. Upon his graduation in 1994, Mr.
Ehrman was employed as a consultant for Andersen Consulting in New York. Mr.
Ehrman is the brother of Kenneth S. Ehrman, our Chief Operating Officer.

Lawrence Burstein has
served as a director since June 1999. Since March 1996, Mr. Burstein has served
as President and a director of Unity Venture Capital Associates, Ltd., a
private investment company. From January 1982 to March 1996, Mr. Burstein was
Chairman of the Board and a principal stockholder of Trinity Capital
Corporation, a private investment company. Mr. Burstein is also a director of
THQ, Inc., CAS Medical Systems, Inc., Traffix, Inc. and Chairman of the Board and director of American Telecom Services, Inc. Mr. Burstein received a Bachelor of Arts in Economics from the University
of Wisconsin and received his law degree from Columbia Law School.

Michael Monaco has
served
as a director since June 2001. Mr. Monaco is a Senior Managing Director at
Conway DelGenio Gries & Co., LLC, a New York based firm specializing in
restructurings, mergers and acquisitions and crisis and turnaround management.
He served as Chairman and Chief Executive Officer of Accelerator, LLC, a
provider of outsourced services from 2000 to 2001. He served as Vice Chairman
of Cendant Corporation from 1996 to 2000 and as Chief Executive Officer of the
Direct Marketing Division of Cendant from 1998 to 2000. Mr. Monaco served as
the Executive Vice President and Chief Financial Officer of the American
Express Company from 1990 to 1996. Mr. Monaco is a Director of Washington Group
International, Inc. Mr. Monaco received a Bachelor of Science degree in
Accounting from Villanova University and a Master of Business Administration
degree from Fairleigh Dickinson University. Mr. Monaco is also a Certified
Public Accountant.

Beatrice Yormark has
served as a director since June 2001. Ms. Yormark is the President and Chief
Operating Officer of Echelon Corporation. Ms. Yormark has been with Echelon
since 1990. Prior to becoming the President and Chief Operating Officer in
September 2001, she held the position of Vice President of Worldwide Marketing
and Sales. Before joining Echelon, she was the Chief Operating Officer of
Connect, Inc., an online information services company. Before joining Connect,
Ms. Yormark held a variety of positions, including executive director of systems
engineering for Telaction Corporation, director in the role of partner at
Coopers & Lybrand, vice president of sales at INTERACTIVE Systems

41

---



Corporation, and various staff positions at the Rand
Corporation. Ms. Yormark received a Masters of Science in Computer Science from
Purdue University in 1968, after which she spent one year teaching computer
science at Purdue. In addition to her graduate degree, Ms. Yormark has a
Bachelor of Science in Mathematics from City College of New York. Ms. Yormark is
the aunt of Mr. Jeffrey M. Jagid, our Chairman and Chief Executive Officer.

Committees of the Board of Directors

The
standing committees of our board of directors include an audit committee, a
compensation committee and a nominating committee.

Audit
Committee

The
audit committee is composed of Messrs. Burstein and Monaco and Ms. Yormark,
each of whom is independent within the meaning of Rule 4200(a)(15) of the
National Association of Securities Dealers Marketplace Rules and under Rule
10A-3 of the Exchange Act.

Our
board of directors has determined that it has at least one audit committee
financial expert serving on its audit committee. Mr. Monaco serves as the audit
committee financial expert. Our board of directors has adopted a written
charter for the audit committee, which is publicly available on our website at
www.id-systems.com. The audit committees charter sets forth the
responsibilities, authority and specific duties of the audit committee and is
reviewed and reassessed annually. The charter specifies, among other things,
the structure and membership requirements of the audit committee, as well as
the relationship of the audit committee to our independent auditors and
management.

In
accordance with its written charter, the audit committee assists our board of
directors in monitoring (1) the integrity of our financial reporting process
including its internal controls regarding financial reporting, (2) our
compliance with legal and regulatory requirements and (3) the independence and
performance of our internal and external auditors, and serves as an avenue of
communication among the independent auditors, management and the board of
directors.

Compensation
Committee

The
compensation committee is composed of Messrs. Burstein and Monaco and Ms. Yormark,
each of whom is independent within the meaning of Rule 4200(a)(15) of the
National Association of Securities Dealers Marketplace Rules. The compensation
committee sets executives annual compensation and long-term incentives,
reviews managements performance, development and compensation, determines
option grants and administers our incentive plans.

Nominating
Committee

The
nominating committee is composed of Messrs. Burstein and Monaco and Ms.
Yormark, each of whom is independent within the meaning of Rule 4200(a)(15) of
the National Association of Securities Dealers Marketplace Rules.

The
board of directors has adopted a written charter for the nominating committee,
which is publicly available on our website at www.id-systems.com. The
nominating committees charter authorizes the committee to develop certain
procedures and guidelines addressing certain nominating matters, such as
procedures for considering nominations made by stockholders, minimum
qualifications

42

---



for nominees and identification and evaluation of
candidates for the board of directors, and the nominating committee has adopted
procedures addressing the foregoing.

Compliance
with Section 16(a) of the Exchange Act

Section
16(a) of the Exchange Act requires our executive officers, directors and
persons who own more than 10% of a registered class of our equity securities to
file statements on Form 3, Form 4 and Form 5 of ownership and changes in
ownership with the SEC.  Officers,
directors and greater than 10% stockholders are required by the regulation to
furnish us with copies of all Section 16(a) reports that they file.

Based
solely upon a review of Forms 3 and 4 and amendments to these forms furnished
to us, all parties subject to the reporting requirements of Section 16(a) filed
all such required reports during and with respect to the fiscal year ended
December 31, 2005.

Code of
Ethics

We
have a code of ethics that applies to our Chief Executive Officer, Chief
Financial Officer and Controller and other persons who perform similar
functions. A copy of our code of ethics can be found on our website at
www.id-systems.com. Our code of ethics is intended to be a codification of the
business and ethical principles that guide us, and to deter wrongdoing, to
promote honest and ethical conduct, to avoid conflicts of interest, and to
foster full, fair, accurate, timely and understandable disclosures, compliance
with applicable governmental laws, rules and regulations, the prompt internal
reporting of violations and accountability for adherence to this code.

Item
11.     Executive Compensation

The
following table sets forth the compensation paid or accrued, for the fiscal
years ended December 31, 2005, 2004 and 2003, for our Chief Executive Officer
and the four next most highly compensated executive officers, which we refer to
collectively as our named executive officers, who were employed by us on December 31, 2005.

43

---



Summary
Compensation Table

|                                      |  |  |      |  |        |                       |       |                          |                                              |  |         |  |  | 
|------------------------------------- |  |  | ---- |  | ------ | --------------------- | ----- | ------------------------ | -------------------------------------------- |  | ------- |  |  | 
|                                      |  |  |      |  |        | Annual
  Compensation |       | Long-Term
  Compensation |                                             
|                                      |  |  |      |  |        |                       |       |                          |                                             
|Name and
  Principal Position         |  |  | Year |  | Salary |                       | Bonus |                          | Securities
  Underlying
  Options/SARs (#(1) | 
|                                      |  |  |      |  |        |                       |       |                          |                                             
|Jeffrey M. Jagid                      |  |  | 2005 |  | $      | 226,500               |       | $                        | 67,950                                       |  | 60,000  |  | 
|Chief Executive Officer               |  |  | 2004 |  |        | 226,500               |       |                          | 215,175                                      |  | 80,000  |  | 
|and General Counsel                   |  |  | 2003 |  |        | 215,625               |       |                          | 53,668                                       |  |        |  | 
|                                      |  |  |      |  |        |                       |       |                          |                                              |  |         |  | 
|Kenneth S. Ehrman                     |  |  | 2005 |  | $      | 200,000               |       | $                        | 60,000                                       |  | 51,000  |  | 
|President and Chief Operating Officer |  |  | 2004 |  |        | 200,000               |       |                          | 190,000                                      |  | 70,000  |  | 
|                                      |  |  | 2003 |  |        | 192,500               |       |                          | 42,350                                       |  |        |  | 
|                                      |  |  |      |  |        |                       |       |                          |                                              |  |         |  | 
|Ned Mavrommatis                       |  |  | 2005 |  | $      | 181,000               |       | $                        | 54,300                                       |  | 49,000  |  | 
|Chief Financial Officer,              |  |  | 2004 |  |        | 181,000               |       |                          | 171,950                                      |  | 55,000  |  | 
|Treasurer and Corporate Secretary     |  |  | 2003 |  |        | 172,500               |       |                          | 43,125                                       |  |        |  | 
|                                      |  |  |      |  |        |                       |       |                          |                                              |  |         |  | 
|Michael L. Ehrman                     |  |  | 2005 |  | $      | 175,000               |       | $                        | 52,500                                       |  | 57,000  |  | 
|Executive Vice President              |  |  | 2004 |  |        | 175,000               |       |                          | 166,250                                      |  | 55,000  |  | 
|                                      |  |  | 2003 |  |        | 165,000               |       |                          | 48,675                                       |  |        |  | 
|                                      |  |  |      |  |        |                       |       |                          |                                              |  |         |  | 
|Frederick F. Muntz                    |  |  | 2005 |  | $      | 200,000               |       | $                        | 60,000                                       |  | 30,000  |  | 
|Executive Vice President              |  |  | 2004 |  |        | 175,000               |       |                          | 166,250                                      |  |        |  | 
|                                      |  |  | 2003 |  |        | 160,416               |       |                          | 53,890                                       |  | 300,000 |  | 

---

|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents shares issuable pursuant to stock options
  granted under our stock option plans.
  These options vest 20% per year commencing on the first anniversary of
  the date of grant.

Option Grants

The
following table sets forth for the year ended December 31, 2005, those named
executive officers who received options to purchase our common stock:

|                  |  |                                                            |  |                                                         |     |                  |  |                   |       |                                                                                                            |  |          |  |   |         |  |   |           | 
|----------------- |  | ---------------------------------------------------------- |  | ------------------------------------------------------- | --- | ---------------- |  | ----------------- | ----- | ---------------------------------------------------------------------------------------------------------- |  | -------- |  | - | ------- |  | - | --------- | 
|                  |  | % of Total
  # 
  of Securities
  Underlying
  Options (1) |  | % of Total
  Options
  Granted to
  Employees
  in 2005 |     | Exercise
  Price |  | Expiration
  Date |       | Potential
  Realizable Value at
  Assumed Annual Rates of
  Stock Price Appreciation
  for Option Term (2) | 
|                  |  |                                                            |  |                                                         |     |                  | 
|Name              |  |                                                            |  |                                                         |     | 5%               |  | 10%               |      
|                  |  |                                                            |  |                                                         |     |                  |  |                   |       |                                                                                                            |  |          | 
|Jeffrey Jagid     |  | 60,000                                                     |  |                                                         | 9.7 | %                |  | $                 | 11.35 |                                                                                                            |  | 3/3/2015 |  | $ | 428,277 |  | $ | 1,085,339 | 
|Kenneth Ehrman    |  | 51,000                                                     |  |                                                         | 8.3 |                  |  |                   | 11.35 |                                                                                                            |  | 3/3/2015 |  |   | 364,036 |  |   | 922,538   | 
|Ned Mavrommatis   |  | 49,000                                                     |  |                                                         | 7.9 |                  |  |                   | 11.35 |                                                                                                            |  | 3/3/2015 |  |   | 349,760 |  |   | 886,360   | 
|Michael L. Ehrman |  | 57,000                                                     |  |                                                         | 9.2 |                  |  |                   | 11.35 |                                                                                                            |  | 3/3/2015 |  |   | 406,863 |  |   | 1,031,072 | 
|Frederick Muntz   |  | 30,000                                                     |  |                                                         | 4.9 |                  |  |                   | 11.35 |                                                                                                            |  | 3/3/2015 |  |   | 214,139 |  |   | 542,669   | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These options vest 20% per year commencing on the
  first anniversary of the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(2) | The SEC requires disclosure of the potential
  realizable value or present value of each grant. The 5% and 10% assumed
  annual rates of compounded stock price appreciation are mandated by rules of
  the SEC and do not represent our estimate or projection of our future common
  stock prices. The disclosure assumes the options will be held for the full
  ten-year term prior to exercise. Such options may be exercised prior to the
  end of such ten-year term. The actual value, if any, an executive officer

44

---



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | may realize will depend on the excess of the stock
  price over the exercise price on the date the option is exercised. There can
  be no assurance that the stock price will appreciate at the rates shown in
  the table.

Option
Exercises and Fiscal Year End Option Values

The
following table sets forth for the year ended December 31, 2005, the named
executive officer who exercised options to purchase our common stock and the
fiscal year end value of unexercised options:

|                |  |                              |  |                  |   |             |  |                                                                  |  |                                                                         |         |               |  |   |           |  |   |           | 
|--------------- |  | ---------------------------- |  | ---------------- | - | ----------- |  | ---------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ------- | ------------- |  | - | --------- |  | - | --------- | 
|                |  |                              |  |                  |   |             |  | Number of
  Securities
  Underlying Options
  at Fiscal Year End |  | Value of
  Unexercised In-The-
  Money Options at
  Fiscal Year End (1) |        
|Name            |  | SharesAcquired
  on Exercise |  | Value
  Realized |   | Exercisable |  | Unexercisable                                                    |  | Exercisable                                                             |         | Unexercisable | 
|                |  |                              |  |                  |   |             |  |                                                                  |  |                                                                         |         |               | 
|Ned Mavrommatis |  | 30,000                       |  |                  | $ | 403,000     |  | 63,000                                                           |  |                                                                         | 104,000 |               |  | $ | 1,097,000 |  | $ | 1,569,000 | 

---

|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | Based on $23.85 per share, the closing price of our
  common stock on December 30, 2005.

Compensation
Committee Interlocks and Insider Participation

None of our executive officers serves as a member of
the board of directors or compensation committee of any entity that has one or
more of its executive officers serving as members of our Board of Directors or
our compensation committee.

Directors
Compensation

We
reimburse our directors for reasonable travel expenses incurred in connection
with their activities on our behalf.
Non-employee directors also receive $2,500 per board meeting, $250 per
telephonic board meeting, $5,000 per year for serving on the audit committee
and $1,000 per year for serving on the compensation committee.

Non-employee
directors are entitled to participate in our 1999 Director Option Plan. A total
of 600,000 shares of our common stock have been reserved for issuance under
such plan.  The plan provides for the
automatic grant of option to purchase 15,000 shares to each non-employee
director at the time he or she is first elected to the board of directors and
an automatic grant of an option to purchase 5,000 shares on the first day of
each fiscal quarter, if on such date he or she has served on the board for at
least six months.  Each option grant
under the plan has a term of 10 years and vests on a cumulative monthly basis
over a four-year period.  The exercise
price of all options equals the fair market value of our common stock on the
date of grant.  During the fiscal year
ended December 31, 2005, each of our non-employee directors received options to
purchase 5,000 shares of common stock on each of January 3, 2005, April 1,
2005, July 1, 2005 and October 3, 2005 at a per share exercise price of $16.87,
$11.06, $15.55 and $19.80, respectively.

Employee
directors are entitled to participate in our 1999 Stock Option Plan.  A total of 2,812,500 shares have been
reserved for issuance under the plan.
The plan provides for grants of incentive stock options and non-qualified
stock options.  Options can be granted
under the plan on terms and at prices as determined by our board of directors,
or the compensation committee, except that the exercise price of incentive
options will not be less than the fair market value of our common stock on the
date of grant.  In the case of an
incentive stock option granted to an employee who owns more than 10% of the
total combined voting power of all classes of our stock, the per share exercise
price will not be less than 110% of the fair market value on the date of
grant.  The aggregate fair market value,
determined on

45

---



the date of grant, of the shares covered by incentive
stock options granted under the plan that become exercisable by a grantee for
the first time in any calendar year is subject to a $100,000 limit.

Item
12.     Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters

Security
Ownership of Certain Beneficial Owners

The
following table sets forth information regarding ownership of shares of our
common stock, as of January 31, 2006:

| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | by each person known by us to be the beneficial
  owner of 5% or more of our common stock;
| |   |                                                                                           
| |  | by each of our directors and executive officers; and                                      
| |   |                                                                                           
| |  | by all of our directors and executive officers as a
  group.                              

Except
as otherwise indicated, each person and each group shown in the table below has
sole voting and investment power with respect to the shares of common stock
indicated. For purposes of the table below, in accordance with Rule 13d-3 under
the Exchange Act, as amended, a person is deemed to be the beneficial owner of
any shares of common stock over which he or she has or shares, directly or
indirectly, voting or investment power or of which he or she has the right to
acquire beneficial ownership at any time within 60 days. As used in this Annual
Report on Form 10-K, voting power is the power to vote or direct the voting
of shares and investment power includes the power to dispose or direct the
disposition of shares.  Common stock
beneficially owned and percentage ownership as of January 31, 2006 were based
on 7,870,523 shares outstanding.

|                                                                  |  |                             |           |   |      |  | 
|----------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- |  | 
|                                                                  |  | Shares
  Beneficially Owned |          
|                                                                  |  |                             |          
|Officers and Directors(1)                                         |  | Number                      |           | % |     
|                                                                  |  |                             |           |   |     
|Jeffrey M. Jagid(2)                                               |  |                             | 606,875   |   | 7.4  |  | 
|Kenneth S. Ehrman(3)                                              |  |                             | 659,513   |   | 8.2  |  | 
|Michael L. Ehrman(4)                                              |  |                             | 459,050   |   | 5.6  |  | 
|Ned Mavrommatis(5)                                                |  |                             | 83,800    |   | 1.1  |  | 
|Frederick F. Muntz(6)                                             |  |                             | 218,900   |   | 2.7  |  | 
|Lawrence Burstein(7)                                              |  |                             | 60,724    |   | *    |  | 
|Michael Monaco(8)                                                 |  |                             | 59,336    |   | *    |  | 
|Beatrice Yormark(9)                                               |  |                             | 62,224    |   | *    |  | 
|Oberweis Asset Management, Inc.(10)                               |  |                             | 588,906   |   | 7.5  |  | 
|CQ Capital, LLC and E. Turner Baur(11)                            |  |                             | 415,726   |   | 5.3  |  | 
|All Directors and Executive Officers as a group (8
  persons)(12) |  |                             | 2,210,422 |   | 24.1 |  | 

---

|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Less than one percent                                                                                                                                           
|    |                                                                                                                                                                 
|(1) | Unless otherwise indicated, the address for each
  named individual or group is c/o I.D. Systems, Inc., One University Plaza,
  6th Floor, Hackensack, NJ 07601.
|    |                                                                                                                                                                 
|(2) | Includes 361,625 shares of common stock issuable
  upon exercise of options exercisable within 60 days of January 31, 2006.                                     
|    |                                                                                                                                                                 
|(3) | Includes 217,950 shares of common stock issuable
  upon exercise of options exercisable within 60 days of January 31, 2006.                                     
|    |                                                                                                                                                                 
|(4) | Includes 347,025 shares of common stock issuable
  upon exercise of options exercisable within 60 days of January 31, 2006.                                     
|    |                                                                                                                                                                 
|(5) | Includes 83,800 shares of common stock issuable upon
  exercise of options exercisable within 60 days of January 31, 2006.                                      

46

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6)  | Includes 9,000 shares held in a trust for Mr.
  Muntzs nieces and nephews of which Mr. Muntz is the trustee. Also includes
  6,000 shares held in custodial accounts for his children and 2,000 shares
  owned of record by his wife. Mr. Muntz currently exercises all voting and
  dispositive power with regard to such shares. Includes 126,000 shares of
  common stock issuable upon exercise of options exercisable within 60 days of
  January 31, 2006.                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(7)  | Includes 57,224 shares of common stock issuable upon
  exercise of options exercisable within 60 days of January 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(8)  | Includes 59,336 shares of common stock issuable upon
  exercise of options exercisable within 60 days of January 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(9)  | Includes 59,932 shares of common stock issuable upon
  exercise of options exercisable within 60 days of January 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(10) | Includes shares beneficially owned by The Oberweis
  Funds on December 31, 2005 with respect to which The Oberweis Funds has
  delegated to Oberweis Asset Management, Inc., its investment adviser, voting
  power and dispositive power. James D. Oberweis and James W. Oberweis are
  principal stockholders of Oberweis Asset Management, Inc.  The address of the business office of each
  of the reporting persons is 3333 Warrenville Road, Suite 500, Lisle, Illinois
  60532.  The foregoing information is
  derived from a Schedule 13G filed on behalf of Oberweis Asset Management,
  Inc., James D. Oberweis and James W. Oberweis on February 14, 2006.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(11) | Includes (i) 339,442 shares held by CQ Capital, LLC
  and beneficially owned by E. Turner Baur on December 31, 2005 and (ii) 76,284
  shares held and beneficially owned by E. Turner Baur, managing member of CQ
  Capital, LLC, on December 31, 2005.
  The address of the business office of each of the reporting persons is
  65 Locust Avenue, Second Floor, New Canaan, Connecticut 06840. The foregoing
  information is derived from a Schedule 13G/A filed on behalf of CQ Capital,
  LLC and E. Turner Baur on February 9, 2006.                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(12) | Includes 1,312,892 shares of common stock issuable
  upon exercise of options exercisable within 60 days of January 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Securities Authorized for Issuance Under Equity Compensation
Plans.

The following table provides information about our
common stock that may be issued upon the exercise of options under our 1995
Employee Stock Option Plan, 1999 Stock Option Plan and 1999 Director Option
Plan as of December 31, 2005.  These
plans were our only equity compensation plans in existence as of December 31,
2005.  No warrants or rights may be
granted, or are outstanding, under the 1999 Stock Option Plan.

|                                                             |  |                                                                                                               |  |                                                                                           |  |                                                                                                                                       |      |  |  |         |  | 
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------- | ---- |  |  | ------- |  | 
|Plan Category                                                |  | Number of
  securities to be
  issued upon
  exercise of
  outstanding
  options, warrants
  and rights
  (a) |  | Weighted
  average
  exercise price of
  outstanding options,
  warrants and rights
  (b) |  | Number of
  securities
  remaining
  available for
  future issuance
  (excluding
  securities
  reflected under
  column (a)) 
  (c) |     
|                                                             |  |                                                                                                               |  |                                                                                           |  |                                                                                                                                       |     
|                                                            
|Equity compensation plans approved by security
  holders     |  | 2,730,000                                                                                                     |  |                                                                                           |  | $                                                                                                                                     | 6.94 |  |  | 764,000 |  | 
|                                                             |  |                                                                                                               |  |                                                                                           |  |                                                                                                                                       |      |  |  |         |  | 
|Equity compensation plans not approved by security
  holders |  |                                                                                                              |  |                                                                                           |  |                                                                                                                                       |     |  |  |        |  | 
|                                                             |  |                                                                                                               |  |                                                                                           |  |                                                                                                                                       |      |  |  |         |  | 
|                                                             |  |                                                                                                               |  |                                                                                           |  |                                                                                                                                       |      |  |  |         |  | 
|Total                                                        |  | 2,730,000                                                                                                     |  |                                                                                           |  | $                                                                                                                                     | 6.94 |  |  | 764,000 |  | 
|                                                             |  |                                                                                                               |  |                                                                                           |  |                                                                                                                                       |      |  |  |         |  | 

---

47

---



|         |                                                 
|-------- | ------------------------------------------------
|Item 13. | Certain Relationships and Related
  Transactions

None

|         |                                         
|-------- | ----------------------------------------
|Item 14. | Principal Accountant Fees and
  Services

Audit
Fees

The
aggregate fees billed by Eisner LLP for professional services rendered for the
audit of our annual financial statements for the fiscal years ended December
31, 2005 and 2004, and for the review of our financial statements included in
our Quarterly Reports on Form 10-Q and Form 10-QSB for the fiscal years ended
December 31, 2005 and 2004 were $143,000 and $61,000, respectively.

Audit-Related
Fees

Other
than the fees described under the caption Audit Fees above, Eisner LLP did
not bill any fees for services rendered to us during fiscal years ended
December 31, 2005 and 2004 for assurance and related services in connection
with the audit or review of our financial statements.

Tax
Fees

There
were no fees billed by Eisner LLP for professional services rendered for tax
compliance, tax advice or tax planning during fiscal years ended December 31,
2005 and 2004.

All
Other Fees

There
were no fees billed by Eisner LLP for products or professional services
rendered, other than services described under the caption Audit Fees above,
during fiscal years ended December 31, 2005 and 2004.

Audit
Committees Pre-Approval Policies and Procedures

Our
Audit Committee pre-approves all services, including both audit and non-audit
services, provided by our independent accountants.  For audit services, each year the independent auditor provides
the Audit Committee with an engagement letter outlining the scope of the audit
services proposed to be performed during the year, which must be formally
accepted by the Audit Committee before the audit commences.  The independent auditor also submits an
audit services fee proposal, which also must be approved by the Audit Committee
before the audit commences.

48

---



PART
IV.

|         |                                          
|-------- | -----------------------------------------
|Item 15. | Exhibits, Financial Statement
  Schedules

(a)          List
of Financial Statements, Financial Statement Schedules, and Exhibits.

|                                                                                                                                                                                                                             |    |                                                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------------
|1.       Financial
  Statements. The following financial statements of I.D.
  Systems, Inc. are included in Item 8 of Part II of this Annual Report on Form
  10-K:                                                         
|                                                                                                                                                                                                                            
|                                                                                                                                                                                                                             |    | Report of Independent Registered Public Accounting
  Firm                                           
|                                                                                                                                                                                                                             |    |                                                                                                     
|                                                                                                                                                                                                                             |    | Balance Sheets as of December 31, 2004 and 2005                                                     
|                                                                                                                                                                                                                             |    |                                                                                                     
|                                                                                                                                                                                                                             |    | Statements of Operations for the Years Ended
  December 31, 2003, 2004 and 2005                     
|                                                                                                                                                                                                                             |    |                                                                                                     
|                                                                                                                                                                                                                             |    | Statements of Changes in Stockholders Equity for
  the Years Ended December 31, 2003, 2004 and 2005
|                                                                                                                                                                                                                             |    |                                                                                                     
|                                                                                                                                                                                                                             |    | Statements of Cash Flows for the Years Ended
  December 31, 2003, 2004 and 2005                     
|                                                                                                                                                                                                                             |    |                                                                                                     
|                                                                                                                                                                                                                             |    | Notes to the Financial Statements                                                                   
|                                                                                                                                                                                                                             |    |                                                                                                     
|                                                                                                                                                                                                                             | 2. | Financial Statement Schedules.                                                                      
|                                                                                                                                                                                                                             |    |                                                                                                     
|                                                                                                                                                                                                                             |    | Schedule II - Valuation and Qualifying Accounts                                                     
|                                                                                                                                                                                                                             |    |                                                                                                     
|All
  other financial statement schedules are omitted from this Annual Report on
  Form 10-K, as they are not required or applicable or the required information
  is included in the financial statements or notes thereto.
|                                                                                                                                                                                                                             |    |                                                                                                     
|3.       Exhibits.
The following exhibits are filed with this
  Annual Report on Form 10-K or are incorporated herein by reference, as
  indicated.                                                                         

| |  |        |  |                                                                                                                                                                                                                                                                                                                | 
| |  | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Number |  | Description                                                                                                                                                                                                                                                                                                    | 
| |  |        |  |                                                                                                                                                                                                                                                                                                                | 
|
| |  | 3.1    |  | Amended and Restated Certificate of Incorporation of
  I.D. Systems, Inc.
  (incorporated herein by reference to the I.D. Systems, Inc.s Form SB-2 filed
  with the SEC on June 30, 1999).                                                                                                                   
| |  |        |  |                                                                                                                                                                                                                                                                                                               
| |  | 3.2    |  | Amended and Restated By-Laws of I.D. Systems, Inc.
  (incorporated herein by Reference to I.D. Systems, Inc.s Form SB-2 filed
  with the SEC on June 30, 1999).                                                                                                                                              
| |  |        |  |                                                                                                                                                                                                                                                                                                               
| |  | 4.1    |  | Specimen Certificate of I.D. Systems, Inc.s Common
  Stock (incorporated herein by reference to I.D. Systems, Inc.s Form SB-2
  filed with the SEC on June 30, 1999).                                                                                                                                       
| |  |        |  |                                                                                                                                                                                                                                                                                                               
| |  | 10.1   |  | Agreement between I.D. Systems, Inc. and the United
  States Postal Service: Offer and Award Standard dated August 22, 1997, as
  modified on May 12, 1998, September 8, 1998, and March 5, 1999 (incorporated
  herein by reference to I.D. Systems, Inc.s Form SB-2 filed with the SEC on
  June 30, 1999).

49

---



| |  |        |  |                                                                                                                                                                                                                                                                                     | 
| |  | ------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Number |  | Description                                                                                                                                                                                                                                                                         | 
| |  |        |  |                                                                                                                                                                                                                                                                                     | 
|
| |  | 10.2   |  | Federal Supply Service Information Technology
  Schedule Award effective April 16, 1999 through April 15, 2004 (incorporated
  herein by reference to I.D. Systems, Inc.s Form SB-2 filed with the SEC on
  June 30, 1999).                                                       
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 10.3   |  | 1995 Non-Qualified Stock Option Plan (incorporated
  herein by reference to I.D. Systems, Inc.s Form SB-2 filed with the SEC on
  June 30, 1999).                                                                                                                                 
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 10.4   |  | 1999 Stock Option Plan (incorporated herein by
  reference to I.D. Systems, Inc.s Form SB-2 filed with the SEC on June 30,
  1999).                                                                                                                                               
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 10.5   |  | 1999 Director Option Plan (incorporated herein by
  reference to I.D. Systems, Inc.s Form SB-2 filed with the SEC on June 30,
  1999).                                                                                                                                            
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 10.6   |  | Office Lease dated November 4, 1999 between I.D.
  Systems, Inc. and Venture Hackensack Holding, Inc. (incorporated herein by
  reference to I.D. Systems, Inc.s Annual Report on Form 10-KSB for the fiscal
  year ended December 31, 1999 filed with the SEC on March 29, 2000).
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 23.1   |  | Consent of Eisner LLP.                                                                                                                                                                                                                                                             
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 31.1   |  | Certification of Chief Executive Officer Pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 31.2   |  | Certification of Chief Financial Officer Pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 32.1   |  | Certification of Chief Executive Officer Pursuant to
  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                             
| |  |        |  |                                                                                                                                                                                                                                                                                    
| |  | 32.2   |  | Certification of Chief Financial Officer Pursuant to
  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                                                                                                             

(b)          Exhibits.
The exhibits required by Item 601 of
Regulation S-K are filed herewith or incorporated by reference.

(c)          Financial
Statement Schedules and Other Financial Statements.

Schedule
II - Valuation and Qualifying Accounts

All
other financial statement schedules are omitted from this Annual Report on Form
10-K, as they are not required or applicable or the required information is
included in the financial statements or notes thereto.

50

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

Date: February
22, 2006

| |                    |                                                                            | 
| | ------------------ | -------------------------------------------------------------------------- | 
| | I.D. SYSTEMS, INC.
| |                    |                                                                           
| | By:                | /s/ Jeffrey M. Jagid                                                      
| |                    |                                                                            | 
| |                    | Jeffrey M. Jagid
  Chief Executive Officer
  (Principal Executive Officer) | 
| |                    |                                                                            | 
| |                    |                                                                            | 
| | By:                | /s/ Ned Mavrommatis                                                        | 
| |                    |                                                                            | 
| |                    | Ned Mavrommatis
  Chief Financial Officer
  (Principal Financial Officer)  | 

Pursuant
to the requirements of the Securities Act of 1934, this report is signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

|                      |  |                                                                        |  |                  
|--------------------- |  | ---------------------------------------------------------------------- |  | -----------------
|Signature             |  | Title                                                                  |  | Date             
|                      |  |                                                                        |  |                  
|/s/ Jeffrey M. Jagid  |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|Jeffrey M. Jagid      |  | Chief Executive Officer and Director (Principal
  Executive Officer)   |  | February 22, 2006
|                      |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|/s/ Kenneth S. Ehrman |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|Kenneth S. Ehrman     |  | President, Chief Operating Officer and Director                        |  | February 22, 2006
|                      |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|/s/ Ned Mavrommatis   |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|Ned Mavrommatis       |  | Chief Financial Officer (Principal Financial and
  Accounting Officer) |  | February 22, 2006
|                      |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|/s/ Lawrence Burstein |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|Lawrence Burstein     |  | Director                                                               |  | February 22, 2006
|                      |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|/s/ Michael Monaco    |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|Michael Monaco        |  | Director                                                               |  | February 22, 2006
|                      |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|/s/ Beatrice Yormark  |  |                                                                        |  |                  
|                      |  |                                                                        |  |                  
|Beatrice Yormark      |  | Director                                                               |  | February 22, 2006

51

---

I.D.
SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

|                             |  |  |                                 |     |                                      |  |                              |   |     |  |  |  |   |     |  |  | 
|---------------------------- |  |  | ------------------------------- | --- | ------------------------------------ |  | ---------------------------- | - | --- |  |  |  | - | --- |  |  | 
|Description                  |  |  | Balance at
  Beginning
  Period |     | Charged to
  to Costs and
  Expenses |  | Balance at
  End of
  Period |  
|                             |  |  |                                 |     |                                      |  |                              |  
|                             |  |  |                                 |     |                                      |  |                              |   |     |  |  |  |   |     |  | 
|Year ended December 31, 2005 |  |  |                                 |     |                                      |  |                              |   |     |  |  |  |   |     |  | 
|Inventory reserve            |  |  | $                               | 200 |                                      |  |                              | $ | 105 |  |  |  | $ | 305 |  | 
|                             |  |  |                                 |     |                                      |  |                              |   |     |  |  |  |   |     |  | 
|Year ended December 31, 2004 |  |  |                                 |     |                                      |  |                              |   |     |  |  |  |   |     |  | 
|Inventory reserve            |  |  | $                               | 200 |                                      |  |                              | $ |    |  |  |  | $ | 200 |  | 
|                             |  |  |                                 |     |                                      |  |                              |   |     |  |  |  |   |     |  | 
|Year ended December 31, 2003 |  |  |                                 |     |                                      |  |                              |   |     |  |  |  |   |     |  | 
|Inventory reserve            |  |  | $                               | 200 |                                      |  |                              | $ |    |  |  |  | $ | 200 |  | 

|                                |  |  |                                 |    |                                      |  |                              |   |     |   |  |  |   |    |  |  | 
|------------------------------- |  |  | ------------------------------- | -- | ------------------------------------ |  | ---------------------------- | - | --- | - |  |  | - | -- |  |  | 
|Description                     |  |  | Balance at
  Beginning
  Period |    | Charged to
  to Costs and
  Expenses |  | Balance at
  End of
  Period |  
|                                |  |  |                                 |    |                                      |  |                              |  
|Year ended December 31, 2005    |  |  |                                 |    |                                      |  |                              |   |     |   |  |  |   |    |  | 
|allowance for doubtful accounts |  |  | $                               | 8  |                                      |  |                              | $ | 20  |   |  |  | $ | 28 |  | 
|                                |  |  |                                 |    |                                      |  |                              |   |     |   |  |  |   |    |  | 
|Year ended December 31, 2004    |  |  |                                 |    |                                      |  |                              |   |     |   |  |  |   |    |  | 
|allowance for doubtful accounts |  |  | $                               | 20 |                                      |  |                              | $ | (12 | ) |  |  | $ | 8  |  | 
|                                |  |  |                                 |    |                                      |  |                              |   |     |   |  |  |   |    |  | 
|Year ended December 31, 2003    |  |  |                                 |    |                                      |  |                              |   |     |   |  |  |   |    |  | 
|allowance for doubtful accounts |  |  | $                               |   |                                      |  |                              | $ | 20  |   |  |  | $ | 20 |  | 

52

---