UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington
D.C. 20549
 
 FORM
10-K
 (Mark
One)
 
 xANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended
December 31, 2008.
 
 oTRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for 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, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Securities Exchange Act of
1934.
 Large
accelerated filer oAccelerated
filer x
 
 Non-accelerated
filer  ̈ (Do not
check if a smaller reporting company)   Smaller reporting company 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 $62.7 million, computed by
reference to the price at which the Common Stock was last sold on June 30, 2008,
as reported on the Nasdaq National Market.
  The
number of shares of Common Stock outstanding as of February 24, 2009 was
10,893,000 shares.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
  Document
                      
                      Part
      of Form 10-KProxy
      Statement For 2008 Annual Meeting of Stockholders
                      
                      Part
      III
  
  I.D.
SYSTEMS, INC.
  TABLE
OF CONTENTS
  PagePART
      I.Item
      1.
                                                                      Business
                                                                      4Item
      1A.
                                                                      Risk
      Factors
                                                                      13Item
      1B.
                                                                      Unresolved
      Staff Comments
                                                                      22Item
      2.
                                                                      Properties
                                                                      22Item
      3.
                                                                      Legal
      Proceedings
                                                                      22Item
      4.
                                                                      Submission
      of Matters to a Vote of Security Holders
                                                                      22PART
      II.Item
      5.
                                                                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                      23Item
      6.
                                                                      Selected
      Financial Data
                                                                      25Item
      7.
                                                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                      26Item
      7A.
                                                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                                                      35Item
      8.
                                                                      Financial
      Statement and Supplementary Data
                                                                      36Item
      9.
                                                                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                      56Item
      9A.
                                                                      Controls
      and Procedures
                                                                      56Item
      9B.
                                                                      Other
      Information
                                                                      57PART
      III.Item
      10.
                                                                      Directors,
      Executive Officers and Corporate Governance
                                                                      58Item
      11.
                                                                      Executive
      Compensation
                                                                      58Item
      12.
                                                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                      58Item
      13.
                                                                      Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                      59Item
      14.
                                                                      Principal
      Accountant Fees and Services
                                                                      59PART
      IV.Item
      15.
                                                                      Exhibits,
      Financial Statement Schedules
                                                                      60
  3
  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.®, Intelli-Listening®, Vehicle Asset
Communicator®, ChaMPTM, Wireless Asset Net®, AvRamp®, Opti-Kan®, WiFree® and
PowerKey®.
 
 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 to comply with certain safety
regulations by accurately and reliably measuring and controlling fleet activity.
This solution also enhances security at industrial facilities and areas of
critical infrastructure, such as airports, by controlling access to, and
restricting the use of, vehicles and equipment. Our solution for rental fleet
management allows rental car companies to generate higher revenue by more
accurately tracking vehicle data, such as fuel consumption and odometer
readings, and improve customer service by expediting the rental and return
processes. In addition to focusing on these core applications, we have adapted,
and intend to continue to adapt, our solutions to meet our customers’ broader
asset management needs.
  We 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 for 2008, our
top customers are:
  ·
              U.S.
      Postal Service; and
 
 ·
              Wal-Mart
      Stores, Inc.
  We were
incorporated in the State of Delaware in 1993.
 
 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 systems, or GPS, receivers typically do not work and cellular
coverage can be sporadic.
  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 and browser-based graphical user interface
      that provides visibility and control of the system
      database.
  4
  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 and processes 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.
 
 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.
  5
  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 and return processes 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 and helping customers with luggage.
 
 Growth
Strategy
 
 Our
objective is to become the leading global provider of wireless solutions for
managing and securing enterprise assets. To achieve this goal, we intend
to:
 
 Increase
sales in existing markets to existing customers and pursue opportunities with
new customers by:
  ·
              maintaining a sales and marketing
      team that is focused on identifying, seizing and managing revenue
      opportunities, with the primary goal of expanding our customer base and
      achieving wider market
penetration;
 
 ·
              utilizing a performance services
      team to (a) shorten our initial sales cycles by helping prospective
      customers identify and quantify benefits expected from our system, (b)
      accelerate transitions from initial implementation to roll-out programs by
      helping customers achieve and prove expected system benefits, and (c)
      build service revenue through long-term consultative engagements that help
      customers use our system to attain continuous improvements in their
      operations;
 
 ·
              utilizing a business development
      team to establish and manage value-added channel partners that provide (a)
      new sales, marketing, distribution and support networks, (b) opportunities
      for system integration and development of unique, integrated value
      propositions, and (c) software development opportunities to expand our
      product and application
offerings;
 
 ·
              utilizing a strategic markets
      team to identify opportunities for and expand sales in key vertical
      markets—such as automotive, aviation, civilian government, defense, and
      rental cars—where our solutions can be effectively branded and marketed
      with specific functionality and subject matter expertise;
      and
 
 ·
              expanding our resources and
      activities internationally, especially in Europe, where re-packaging,
      promoting and supporting our products represents a large, untapped growth
      opportunity.
 
 Expand
into new applications and markets for our technology by:
 
 ·
              pursuing opportunities to
      integrate our system with computer hardware and software vendors,
      including original equipment
  manufacturers;
 
 ·
              establishing relationships with
      global distributors to market and sell our system internationally;
      and
 
 ·
              pursuing acquisitions of
      companies that we believe will enhance the functionality and broaden the
      applicability of our
solutions.
 
 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 computer,
      programmed with a product-specific application, 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 most existing
      facility access security
systems;
  6
 
 ·
              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 and control
      functions at all times, independent of RF or network connectivity;
      and
 
 ·
              incorporates a multi-voltage
      power supply designed to control electrical
    anomalies.
 
 Wireless Asset Managers. Most
of our Wireless Asset Net system deployments require at least one fixed-position
communication device, referred to as a Wireless Asset Manager, to link the
mobile assets being monitored with the customer’s computer network. Our Wireless
Asset Managers conduct two-way RF communications with the assets being monitored
and can communicate on either a local or wide area network. The Wireless Asset
Managers solution offers flexible configuration options and scalability. A
single Wireless Asset Manager is enough to operate an entire asset management
system. For expanded, real-time data communication and location tracking,
Wireless Asset Managers can be added incrementally as needed. They also allow
system settings and on-asset functionality to be changed without physically
interfacing with on-asset hardware, which can save significant time and
money.
  Each of
our Wireless Asset Managers:
 
 ·
              incorporates an integrated
      computer, programmed with a product specific application, and an
      advanced wireless transceiver with a communication range of up to one-half
      mile;
 
 ·
              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 either the Wireless Asset Managers or On-Asset Hardware.
Our server software:
 
 ·
              is a set of Windows
      services;
 
 ·
              automatically processes data
      between our devices and system
databases;
 
 ·
              actively polls Wireless Asset
      Managers to retrieve data on
demand;
 
 ·
              passively listens to allow remote
      systems to initiate data communications for data
      download;
 
 ·
              automates event scheduling,
      including data downloads, database archiving and diagnostic
      notifications;
 
 ·
              interfaces with certain existing
      external 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 and customizable
reports.
 
 Client Software . Our client
software, referred to as the Wireless Asset Net Console, provides an intuitive,
easy-to-use, user interface. The console is deployed either as a standard
client-server application or as a thin-client. The console interfaces only with
the system 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
clients 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;
  7
  ·
              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 access 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 and battery swap systems. The Battery ChaMP
provides automatic data uploads, real-time system visibility and data collection
for electric vehicle batteries and chargers. The Battery ChaMP:
 
 ·
              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.
 
 Line Asset Communicator . Our
Line Asset Communicator is a wireless messaging device that triggers automatic,
real-time task requests via radio frequency. Our Line Asset Communicator is
designed to automatically forward requests to the material handling resource
that:
 
 ·
              has been designated as capable of
      performing the work
requested;
 
 ·
              is available for work at the
      moment of request; and
 
 ·
              is physically closest to the site
      where the work must be
performed.
 
 The Line
Asset Communicator is a key component of our OptiKan system, an optimized,
wireless, electronic "kanban" system. "Kanban" refers to a method of signaling
for parts replenishment on an assembly line, popularized by Japanese automobile
manufacturers to achieve "just in time" production efficiencies. Our OptiKan
system is designed to (i) eliminate dependence on line-of-sight parts
replenishment calls, which can optimize material handling efficiency by reducing
vehicle travel and eliminating unnecessary down time and (ii) provide a more
dynamic, intelligent allocation of tasks to the material handling workforce that
feeds the assembly line, which can both increase the timeliness and accuracy of
parts replenishment and significantly reduce indirect labor costs.
 
 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. Expenses to fulfill our warranty
obligations have historically been minimal.
 
 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 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, 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.
  8
  In
certain instances customers prepay us for extended maintenance, support and
consulting services. In those instances the amount is recorded as deferred
revenue and revenue is recognized over the service period.
 
 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 February 24, 2009, we had 27 employees, including three
based in Germany, devoted to sales and marketing.
 
 We
primarily market our systems directly to commercial and government
organizations. To complement our direct sales activities, we 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 Motor Company, Walgreens, the U.S. Postal Service,
Target and Wal-Mart Stores, Inc. 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,
      2008, we had deployed our system at 38 Ford
    facilities.
 
 ·
              Walgreens initially deployed our
      system at a single distribution center in 2003.As of December 31, 2008, we
      had deployed our system at 12 distribution
  centers.
 
 ·
              The U.S. Postal Service used the
      implementation of our system at one of its facilities 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, 2008, we had
      deployed our system at 113
facilities.
 
 ·
              Beginning in 2003, Target
      utilized our system on a limited number of vehicles at one of its
      facilities. As of December 31, 2008, we had deployed our system at 31
      facilities.
 
 ·
              Wal-Mart initially deployed our
      system at a single distribution center in 2005. After testing our system,
      Wal-Mart ordered our system to be deployed in 50 facilities as of December
      31, 2008.
 
 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.
 
 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.
  During
the year ended December 31, 2008, the U.S. Postal Service and Wal-Mart Stores,
Inc. accounted for 42% and 41% of our revenues, respectively. During the year
ended December 31, 2007, the U.S. Postal Service, Wal-Mart Stores, Inc. and Ford
Motor Company accounted for 37%, 32% and 10% 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. Postal Service illustrates this effort. We started
working with the U.S. Postal Service in 1995, under a research and development
contract. We have a contract with the U.S. Postal Service through December 31,
2010 to continue deploying our system in postal facilities nationwide.  As
of December 31, 2008, we had implemented our system in 113 U.S. Postal Service
facilities.
  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.
  9
  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 ShockWatch, a division of Media Recovery
Inc., 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, which was acquired by
Lockheed Martin Company in June 2006, Symbol Technologies, which was acquired by
Motorola, Inc. in January 2007, Intermec, Inc. and WhereNet Corp., which was
acquired by Zebra Technologies Corporation in January 2007.
 
 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
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.
 
 Research
and Development
 
 As of
February 24, 2009, including our executive vice president of engineering, our
research and development group was comprised of 14 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.
 
 In our
effort to expand our product beyond North America, we achieved product
compliance certification, including European Telecommunications Standard
Institutes and European Conformity certification, for our primary product line.
In addition, we have completed our conversion of those products to meet the
requirements of the European Union’s Restriction of certain Hazardous Substances
Directive (RoHS) and its Waste Electrical and Electronic Equipment (WEEE)
regulations. These efforts included redesign of circuitry, replacement of
components and materials, and new marking and documentation. This has permitted
us to market and sell our integrated wireless solutions in the European
Union.
 
 Additionally,
we have utilized resources to design an alternative system architecture that
leverages customers’ existing Wi-Fi (802.11 b/g) wireless network
infrastructures. Leveraging the “distributed intelligence” of our patented
system design, our Wi-Fi solution overcomes many of the complexities and
limitations of a mobile Wi-Fi implementation. In our Wi-Fi system deployments,
Wireless Asset Managers are not required, but can still be used to improve the
effectiveness of the system. With this new Wi-Fi architecture, we now can
provide more flexibility to end-users who want the operational benefits of our
system but require the use of their existing Wi-Fi wireless
infrastructure.
 
 Our
current research and development efforts are focused on:
 
 ·
              enhancing productivity by
      continuing to add to the functionality and reduce the costs of our
      system;
 
 ·
              expanding our system to meet the
      needs of potential markets and to provide new solutions to our customers;
      and
 
 ·
              improving our core products by
      utilizing continuing advances in
  technology.
  10
  We spent
$2.9 million, $2.8 million and $2.6 million for research and development during
years ended December 31, 2008, 2007 and 2006, 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 five U.S. patents and twenty-three 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, our U.S. patent that covers our rental car fleet
management system (U.S. Patent Number 6,898,493) expires on April 6, 2020, our
U.S. patent that covers our Wireless Asset Net system (U.S. Patent Number
7,165,040) expires on April 28, 2023), our U.S. patent that covers our Wireless
Asset Net system (U.S. Patent Number 7,171,381) expires on December 20, 2019,
and our U.S. patent that covers our Wireless Asset Net system (U.S. Patent
Number 7,356,494) expires on December 10, 2023.
 
 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.
  U.S.
Patent Number 7,356,494, entitled “Robust Wireless Communications System
Architecture and Asset Management Applications Performed Thereon,” is directed
toward an automated asset monitoring and control system.  The system uses
asset monitors mounted on each asset to collect data regarding the asset and to
transmit the collected data to a management computer.  The asset monitor
also controls the operation of the asset based on the collected data and on
control data received from the management computer.
 
 U.S.
Patent Number 7,165,040 and U.S. Patent Number 7,171,381, entitled “System and
Method for Managing Remotely and Distantly Located Assets” and “System
Architecture and Communications for an Asset Management System,” respectively,
are directed toward protection for wireless, bi-directional
communications between intelligent asset monitoring devices and central data
processing nodes.  The patented systems enable monitoring and control of
remote assets in environments where wireless communication networks are
overburdened or not reliable.
  We have
foreign patents in China, Australia and Mexico covering our Wireless Asset Net
system. We also have patent applications for our Wireless Asset Net system
pending in Japan, Europe and Canada and patent applications for our mobile RFID
portal pending in Canada, China, Mexico, Europe and Australia. 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,
or have applied for, trademark protection for I.D. Systems, Inc.®,
Intelli-Listening®,  Vehicle Asset Communicator®, ChaMP®, Wireless Asset
Net®, AvRamp®, Opti-Kan®, WiFree® and PowerKey®.
 
 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.
  11
  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, such as Flextronics International Ltd. 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 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 any 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. To market and sell our integrated wireless
solutions in the European Union, we also utilize unlicensed radio spectra, and
have obtained the required European Norm (EN) certifications.
 
 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
February 24, 2009 we had 99 full-time employees, of which 33 are engaged in
customer service, 14 in product development (which includes engineering), 10 in
operations, 27 in sales and marketing, and 15 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 reasonably practicable after we
electronically file such material with, or furnish such information to, the
Securities and Exchange Commission (“SEC”). We also make available on this
website, free of charge, our Code of Ethics for Senior Financial Officers, which
applies to our principal executive officer, principal financial officer and
principal accounting officer.
  12
  Item 1A.   Risk Factors
 
 We
have incurred significant losses and have a substantial accumulated deficit. If
we cannot achieve profitability, the market price of our common stock could
decline significantly.
 
 Although
we generated net income of $851,000 for the year ended December 31, 2005, we
incurred net losses of approximately $1.6 million, $7.3 million and $4.2 million
for the years ended December 31, 2006, 2007 and 2008 respectively, and have
incurred additional net losses since inception. At December 31, 2008, we had an
accumulated deficit of approximately $23.7 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. During 2008, the market price of our common stock declined
significantly. If our revenues do not grow or if our operating expenses continue
to increase, we may not be able to become profitable as we were in 2005 and the
market price of our common stock could decline further.
 
 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, 2008, the U.S. Postal Service and Wal-Mart Stores,
Inc. accounted for 42% and 41% of our revenues, respectively. During the year
ended December 31, 2007, the U.S. Postal Service, Wal-Mart Stores, Inc. and Ford
Motor Company accounted for 37%, 32% and 10% 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 develop or become sustainable, expands
more slowly than we expect or becomes saturated, our revenues will continue to
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 become
sustainable, or becomes saturated with competing products or services, our
revenues will continue to 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 adversely 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 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.
 
 Historically,
we have grown our business rapidly. Between the fiscal years ended December 31,
2001 and 2006, our revenues increased at a compounded annual growth rate of 93%,
between fiscal years ended December 31, 2006 and 2007, our revenues decreased by
30.9% and between fiscal years ended December 31, 2007 and 2008, our revenues
increased by 58.3%. During 2007 and 2008, we increased our operating expenses to
expand our sales and marketing capabilities and broadened 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
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
  13
  ·
              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 or year to year,
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 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;
 
 ·
              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
 
  14
  ·
              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, reputation 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. 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.
 
 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.
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:
  15
  ·
              advances in
      technology;
 
 ·
              new product
      introductions;
 
 ·
              evolving industry
      standards;
 
 ·
              product
      improvements;
 
 ·
              rapidly changing customer
      needs;
 
 ·
              intellectual property invention
      and protection;
 
 ·
              marketing and distribution
      capabilities;
 
 ·
              ability to attract highly skilled
      professionals;
 
 ·
              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 ShockWatch, a division of 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., which was acquired by
Lockheed Martin Company in June 2006, Symbol Technologies, Inc., which was
acquired by Motorola, Inc. in January 2007, Intermec, Inc. and WhereNet Corp,
which was acquired by Zebra Technologies Corporation in January
2007.
 
 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 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:
  16
  ·
              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.
  17
  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 affected.
 
 We have
not generated significant revenues outside of North America. As part of our
growth strategy, we are seeking ways to expand our operations outside of North
America by establishing offices overseas and developing relationships with
global distributors to market and sell our systems internationally. For example,
as of February 24, 2009, we had three employees in Germany who market and
sell our systems in Europe. There are a number of risks inherent in doing
business in such markets, including:
 
 ·
              unexpected legal or regulatory
      changes;
 
 ·
              unfavorable political or economic
      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.
 
 Until
recently, we had no operations outside of North America, and we have limited
experience establishing or operating businesses outside of North America. If we
do not adequately 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.
 
 Since
our inception, we have not made any acquisitions other than one small
acquisition during 2008, and we 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.
 
 Since our
inception, we have not made any acquisitions other than one small acquisition
during 2008, and we 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.
  18
  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
February 24, 2009, our executive officers and directors beneficially owned, in
the aggregate, 10.5% of our outstanding common stock, not including 1,373,300
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 result, our officers and directors
may 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.
 
 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;
  ·
              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
10,893,000 shares of common stock outstanding as of February 24, 2009, of which
9,748,000 shares are freely transferable without restriction and 1,145,000
shares are held by our officers and directors which are subject to the
applicable volume, manner of sale, holding period and other limitations of Rule
144. In addition, as of December 31, 2008, options to purchase 2,601,000 shares
of our common stock were issued and outstanding, of which 1,486,000 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 the vested stock
options is $9.37. 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.
  19
  A
decline in the value of the auction rate securities included in our investments
and an inability to realize proceeds from our auction rate securities right
issued by UBS AG could materially adversely affect our liquidity and
income.
 
 At
December 31, 2007 and 2008, we held approximately $25.1 million ($25.1 million
par value) and $18.1 million ($20.4 million par value), respectively, in
investments in auction rate securities which represent interests in
collateralized pools of student loan receivables issued by agencies established
by counties, cities, states and other municipal entities. We sold approximately
$5.0 million of these investments in 2008. Since February 2008 we have
experienced difficulty in effecting additional sales of such securities because
of the failure of the auction mechanism as a result of sell orders exceeding buy
orders. Liquidity for these auction rate securities is typically provided by an
auction process that resets the applicable interest rate at pre-determined
intervals. Holders of the securities continue to receive interest on the
investments, and the securities continue to be auctioned at the pre-determined
intervals (typically every 28 days) until the auction succeeds, the issuer calls
the securities, or they mature. These failed auctions represent liquidity risk
exposure and are not defaults or credit events. A decline in the value of these
securities that is not temporary could materially adversely affect our liquidity
and income.
  In
October 2008, we received an offer (the “Offer”) from UBS for a put right
permitting us to sell to UBS at par value all auction rate securities previously
purchased from UBS at a future date (any time during a two-year period beginning
June 30, 2010). The Offer also included a commitment to loan us 75% of the
UBS-determined value of the auction rate securities at any time until the put is
exercised. In exchange for the Offer, we were required to provide UBS with
a general release of claims (other than certain consequential damages
claims) concerning our auction rate securities and grant UBS the right to
purchase our auction rate securities at any time for full par value. The Offer
was non-transferable and expired on November 14, 2008. During November 2008, we
accepted the Offer.
  Given the
substantial dislocation in the financial markets and among financial services
companies, we cannot assure you that UBS ultimately will have the ability to
repurchase our auction rate securities at par, or at any other price, as these
rights will be an unsecured contractual obligation of UBS or that if UBS
determines to purchase our auction rate securities at any time, we will be able
to reinvest the cash proceeds of any such sale at the same interest rate or
dividend yield currently being paid to us. Also, as a condition of accepting the
auction rate securities rights, we were required to sign a release of claims
against UBS, which will prevent us from making claims against UBS related to our
investment in auction rate securities, other than claims for consequential
damages.
 
 Interest
rate fluctuations may adversely affect our income and results of
operations.
 
 As of
December 31, 2008, we had cash, cash equivalents and investments, which include
auction rate securities and an auction rate securities right, of $56.0 million.
In a declining interest rate environment, reinvestment typically occurs at less
favorable market rates, negatively impacting future investment income.
Accordingly, interest rate fluctuations may adversely affect our income and
results of operations.
  Our
cash and cash equivalents could be adversely affected by the current downturn in
the financial and credit markets.
 
 We
maintain our cash and cash equivalents with major financial institutions;
however, our cash and cash equivalent balances with these institutions exceed
the Federal Deposit Insurance Corporation insurance limits. While we monitor on
a systematic basis the cash and cash equivalent balances in the operating
accounts and adjust the balances as appropriate, these balances could be
impacted if one or more of the financial institutions with which we deposit
fails or is subject to other adverse conditions in the financial or credit
markets. To date, we have experienced no loss of principal or lack of access to
our invested cash or cash equivalents; however, we can provide no assurance that
access to our invested cash and cash equivalents will not be affected if the
financial institutions in which we hold our cash and cash equivalents fail or
the financial and credit markets continue to worsen.
 Declines
in general economic conditions could result in decreased demand for our products
and services, which could adversely affect our business, financial condition and
results of operations.
 
 Our
results of operations are affected by the levels of business activities of our
customers, which can be affected by economic conditions in the U.S. and
globally.  During periods of economic downturns, our customers may
decrease their demand for wireless technology solutions, as well as the
maintenance, support and consulting services we provide.   As we enter
2009, the United States economy is experiencing a significant slowdown in
growth.  This slowdown may have an adverse effect on the wireless
solutions industry in general and on demand for our products and services, but
the magnitude of that impact is uncertain. Our future growth is dependent, in
part, upon the demand for our products and services. Prolonged weakness in the
economy may cause business enterprises to delay or cancel wireless solutions
projects, reduce their overall wireless solutions budgets and/or reduce or
cancel orders for our services. This, in turn, may lead to longer sales cycles,
delays in purchase decisions, payment and collection issues, and may also result
in price pressures, causing us to realize lower revenues and operating margins.
Additionally, if our customers cancel or delay their wireless solutions
initiatives, our business, financial condition and results of operations could
be materially and 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:
  20
  ·
              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
 
 ·
              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, 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.
  21
  Item 1B.   Unresolved Staff
Comments
 
 None.
  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
provided for monthly payments of $11,619, subject to adjustments for increases
in real estate taxes and certain operating expenses. In July 2007, the Company
released the sublessee from the sublease and reassumed the space.
 
 In
February 2007, we entered into a lease in Edgewater, NJ. The lease expires in
February 2010 and the rent is currently $1,995 per month.
 
 In March
2007, we entered into a lease for office space located in Suwanee, Georgia for
sales, marketing and customer service. The current six month renewal option
lease extension expired in September 2008 and was subsequently renewed until
March 2009. The rent is currently $1,120 per month.
 
 In
September 2007, we entered into a lease for warehouse space located in Clifton,
New Jersey. The lease expired in September 2008 and automatically renews on an
annual basis. The rent is currently $800 per month.
 
 We
believe that our existing facilities are adequate for our existing
needs.
  Item 3.   Legal Proceedings
 
 As of
February 24, 2009, we were not involved in any material litigation.
  Item 4.   Submission of Matters to a Vote of
Security Holders
 
 Our
annual meeting of stockholders (the “Annual Meeting”) for our fiscal year ended
December 31, 2007 was held on December 15, 2008, at which time our stockholders
elected the following individuals to serve as our directors until the next
annual meeting of stockholders and until their successors are duly elected and
qualified: Jeffrey Jagid, Kenneth S. Ehrman, Lawrence Burstein, Harold D.
Copperman and Michael Monaco. There were 10,892,993 shares of our common stock
outstanding and entitled to vote at the record date for the Annual Meeting.
There were present at the Annual Meeting, in person or by proxy, stockholders
holding 9,822,145 shares of our common stock, which represented approximately
90% of the total capital stock outstanding and entitled to vote.
  The matters voted upon at the Annual
Meeting and the results of the voting at the Annual Meeting are set forth
below:
  (i) With respect
to the election of our directors by the holders of our common stock, the persons
named below received the following number of votes:
  Name
                      
                      Votes For
                      
                      
                      Votes WithheldJeffrey
      Jagid
                      
                      
                      9,411,178
                      
                      
                      
                      410,967Kenneth
      S. Ehrman
                      
                      
                      9,240,796
                      
                      
                      
                      581,349Harold
      D. Copperman
                      
                      
                      9,394,074
                      
                      
                      
                      428,071Lawrence
      Burstein
                      
                      
                      9,203,406
                      
                      
                      
                      618,739Michael
      Monaco
                      
                      
                      9,394,274
                      
                      
                      
                      427,871
 
 (ii) With respect
to the proposal to adopt and approve our Non-Employee Director Equity
Compensation Plan, the votes cast by the holders of our common stock were as
follows: 1,613,582 shares were voted in favor; 4,366,554 shares were voted
against; and 19,264 shares abstained from voting on the proposal. There
were no broker non-votes with respect to such proposal.
  (iii) With respect
to the proposal to ratify the appointment of Eisner LLP to serve as our
independent registered public accounting firm for the fiscal year ending
December 31, 2008, the votes cast by the holders of our common stock were
as follows: 9,706,911 shares were voted in favor; 89,810 shares were voted
against; and 25,424 shares abstained from voting on the proposal. There were no
broker non-votes with respect to such proposal.
 22
  PART
II.
 
 Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
 
 (a) Market Information .
Our common stock is 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
system.
  Quarter Ending
                        
                        High
                        
                        
                        Low2007March
      31, 2007
                        
                        $
                        18.90
                        
                        
                        $
                        11.82June
      30, 2007
                        
                        
                        14.85
                        
                        
                        
                        11.13September
      30, 2007
                        
                        
                        13.09
                        
                        
                        
                        8.96December
      31, 2007
                        
                        
                        14.75
                        
                        
                        
                        11.892008March
      31, 2008
                        
                        $
                        12.94
                        
                        
                        $
                        5.94June
      30, 2008
                        
                        
                        9.60
                        
                        
                        
                        6.22September
      30, 2008
                        
                        
                        9.31
                        
                        
                        
                        5.50December
      31, 2008
                        
                        
                        8.75
                        
                        
                        
                        2.78
 
 Set forth
below is a line-graph presentation comparing the cumulative shareholder return
on our common stock on an indexed basis against the cumulative total returns of
the Nasdaq Market Value Index and the Hemscott Industry Communication Equipment
Group Index (consisting of 74 publicly traded communication equipment companies)
(“Hemscott Group Index”) for the period from January 1, 2003 through December
31, 2008.
 
 
 
 Fiscal Year EndingCOMPANY/INDEX/MARKET
                  
                  12/31/2003
                  
                  
                  12/31/2004
                  
                  
                  12/30/2005
                  
                  
                  12/29/2006
                  
                  
                  12/31/2007
                  
                  
                  12/31/2008I.D.
      Systems Inc
                  
                  
                  100.00
                  
                  
                  
                  266.95
                  
                  
                  
                  341.20
                  
                  
                  
                  269.24
                  
                  
                  
                  178.25
                  
                  
                  
                  57.94Communication
      Equipment
                  
                  
                  100.00
                  
                  
                  
                  121.50
                  
                  
                  
                  136.99
                  
                  
                  
                  146.49
                  
                  
                  
                  158.22
                  
                  
                  
                  86.05NASDAQ
      Market Index
                  
                  
                  100.00
                  
                  
                  
                  108.41
                  
                  
                  
                  110.79
                  
                  
                  
                  122.16
                  
                  
                  
                  134.29
                  
                  
                  
                  79.25
  23
  (b) Holders . As of
February 24, 2009, there were 26 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) Purchases of Equity
Securities by the Issuer .
 
 The
following table provides a month-to-month summary of our share repurchase
activity during the three months ended December 31, 2008:
 
 Issuer Purchases of Equity
Securities (1)
  Period
                  
                  Total number of
                    shares (or unit)
                    purchased
                  
                  
                  Average price
                    paid per share (or
                    unit)
                  
                  
                  Total number of
                    shares (or units)
                    purchased as part of
                    publicly announced
                    plans or programs
                  
                  
                  Maximum number (or
                    approximate dollar
                    value) of shares (or
                    units) that may yet be
                    purchased under the
                    plans or programs10/1/08
      through 10/31/08
                  
                  
                  45,546
                  
                  
                  
                  6.45
                  
                  
                  
                  45,546
                  
                  
                  $
                  30,30511/1/08
      through 11/30/08
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  30,30512/1/08
      through 12/31/08
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  30,305Total
                  
                  
                  45,546
                  
                  
                  
                  6.45
                  
                  
                  
                  45,546
                  
                  
                  $
                  30,305
 
 (1)
  On May 3, 2007, we announced that our Board of Directors had authorized
the repurchase of issued and outstanding shares of our common stock having an
aggregate value of up to $10,000,000 pursuant to a share repurchase program
established under Rule 10b-18 of the Securities Exchange Act of 1934, as
amended. The amount and timing of such repurchases are dependent upon the price
and availability of shares, general market conditions and the availability of
cash, as determined in the discretion of our management. The repurchases are
funded from our working capital. Our share repurchase program does not have an
expiration date, and we may discontinue or suspend the share repurchase program
at any time. All of the repurchases set forth in this table were made under the
share repurchase program in open market transactions. All shares of common stock
repurchased under our share repurchase program are held as treasury
stock.
  24
  Item 6. Selected Financial
Data
 
 The following table sets forth
selected financial data for each of the five years ended December 31, 2008
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,”, which discusses the 2006, 2007 and 2008 fiscal year,
and our financial statements and related notes and the other financial data
included elsewhere in this Annual Report on Form 10-K.
 
 Year Ended December 31,2004
                    
                    
                    2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008Statement
      of Operations Data:Revenues
                    
                    $
                    13,741,000
                    
                    
                    $
                    19,004,000
                    
                    
                    $
                    24,740,000
                    
                    
                    $
                    17,083,000
                    
                    
                    $
                    27,046,000Cost
      of revenues
                    
                    
                    6,509,000
                    
                    
                    
                    9,708,000
                    
                    
                    
                    13,701,000
                    
                    
                    
                    8,929,000
                    
                    
                    
                    13,466,000Gross
      profit
                    
                    
                    7,232,000
                    
                    
                    
                    9,296,000
                    
                    
                    
                    11,039,000
                    
                    
                    
                    8,154,000
                    
                    
                    
                    13,580,000Operating
      expenses:Selling,
      general and administrative expenses
                    
                    
                    5,879,000
                    
                    
                    
                    7,140,000
                    
                    
                    
                    12,943,000
                    
                    
                    
                    15,963,000
                    
                    
                    
                    16,760,000Research
      and development expenses
                    
                    
                    1,234,000
                    
                    
                    
                    1,625,000
                    
                    
                    
                    2,639,000
                    
                    
                    
                    2,849,000
                    
                    
                    
                    2,883,000Income
      (loss) from operations
                    
                    
                    (119,000
                    )
                    
                    
                    531,000
                    
                    
                    
                    (4,543,000
                    )
                    
                    
                    (10,658,000
                    )
                    
                    
                    (6,063,000
                    )Interest
      income
                    
                    
                    195,000
                    
                    
                    
                    222,000
                    
                    
                    
                    2,801,000
                    
                    
                    
                    3,238,000
                    
                    
                    
                    2,226,000Interest
      expense
                    
                    
                    (63,000
                    )
                    
                    
                    (53,000
                    )
                    
                    
                    (29,000
                    )
                    
                    
                    (10,000
                    )
                    
                    
                    -Other
      income (loss)
                    
                    
                    147,000
                    
                    
                    
                    151,000
                    
                    
                    
                    155,000
                    
                    
                    
                    89,000
                    
                    
                    
                    (338,000
                    )Net
      income (loss)
                    
                    $
                    398,000
                    
                    
                    $
                    851,000
                    
                    
                    $
                    (1,616,000
                    )
                    
                    $
                    (7,341,000
                    )
                    
                    $
                    (4,175,000
                    )Net
      income (loss) per share - basic
                    
                    $
                    0.05
                    
                    
                    $
                    0.11
                    
                    
                    $
                    (0.15
                    )
                    
                    $
                    (0.66
                    )
                    
                    $
                    (0.38
                    )Net
      income (loss) per share - diluted
                    
                    $
                    0.05
                    
                    
                    $
                    0.09
                    
                    
                    $
                    (0.15
                    )
                    
                    $
                    (0.66
                    )
                    
                    $
                    (0.38
                    )Weighted
      average common shares outstanding - basic
                    
                    
                    7,455,000
                    
                    
                    
                    7,771,000
                    
                    
                    
                    10,501,000
                    
                    
                    
                    11,205,000
                    
                    
                    
                    10,887,000Weighted
      average common shares outstanding - diluted
                    
                    
                    8,783,000
                    
                    
                    
                    9,332,000
                    
                    
                    
                    10,501,000
                    
                    
                    
                    11,205,000
                    
                    
                    
                    10,887,000Balance
      Sheet Data (at end of period):Cash
      and cash equivalents
                    
                    
                    8,440,000
                    
                    
                    
                    2,138,000
                    
                    
                    
                    9,644,000
                    
                    
                    
                    5,103,000
                    
                    
                    
                    12,558,000Investments
                    
                    
                    3,195,000
                    
                    
                    
                    5,463,000
                    
                    
                    
                    60,716,000
                    
                    
                    
                    59,900,000
                    
                    
                    
                    43,461,000Total
      assets
                    
                    
                    17,159,000
                    
                    
                    
                    19,840,000
                    
                    
                    
                    84,905,000
                    
                    
                    
                    74,796,000
                    
                    
                    
                    69,948,000Long-term
      debt
                    
                    
                    648,000
                    
                    
                    
                    449,000
                    
                    
                    
                    240,000
                    
                    
                    
                    19,000
                    
                    
                    
                    -Total
      stockholders’ equity
                    
                    
                    13,572,000
                    
                    
                    
                    15,166,000
                    
                    
                    
                    81,284,000
                    
                    
                    
                    71,670,000
                    
                    
                    
                    67,085,000
  25
  Item 7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
 
 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 Motor Company, Walgreens, the U.S. Postal Service,
Target and Wal-Mart Stores, Inc. 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,
      2008, we had deployed our system at 38 Ford
    facilities.
 
 ·
              Walgreens initially deployed our
      system at a single distribution center in 2003.As of December 31, 2008, we
      had deployed our system at 12 distribution
  centers.
 
 ·
              The U.S. Postal Service used the
      implementation of our system at one of its facilities 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, 2008, we had
      deployed our system at 113
facilities.
 
 ·
              Beginning in 2003, Target
      utilized our system on a limited number of vehicles at one of its
      facilities As of December 31, 2008, we had deployed our system at 31
      facilities.
 
 ·
              Wal-Mart initially deployed our
      system at a single distribution center in 2005. After testing our system,
      Wal-Mart ordered our system to be deployed in 50 facilities as of December
      31, 2008.
 
 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.
 
 We have
incurred net losses of approximately $7.3 million and $4.2 million for the years
ended December 31, 2007 and 2008, respectively, and have incurred additional net
losses since inception. At December 31, 2008, we had an accumulated deficit of
approximately $23.7 million.
  During
the year ended December 31, 2008, we generated revenues of $27 million, and the
U.S. Postal Service and Wal-Mart Stores, Inc. accounted for 42% and 41% of our
revenues, respectively. During the year ended December 31, 2007, we generated
revenues of $17.1 million, and the U.S. Postal Service, Wal-Mart Stores, Inc.
and Ford Motor Company accounted for 37%, 32% and 10% of our revenues,
respectively.
 
 Our
ability to increase our revenues and 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.
  26
  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 periodically (iii) leasing arrangements. Our system consists of
on-asset hardware, communication infrastructure and software. Revenue is
allocated to each element based upon vendor specific objective evidence (VSOE)
of the fair value of the element. VSOE of the fair value is based upon the price
charged when the element is sold separately. Revenue from the sale of our system
is recognized as the 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. 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.
 
 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.
 
 Stock-Based
Compensation
 
 Prior to
January 1, 2006, we accounted for stock-based employee compensation under
Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related interpretations, and had 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 replaced
SFAS 123 and superseded 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 is recognized over the period during which an
employee is required to provide service in exchange for the award, usually the
vesting period. 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. Commencing January 1, 2006,
we adopted SFAS 123R, and have applied the modified prospective method such that
periods prior to adoption have not been restated. Pursuant to SFAS No. 123(R),
stock based compensation expense amounted to $2,975,000, $3,288,000 and
$2,989,000 for the fiscal years ended December 31, 2006, 2007 and 2008,
respectively.
  27
  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 31,2006
                        
                        2007
                        
                        2008Revenues:Products
                        
                        
                        65.5
                        %
                        64.6
                        %
                        74.2
                        %Services
                        
                        
                        34.5
                        
                        35.4
                        
                        25.8100.0
                        
                        100.0
                        
                        100.0Cost
      of Revenues:Products
                        
                        
                        33.3
                        
                        34.3
                        
                        37.0Services
                        
                        
                        22.1
                        
                        18.0
                        
                        12.8Total
      Gross Profit
                        
                        
                        44.6
                        
                        47.7
                        
                        50.2Selling,
      general and administrative expenses
                        
                        
                        52.3
                        
                        93.4
                        
                        62.0Research
      and development expenses
                        
                        
                        10.7
                        
                        16.7
                        
                        10.7Loss
      from operations
                        
                        
                        (18.4
                        )
                        (62.4
                        )
                        (22.4
                        )Interest
      income
                        
                        
                        11.3
                        
                        19.0
                        
                        8.2Interest
      expense
                        
                        
                        (0.1
                        )
                        (0.1
                        )Other
      income (loss)
                        
                        
                        0.6
                        
                        0.5
                        
                        (1.2)Net
      loss
                        
                        
                        (6.5)
                        %
                        (43.0)
                        %
                        (15.4)
                        %
  28
  Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007
 
 REVENUES.
Revenues increased by $9.9 million, or 58.3%, to $27.0 million in 2008 from
$17.1 million in 2007.
 
 Revenues
from product increased by $9.0 million, or 81.9%, to $20.0 million in 2008 from
$11.0 million in 2007. The increase in product revenue was primarily
attributable to an increase in product revenue from the U.S. Postal Service and
Wal-Mart Stores, Inc.
 
 Revenues
from service increased $928,000, or 15.3%, to $6.9 million in 2008 from $6.0
million in 2007. The increase in revenues was primarily attributable to an
increase in service revenue from the U.S. Postal Service.
 
 COST OF
REVENUES. Cost of revenues increased by $4.5 million, or 50.8%, to $13.4
million in 2008 from $8.9 million in 2007. Gross profit was $13.6 million in
2008 compared to $8.2 million in 2007. As a percentage of revenues, gross profit
increased to 50.2% in 2008 from 47.7% in 2007.
 
 Cost of
product increased by $4.1 million, or 70.6%, to $10.0 million in 2008 from $5.9
million in the same period in 2007. Gross profit from product revenue was $10.0
million in 2008 compared to $5.2 million in 2007. As a percentage of product
revenues, gross profit increased to 50.2% in 2008 from 46.9% in 2007. The
increase in gross profit is primarily attributable to a lesser amount reserved
for inventory obsolescence in 2008 as compared to 2007. The amount of inventory
identified as obsolete and therefore charged to cost of product was $517,000 in
2007 and $126,000 in 2008.
  Cost of
service increased by $400,000, or 13.0%, to $3.5 million in 2008 from $3.1
million in the same period in 2007. Gross profit from service revenue was $3.5
million in 2008 compared to $3.0 million in 2007. As a percentage of service
revenues, gross profit slightly increased to 50.2% in 2008 from 49.2% in 2007.
The increase was marginal and was attributed to increased service revenue, in
general.
 
 Selling, General
and Administrative Expenses. Selling, general and administrative expenses
increased by $797,000, or 5.0%, to $16.8 million in 2008 compared to $16.0
million in 2007. This increase was attributable primarily to (i) the increase in
payroll and related costs of approximately $661,000 primarily resulting from the
hiring of additional staff within our sales and customer service departments and
(ii) an increase in insurance expense of approximately $183,000 in 2008. As a
percentage of revenues, selling, general and administrative expenses decreased
to 62.0% in 2008 from 93.4% in 2007 due to an increase in revenue, partially
offset by the aforementioned increase to payroll and payroll related
expenses.
 
 Research and
Development Expenses. Research and development expenses were nearly flat
with a minor increase of $34,000, or 1.2%, to $2.9 million in 2008 from $2.8
million in 2007. As a percentage of revenues, research and development expenses
decreased to 10.7% in 2008 from 16.7% in 2007 due to an increase in
revenue.
 
 Interest
Income. Interest income decreased $1.0 million, or 31.2%, to $2.2 million
in 2008 from $3.2 million in 2007. This decrease was attributable to the
decrease in interest rates as well as a decrease in the amount of cash, cash
equivalents and investments in 2008.
 
 Interest
Expense. Interest expense decreased $10,000 to $0 in 2008 from $10,000 in
2007. The decrease was attributable to the payoff of our outstanding debt in
February 2008.
 
 Other Income
(loss). Other loss of $338,000 in 2008 reflects a charge to operations
related to our auction rate securities and auction rate securities right as
disclosed in Note C of the financial statements. Other income of $89,000 in 2007
reflects rental income earned from a sublease arrangement. In July 2007, we
released the sub-lessee from the sublease and reassumed the space.
  Net Loss.
Net loss was $4.2 million, or $(0.38) per basic and diluted share for the year
ended December 31, 2008, as compared to net loss of $7.3 million or $(0.66) per
basic and diluted share for the year ended December 31, 2007. The decrease in
net loss was due primarily to the reasons described above with emphasis on the
increase in revenue and an improvement in the gross profit
percentage.
 
 Year
Ended December 31, 2007 Compared to the Year Ended December 31,
2006
 
 REVENUES.
Revenues decreased by $7.7 million, or 30.9%, to $17.1 in 2007 from $24.7
million in 2006.
 
 Revenues
from product decreased by $5.2 million, or 31.9%, to $11.0 million in 2007 from
$16.2 million in 2006. The decrease in product revenue was primarily
attributable to a decrease in product revenue from the U.S. Postal Service of
approximately $6.2 million, offset by an increase of product revenue from
Wal-Mart Stores, Inc of approximately $2.0 million, and a decrease in product
revenue from other customers.
 
 Revenues
from service decreased $2.5 million, or 29.2%, to $6.0 million in 2007 from $8.5
million in 2006. The decrease in revenues was primarily attributable to a
decrease in service revenue from the U.S. Postal Service of approximately $2.7
million, partially offset by an increase in service revenue from other
customers.
  29
  COST OF
REVENUES . Cost of revenues decreased by $4.8 million, or 34.8%, to $8.9
million in 2007 from $13.7 million in 2006. Gross profit was $8.2 million in
2007 compared to $11.0 million in 2006. As a percentage of revenues, gross
profit increased to 47.7% in 2007 from 44.6% in 2006.
 
 Cost of
product decreased by $2.4 million, or 28.8%, to $5.9 million in 2007 from $8.2
million in the same period in 2006. Gross profit from product revenue was $5.2
million in 2007 compared to $8.0 million in 2006. As a percentage of product
revenues, gross profit decreased to 46.9% in 2007 from 49.2% in 2006. The
decrease in gross profit is primarily attributable to a greater amount reserved
for inventory obsolescence in 2007 as compared to 2006. The amount of inventory
identified as obsolete and therefore charged to cost of product was $517,000 in
2007 and $100,000 in 2006.
  Cost of
service decreased by $2.4 million, or 43.9%, to $3.1 million in 2007 from $5.5
million in the same period in 2006. Gross profit from service revenue was $3.0
million in 2007 compared to $3.1 million in 2006. As a percentage of service
revenues, gross profit increased to 49.2% in 2007 from 35.9% in 2006. The
increase was primarily attributable to the fact that a larger percentage of the
service revenue in 2007 was from engineering services and maintenance, which
typically have higher gross margins than revenue from implementation
services.
 
 Selling, General
and Administrative Expenses . Selling, general and administrative
expenses increased $3.0 million, or 23.3%, to $16.0 million in 2007 compared to
$12.9 million in 2006. This increase was attributable primarily to (i) the
increase in payroll of approximately $2.2 million primarily resulting from the
hiring of additional staff within our sales and customer service departments and
(ii) an increase to the stock based employee compensation expense of $439,000 in
2007. As a percentage of revenues, selling, general and administrative expenses
increased to 93.4% in 2007 from 52.3% in 2006 due to the aforementioned increase
to payroll and payroll related expenses as well as to a decrease in
revenue.
 
 Research and
Development Expenses. Research and development expenses increased
$210,000, or 8.0%, to $2.8 million in 2007 from $2.6 million in 2006. This
increase was attributable primarily to the work performed relating to the
development of European compliant products. As a percentage of revenues,
research and development expenses increased to 16.7% in 2007 from 10.7% in 2006
due to the aforementioned increase to expenses as well as to a decrease in
revenue.
 
 Interest
Income. Interest income increased $437,000, or 15.6%, to $3.2 million in
2007 from $2.8 million in 2006. This increase was attributable primarily to the
increase in cash and cash equivalents and investments resulting from the
proceeds received in connection with the public offering completed by us in
March 2006.
 Interest
Expense. Interest expense decreased $19,000, or 65.5%, to $10,000 in 2007
from $29,000 in 2006. The decrease was attributable to a reduction in the
principal amount of our outstanding debt in 2007.
 
 Other
Income. Other income decreased $66,000, or 42.6%, to $89,000 in 2007 from
$155,000 in 2006 and reflects rental income earned from a sublease arrangement.
In July 2007, we released the sublessee from the sublease and reassumed the
space.
 
 Net Income
(Loss). Net loss was $7.3 million or $(0.66) per basic and diluted share
in the year ended December 31, 2007 as compared to net loss of $1.6 million or
$(0.15) per basic and diluted share for the year ended December 31, 2006. The
increase in net loss 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, 2008, we had cash, cash equivalents and investments, which include
auction rate securities and an auction rate securities right, of $56.0 million
and working capital of $30.9 million compared to $65.0 million and $31.9
million, respectively, as of December 31, 2007.
 
 At
December 31, 2007 and 2008, we held approximately $25.1 million ($25.1 million
par value) and $18.1 million ($20.4 million par value), respectively, in
investments in auction rate securities which represent interests in
collateralized pools of student loan receivables issued by agencies established
by counties, cities, states and other municipal entities. We sold approximately
$5.0 million of these investments in 2008. Since February 2008 we have
experienced difficulty in effecting additional sales of such securities because
of the failure of the auction mechanism as a result of sell orders exceeding buy
orders. Liquidity for these auction rate securities is typically provided by an
auction process that resets the applicable interest rate at pre-determined
intervals. Holders of the securities continue to receive interest on the
investments, and the securities continue to be auctioned at the pre-determined
intervals (typically every 28 days) until the auction succeeds, the issuer calls
the securities, or they mature. These failed auctions represent liquidity risk
exposure and are not defaults or credit events. A decline in the value of these
securities that is not temporary could materially adversely affect our liquidity
and income.
  In
October 2008, we received an offer (the “Offer”) from UBS for a put right
permitting us to sell to UBS at par value all auction rate securities previously
purchased from UBS at a future date (any time during a two-year period beginning
June 30, 2010). The Offer also included a commitment to loan us 75% of the
UBS-determined value of the auction rate securities at any time until the put is
exercised. In exchange for the Offer, we were required to provide UBS
with a general release of claims (other than certain consequential damages
claims) concerning our auction rate securities and grant UBS the right to
purchase our auction rate securities at any time for full par value. The Offer
was non-transferable and expired on November 14, 2008. During November 2008, we
accepted the Offer. Our right under the Offer is in substance a put right (with
the strike price equal to the par value of the auction rate securities) which we
recorded as an asset, measured at its fair value (pursuant to election under
SFAS No. 159), with the resultant gain recognized in earnings. Pursuant to SFAS
No. 159, we recorded the put right at a fair value of $2.0 million and
recognized the gain in operations. As we have classified the auction rate
securities as trading securities, the $2.3 million decline in fair value of the
auction rate securities was charged to operations in 2008. The net charge to
operations in 2008 was $338,000 which was included in other expense. The fair
value of the put right was based on an approach in which the present value of
all expected future cash flows were subtracted from the current fair market
value of the security and the resultant value was calculated as a future value
at an interest rate reflective of counterparty risk.
  30
  Given the
substantial dislocation in the financial markets and among financial services
companies, we cannot assure you that UBS ultimately will have the ability to
repurchase our auction rate securities at par, or at any other price, as these
rights will be an unsecured contractual obligation of UBS or that if UBS
determines to purchase our auction rate securities at any time, we will be able
to reinvest the cash proceeds of any such sale at the same interest rate or
dividend yield currently being paid to us. Also, as a condition of accepting the
auction rate securities rights, we were required to sign a release of claims
against UBS, which will prevent us from making claims against UBS related to our
investment in auction rate securities, other than claims for consequential
damages.
 
 Business
Acquisition
 
 On April
18, 2008, we acquired the assets of PowerKey, the industrial vehicle monitoring
products division of International Electronics, Inc., a manufacturer of access
control and security equipment, for approximately $573,000, which includes
approximately $73,000 of direct acquisition costs. The tangible assets acquired
include inventory (totaling approximately $191,000), and fixed assets (totaling
approximately $4,000).
 
 Allocation
of the purchase price of the intangible assets consists of the following:
goodwill (totaling approximately $200,000), trademarks and trade names (totaling
approximately $74,000), and a customer list (totaling approximately $104,000)
resulting from the acquisition of PowerKey are carried at cost.
  Operating
Activities
 
 Net cash
used in operating activities was $4.9 million for the year ended December 31,
2008 compared to net cash provided by operating activities of $604,000 for the
year ended December 31, 2007. The change was due primarily to an increase in
accounts receivable resulting from the increase in revenue, partially offset by
a decrease in net loss.
 
 Net cash
provided by operating activities was $604,000 for the year ended December 31,
2007 compared to net cash used in operating activities of $1.1 million for the
year ended December 31, 2006. The change was due primarily to (i) a decrease in
accounts receivable resulting from improved collections and (ii) a decrease in
finished goods inventory, partially offset by an increase in net
loss.
 
 Investing
Activities
 
 Net cash
provided by investing activities was $15.4 million for the year ended December
31, 2008 compared to net cash provided by investing activities of $284,000 for
the year ended December 31, 2007. The increase was due to an increase in the
maturities of investments, partially offset by fewer purchases of investments in
2008 and the business acquisition of Powerkey.
 
 Net cash
provided by investing activities was $284,000 for the year ended December 31,
2007 compared to net cash used in investing activities of $56.0 million for the
year ended December 31, 2006. The change was due primarily to an increase in the
maturities of investments and fewer purchases of investments in
2007.
 
 Financing
Activities
 
 Net cash
used in financing activities was $3.0 million for the year ended December 31,
2008 compared to net cash used in financing activities of $5.4 million for the
year ended December 31, 2007. The decrease in cash used was due primarily to
less cash used to purchase shares of our issued and outstanding common stock
during 2008 pursuant to our share repurchase program authorized by our Board of
Directors in May 2007 and an increase in proceeds from the exercise of stock
options.
 
 Net cash
used in financing activities was $5.4 million for the year ended December 31,
2007 compared to net cash provided by $64.5 million for the year ended December
31, 2006. The decrease was due primarily to the proceeds received in connection
with the public offering that was completed in March 2006 that were not received
in 2007, as well as the purchase of shares of our issued and outstanding common
stock during 2007 pursuant to our share purchase program authorized by our Board
of Directors in May 2007.
  31
  Capital
Requirements
 
 We
believe that with the proceeds received from our public offering that was
completed by us in March 2006, 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.
 
 Term
Loan
 
 In
January 2003, we 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, we 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. At December 31, 2007 the
outstanding balance on the loan was $19,000. In February 2008 we paid off the
remaining principal balance on the loan which is $0 at December 31, 2008. The
term-loan expired in 2008.
 
 Contractual
Obligations and Commitments
 
 The
following table summarizes our significant contractual obligations and
commitments as of December 31, 2008:
 
 Payment due by
      PeriodTotal
                  
                  Less than
                    one year
                  
                  1 to 3 years
                  
                  3 to 5 years
                  
                  After 5
                    yearsOperating
      Leases
                  
                  
                  563,000
                  
                  
                  
                  455,000
                  
                  
                  
                  108,000
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      Contractual Cash Obligations
                  
                  $
                  563,000
                  
                  
                  $
                  455,000
                  
                  
                  $
                  108,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —
 
 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
 
 In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment to SFAS No.
115” (“SFAS No. 159”) which is effective for fiscal years beginning after
November 15, 2007. This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reporting earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurements, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. We have elected to account
for our auction rate security put right under the provisions of SFAS No. 159.
Therefore,
material financial assets and liabilities such as our accounts receivables and
payables are still reported at their carrying value which approximates fair
value.
  32
 
 In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
No. 157”), to define fair value, establish framework for measuring fair value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value measurements, which is effective for fiscal years beginning
after November 15, 2007, the beginning of our 2008 fiscal year. However, in
February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of
FASB Statement No. 157” (“FSP 157-2”), which provides a one year deferral of the
effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (that is, at least annually). FSP
157-2 defers the effective date of SFAS No. 157 as it relates to non-financial
assets to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of FSP 157-2. We adopted
the provisions of SFAS No. 157 effective January 1, 2008.
 
 In
December 2007, the FASB issued SFAS No. 141R,“Business Combinations” (“SFAS No.
141R”), which replaces SFAS No. 141. Under SFAS No. 141R, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition date fair value with limited exceptions. SFAS
No. 141R establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquire and the
goodwill acquired. This statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective for financial statements issued for
fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.
The impact, if any, that the implementation of SFAS No. 141R will have on our
results of operations or financial condition will, in the future, be dependent
on future acquisition activity, occurring after the effective date.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51” (“SFAS No.
160”). SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No. 160
clarifies that changes in a parent’s ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidated date. SFAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. As we
do not presently have any noncontrolling interest in a subsidiary, the adoption
of SFAS No. 160 is not expected to have a significant effect on us.
 
 In March
2008, the FASB issued FASB No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133” (“SFAS No. 161”).
This statement requires enhanced disclosures about an entity’s derivative and
hedging activities and thereby improves the transparency of financial reporting.
This statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. This statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. This statement has the same
scope as Statement 133. This statement applies to all derivative instruments,
including bifurcated derivative instruments (and nonderivative instruments that
are designated and qualify as hedging instruments pursuant to paragraphs 37 and
42 of Statement 133) and related hedged items accounted for under Statement 133
and its related interpretations. We have not yet determined the impact, if any,
that the implementation of SFAS No. 161 will have on our results of operations
or financial condition.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 142-3, Determination of the Useful Life of
Intangible Assets(“FSP FAS No. 142-3”). FSP
FAS No. 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The intent of this FSP is to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141
(revised 2007), Business
Combinations, and other US GAAP. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company has not yet determined
the impact, if any, FSP FAS No. 142-will have on the our financial
position, results of operations or cash flows.
  In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
United States Generally Accepted Accounting Principles. SFAS 162
became effective in September 2008 following the approval by the SEC. We currently adhere to the
hierarchy of U.S. GAAP as presented in SFAS 162, and adoption is not
expected to have a material impact on our consolidated financial
statements.
 
 In
September 2008, the EITF issued EITF No. 08-6, Equity Method Investment Accounting
Considerations (“EITF 08-6”). EITF 08-6 addresses the effect of
SFAS No. 141(R) and SFAS No. 160 on the equity method of
accounting. EITF 08-0 is effective in fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal years. Currently, we
have no equity investees and therefore, this standard will have no current
impact on our financial position, results of operations or cash flows. The
impact, if any, that the implementation of EITF No. 08-06 will have on our
results of operations or financial condition will, in the future, be dependent
on future acquisition or investment activity, occurring after the effective
date, if any.
  33
  In
October 2008, the FASB issued FASB Staff Position (“FSP”) 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application
of FAS 157. FSP 157-3 demonstrated how the fair value of a
financial asset is determined when the market for that financial asset is
inactive. FSP 157-3 was effective upon issuance, including prior periods
for which financial statements had not been issued. The guidance provided
by FSP 157-3 is consistent with our approach to valuing our auction rate
securities for which there is no active market.
  34
  Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
 
 We are
subject to market risks in the form of changes in corporate income tax
rates, which risks are currently immaterial to us.
 
 We also
are subject to market risk from changes in interest rates which could
affect our future results of operations and financial condition. We manage our
exposure to these risks through our regular operating and financing activities.
As of December 31, 2008, we had cash, cash equivalents and investments, which
includes auction rate securities and an auction rate securities right, of $56.0
million.
 
 As of
December 31, 2008 the carrying value of our cash and cash equivalents
approximated fair value. In a declining interest rate environment, as short-term
investments mature, reinvestment occurs at less favorable market rates,
negatively impacting future investment income. We
maintain our cash and cash equivalents with major financial institutions;
however, our cash and cash equivalent balances with these institutions exceed
the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. While we
monitor on a systematic basis the cash and cash equivalent balances in the
operating accounts and adjust the balances as appropriate, these balances could
be impacted if one or more of the financial institutions with which we deposit
fails or is subject to other adverse conditions in the financial or credit
markets. To date, we have experienced no loss of principal or lack of access to
our invested cash or cash equivalents; however, we can provide no assurance that
access to our invested cash and cash equivalents will not be affected if the
financial institutions in which we hold our cash and cash equivalents fail or
the financial and credit markets continue to worsen.
 
 At
December 31, 2007 and 2008, we held approximately $25.1 million ($25.1 million
par value) and $18.1 million ($20.4 million par value), respectively, in
investments in auction rate securities which represent interests in
collateralized pools of student loan receivables issued by agencies established
by counties, cities, states and other municipal entities. We sold approximately
$5.0 million of these investments in 2008. Since February 2008 we have
experienced difficulty in effecting additional sales of such securities because
of the failure of the auction mechanism as a result of sell orders exceeding buy
orders. Liquidity for these auction rate securities is typically provided by an
auction process that resets the applicable interest rate at pre-determined
intervals. Holders of the securities continue to receive interest on the
investments, and the securities continue to be auctioned at the pre-determined
intervals (typically every 28 days) until the auction succeeds, the issuer calls
the securities, or they mature. These failed auctions represent liquidity risk
exposure and are not defaults or credit events. A decline in the value of these
securities that is not temporary could materially adversely affect our liquidity
and income.
  In
October 2008, we received an offer (the “Offer”) from UBS for a put right
permitting us to sell to UBS at par value all auction rate securities previously
purchased from UBS at a future date (any time during a two-year period beginning
June 30, 2010). The Offer also included a commitment to loan us 75% of the
UBS-determined value of the auction rate securities at any time until the put is
exercised. In exchange for the Offer, we were required to provide UBS with
a general release of claims (other than certain consequential damages claims)
concerning our auction rate securities and grant UBS the right to purchase our
auction rate securities at any time for full par value. The Offer was
non-transferable and expired on November 14, 2008. During November 2008, we
accepted the Offer. Our right under the Offer is in substance a put right (with
the strike price equal to the par value of the auction rate securities) which we
recorded as an asset, measured at its fair value (pursuant to SFAS No. 159),
with the resultant gain recognized in earnings. We recorded the put right at a
fair value of $2.0 million and recognized the gain in operations, which,
together with the $2.3 million decline in fair value of the auction rate
securities, resulted in a net charge to operations in 2008 of $338,000 included
in other expense. The fair value of the put right was based on an approach in
which the present value of all expected future cash flows were subtracted from
the current fair market value of the security and the resultant value was
calculated as a future value at an interest rate reflective of counterparty
risk.
 
 Given the
substantial dislocation in the financial markets and among financial services
companies, we cannot assure you that UBS ultimately will have the ability to
repurchase our auction rate securities at par, or at any other price, as these
rights will be an unsecured contractual obligation of UBS or that if UBS
determines to purchase our auction rate securities at any time, we will be able
to reinvest the cash proceeds of any such sale at the same interest rate or
dividend yield currently being paid to us. Also, as a condition of accepting the
auction rate securities rights, we were required to sign a release of claims
against UBS, which will prevent us from making claims against UBS related to our
investment in auction rate securities, other than claims for consequential
damages.
  35




Item 8. Financial Statements and
Supplementary Data





INDEX
TO FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm
                        36Balance
      Sheets at December 31, 2007 and 2008
                        38Statements
      of Operations for the YearsEnded
      December 31, 2006, 2007 and 2008
                        39Statements
      of Changes in Stockholders' Equity for the YearsEnded
      December 31, 2006, 2007 and 2008
                        40Statements
      of Cash Flows for the YearsEnded
      December 31, 2006, 2007 and 2008
                        41Notes
      to the Financial Statements
                        42


36




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of
Directors and Stockholders of
 I.D.
Systems, Inc.
 
 We have
audited the accompanying balance sheets of I.D. Systems, Inc. as of
December 31, 2007 and 2008 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, 2008. Our audits also included the
financial statement schedule II - Valuation and Qualifying Accounts for each of
the years in the three-year period ended December 31, 2008 listed in Item
15.(a)(2) in the accompanying index. These financial statements and schedule are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and schedule 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 audits 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 referred to above present fairly, in
all material respects, the financial position of I.D. Systems, Inc. as of
December 31, 2007 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements, taken as a
whole, presents fairly, in all material respects, the information stated
therein.
 
 As
described in Note B to the financial statements, effective January 1, 2008, the
Company elected to adopt Statement of Financial Accounting Standard No. 159,
“The Fair Value Option for Financial Assets and Liabilities.”
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), I.D. Systems, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated March 12, 2009
expressed an unqualified opinion thereon.
 
 /s/
Eisner LLP
  New York,
New York
 March 12,
2009


37


I.D.
SYSTEMS, INC.


Balance
Sheets





As of December 31,2007
                                                                    
                                                                    
                                                                    2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                                    
                                                                    $
                                                                    5,103,000
                                                                    
                                                                    
                                                                    $
                                                                    12,558,000Restricted
      cash
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    230,000Investments –
      short term
                                                                    
                                                                    
                                                                    21,385,000
                                                                    
                                                                    
                                                                    
                                                                    8,550,000Accounts
      receivable, net of allowance for doubtful accounts of $239,000 in 2007 and
      2008
                                                                    
                                                                    
                                                                    2,875,000
                                                                    
                                                                    
                                                                    
                                                                    8,245,000Unbilled
      receivables
                                                                    
                                                                    
                                                                    580,000
                                                                    
                                                                    
                                                                    
                                                                    168,000Inventory,
      net
                                                                    
                                                                    
                                                                    4,420,000
                                                                    
                                                                    
                                                                    
                                                                    3,273,000Interest
      receivable
                                                                    
                                                                    
                                                                    142,000
                                                                    
                                                                    
                                                                    
                                                                    217,000Prepaid
      expenses and other current assets
                                                                    
                                                                    
                                                                    291,000
                                                                    
                                                                    
                                                                    
                                                                    261,000Total
      current assets
                                                                    
                                                                    
                                                                    34,796,000
                                                                    
                                                                    
                                                                    
                                                                    33,502,000Investments –long
      term
                                                                    
                                                                    
                                                                    38,515,000
                                                                    
                                                                    
                                                                    
                                                                    34,911,000Fixed
      assets, net
                                                                    
                                                                    
                                                                    1,398,000
                                                                    
                                                                    
                                                                    
                                                                    1,050,000Goodwill
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    200,000Other
      intangible assets
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    178,000Other
      assets
                                                                    
                                                                    
                                                                    87,000
                                                                    
                                                                    
                                                                    
                                                                    107,000$
                                                                    74,796,000
                                                                    
                                                                    
                                                                    $
                                                                    69,948,000LIABILITIESCurrent
      liabilities:Accounts
      payable and accrued expenses
                                                                    
                                                                    $
                                                                    2,594,000
                                                                    
                                                                    
                                                                    $
                                                                    2,175,000Current
      portion of long term debt
                                                                    
                                                                    
                                                                    19,000
                                                                    
                                                                    
                                                                    
                                                                    —Deferred
      revenue
                                                                    
                                                                    
                                                                    291,000
                                                                    
                                                                    
                                                                    
                                                                    424,000Total
      current liabilities
                                                                    
                                                                    
                                                                    2,904,000
                                                                    
                                                                    
                                                                    
                                                                    2,599,000Deferred
      revenue
                                                                    
                                                                    
                                                                    167,000
                                                                    
                                                                    
                                                                    
                                                                    231,000Deferred
      rent
                                                                    
                                                                    
                                                                    55,000
                                                                    
                                                                    
                                                                    
                                                                    33,0003,126,000
                                                                    
                                                                    
                                                                    
                                                                    2,863,000Commitments
      and Contingencies (Note J)STOCKHOLDERS'
      EQUITYPreferred
      stock; authorized 5,000,000 shares, $0.01 par value; none
      issued
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Common
      stock; authorized 50,000,000 shares, $.01 par value; 11,561,000 and
      12,082,000 shares issued at December 31, 2007 and 2008, respectively,
      shares outstanding, 11,015,000 and 10,893,000 at December 31, 2007 and
      2008, respectively
                                                                    
                                                                    
                                                                    115,000
                                                                    
                                                                    
                                                                    
                                                                    120,000Additional
      paid-in capital
                                                                    
                                                                    
                                                                    97,076,000
                                                                    
                                                                    
                                                                    
                                                                    101,437,000Accumulated
      deficit
                                                                    
                                                                    
                                                                    (19,492,000
                                                                    )
                                                                    
                                                                    
                                                                    (23,667,000
                                                                    )Accumulated
      other comprehensive income
                                                                    
                                                                    
                                                                    11,000
                                                                    
                                                                    
                                                                    
                                                                    46,00077,710,000
                                                                    
                                                                    
                                                                    
                                                                    77,936,000Treasury
      stock; 546,000 shares and 1,189,000 shares at cost at December 31, 2007
      and 2008, respectively
                                                                    
                                                                    
                                                                    (6,040,000
                                                                    )
                                                                    
                                                                    
                                                                    (10,851,000
                                                                    )Total
      stockholders’ equity
                                                                    
                                                                    
                                                                    71,670,000
                                                                    
                                                                    
                                                                    
                                                                    67,085,000Total
      liabilities and stockholders’ equity
                                                                    
                                                                    $
                                                                    74,796,000
                                                                    
                                                                    
                                                                    $
                                                                    69,948,000





SEE
ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


38


I.D.
SYSTEMS, INC.


Statements
of Operations





Year Ended December 31,2006
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2008Revenues:Products
                                                        
                                                        $
                                                        16,205,000
                                                        
                                                        
                                                        $
                                                        11,037,000
                                                        
                                                        
                                                        $
                                                        20,072,000Services
                                                        
                                                        
                                                        8,535,000
                                                        
                                                        
                                                        
                                                        6,046,000
                                                        
                                                        
                                                        
                                                        6,974,00024,740,000
                                                        
                                                        
                                                        
                                                        17,083,000
                                                        
                                                        
                                                        
                                                        27,046,000Cost
      of Revenues:Cost
      of products
                                                        
                                                        
                                                        8,229,000
                                                        
                                                        
                                                        
                                                        5,859,000
                                                        
                                                        
                                                        
                                                        9,996,000Cost
      of services
                                                        
                                                        
                                                        5,472,000
                                                        
                                                        
                                                        
                                                        3,070,000
                                                        
                                                        
                                                        
                                                        3,470,00013,701,000
                                                        
                                                        
                                                        
                                                        8,929,000
                                                        
                                                        
                                                        
                                                        13,466,000Gross
      Profit
                                                        
                                                        
                                                        11,039,000
                                                        
                                                        
                                                        
                                                        8,154,000
                                                        
                                                        
                                                        
                                                        13,580,000Operating
      expenses:Selling,
      general and administrative expenses
                                                        
                                                        
                                                        12,943,000
                                                        
                                                        
                                                        
                                                        15,963,000
                                                        
                                                        
                                                        
                                                        16,760,000Research
      and development expenses
                                                        
                                                        
                                                        2,639,000
                                                        
                                                        
                                                        
                                                        2,849,000
                                                        
                                                        
                                                        
                                                        2,883,00015,582,000
                                                        
                                                        
                                                        
                                                        18,812,000
                                                        
                                                        
                                                        
                                                        19,643,000Loss
      from operations
                                                        
                                                        
                                                        (4,543,000
                                                        )
                                                        
                                                        
                                                        (10,658,000
                                                        )
                                                        
                                                        
                                                        (6,063,000
                                                        )Interest
      income
                                                        
                                                        
                                                        2,801,000
                                                        
                                                        
                                                        
                                                        3,238,000
                                                        
                                                        
                                                        
                                                        2,226,000Interest
      expense
                                                        
                                                        
                                                        (29,000
                                                        )
                                                        
                                                        
                                                        (10,000
                                                        )
                                                        
                                                        
                                                        —Other
      income (loss)
                                                        
                                                        
                                                        155,000
                                                        
                                                        
                                                        
                                                        89,000
                                                        
                                                        
                                                        
                                                        (338,000
                                                        )Net
      loss
                                                        
                                                        $
                                                        (1,616,000
                                                        )
                                                        
                                                        $
                                                        (7,341,000
                                                        )
                                                        
                                                        $
                                                        (4,175,000
                                                        )Net
      loss per share – basic and diluted
                                                        
                                                        $
                                                        (0.15
                                                        )
                                                        
                                                        $
                                                        (0.66
                                                        )
                                                        
                                                        $
                                                        (0.38
                                                        )Weighted
      average common shares outstanding – basic and diluted
                                                        
                                                        
                                                        10,501,000
                                                        
                                                        
                                                        
                                                        11,205,000
                                                        
                                                        
                                                        
                                                        10,887,000





SEE
ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


39


I.D.
SYSTEMS, INC.


Statements
of Changes in Stockholders' Equity


AccumulatedCommon Stock
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Additional
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      OtherNumber of
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Paid-in
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Accumulated
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Comprehensive
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Treasury
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Stockholders'Shares
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Amount
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Capital
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Deficit
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Income
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      Stock
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      EquityBalance
      at January 1, 2006
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      7,851,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      79,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      25,735,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (10,535,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      —
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (113,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      15,166,000Net
      loss
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (1,616,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (1,616,000
                                                                                                                                                      )Comprehensive
      income - unrealized gain on investments
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      12,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      12,000Total
      comprehensive loss
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (1,604,000
                                                                                                                                                      )Shares
      issued pursuant to exercise of stock options
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      200,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      2,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      784,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      786,000Shares
      issued pursuant to a public offering
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      2,750,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      28,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      55,500,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      55,528,000Shares
      issued pursuant to exercise of overallotment options related to
      public offering
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      413,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      4,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      8,429,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      8,433,000Issuance
      of restricted stock
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      91,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      478,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      478,000Issuance
      of performance shares
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      32,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      602,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      602,000Stock
      based compensation - options
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      1,895,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      1,895,000Balance
      at December 31, 2006
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      11,337,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      113,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      93,423,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (12,151,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      12,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (113,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      81,284,000Net
      loss
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (7,341,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (7,341,000
                                                                                                                                                      )Comprehensive
      loss - unrealized loss on investments
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (1,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (1,000
                                                                                                                                                      )Total
      comprehensive loss
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (7,342,000
                                                                                                                                                      )Shares
      issued pursuant to exercise of stock options
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      205,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      2,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      365,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      367,000Shares
      repurchased
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (5,583,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (5,583,000
                                                                                                                                                      )Shares
      withheld pursuant to stock issuances
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (344,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (344,000
                                                                                                                                                      )Issuance
      of restricted stock
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      19,000Stock
      based compensation – restricted stock
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      941,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      941,000Stock
      based compensation - options
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      2,347,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      2,347,000Balance
      at December 31, 2007
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      11,561,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      115,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      97,076,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (19,492,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      11,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (6,040,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      71,670,000Net
      loss
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (4,175,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (4,175,000
                                                                                                                                                      )Comprehensive
      loss – unrealized gain on investments
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      35,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      35,000Total
      comprehensive loss
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (4,140,000
                                                                                                                                                      )Shares
      issued pursuant to exercise of stock options
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      505,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      5,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      1,372,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      1,377,000Shares
      repurchased
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (4,387,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (4,387,000
                                                                                                                                                      )Shares
      withheld pursuant to stock issuances
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (424,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      (424,000
                                                                                                                                                      )Issuance
      of restricted stock
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      16,000Stock
      based compensation – restricted stock
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      513,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      513,000Stock
      based compensation – performance shares
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      292,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      292,000Stock
      based compensation - options
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      2,184,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      2,184,000Balance
      at December 31, 2008
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      12,082,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      120,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      101,437,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (23,667,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      46,000
                                                                                                                                                      
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      (10,851,000
                                                                                                                                                      )
                                                                                                                                                      
                                                                                                                                                      $
                                                                                                                                                      67,085,000


SEE
ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


40


I.D.
SYSTEMS, INC.


Statements
of Cash Flows


Year Ended December 31,2006
                                                                            
                                                                            
                                                                            2007
                                                                            
                                                                            
                                                                            2008Cash
      flows from operating activities:Net
      loss
                                                                            
                                                                            $
                                                                            (1,616,000
                                                                            )
                                                                            
                                                                            $
                                                                            (7,341,000
                                                                            )
                                                                            
                                                                            $
                                                                            (4,175,000
                                                                            )Adjustments
      to reconcile net loss to cash (used in) provided by operating
      activities:Inventory
      reserve
                                                                            
                                                                            
                                                                            100,000
                                                                            
                                                                            
                                                                            
                                                                            517,000
                                                                            
                                                                            
                                                                            
                                                                            126,000Accrued
      interest income
                                                                            
                                                                            
                                                                            (153,000
                                                                            )
                                                                            
                                                                            
                                                                            20,000
                                                                            
                                                                            
                                                                            
                                                                            (75,000
                                                                            )Stock
      based compensation
                                                                            
                                                                            
                                                                            2,975,000
                                                                            
                                                                            
                                                                            
                                                                            3,288,000
                                                                            
                                                                            
                                                                            
                                                                            2,989,000Depreciation
      and amortization
                                                                            
                                                                            
                                                                            468,000
                                                                            
                                                                            
                                                                            
                                                                            544,000
                                                                            
                                                                            
                                                                            
                                                                            540,000Deferred
      rent expense
                                                                            
                                                                            
                                                                            (22,000
                                                                            )
                                                                            
                                                                            
                                                                            (22,000
                                                                            )
                                                                            
                                                                            
                                                                            (22,000
                                                                            )Deferred
      revenue
                                                                            
                                                                            
                                                                            109,000
                                                                            
                                                                            
                                                                            
                                                                            104,000
                                                                            
                                                                            
                                                                            
                                                                            197,000Provision
      for uncollectible accounts
                                                                            
                                                                            
                                                                            211,000
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —Change
      in fair value of investments
                                                                            
                                                                            __
                                                                            
                                                                            
                                                                            __
                                                                            
                                                                            
                                                                            
                                                                            338,000Deferred
      contract costs
                                                                            
                                                                            
                                                                            20,000
                                                                            
                                                                            
                                                                            
                                                                            33,000Changes
      in:Restricted
      cash
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            (230,000
                                                                            )Accounts
      receivable
                                                                            
                                                                            
                                                                            756,000
                                                                            
                                                                            
                                                                            
                                                                            2,226,000
                                                                            
                                                                            
                                                                            
                                                                            (5,370,000
                                                                            )Unbilled
      receivables
                                                                            
                                                                            
                                                                            251,000
                                                                            
                                                                            
                                                                            
                                                                            462,000
                                                                            
                                                                            
                                                                            
                                                                            412,000Inventory
                                                                            
                                                                            
                                                                            (3,578,000
                                                                            )
                                                                            
                                                                            
                                                                            1,493,000
                                                                            
                                                                            
                                                                            
                                                                            1,212,000Prepaid
      expenses and other assets
                                                                            
                                                                            
                                                                            (130,000
                                                                            )
                                                                            
                                                                            
                                                                            (20,000
                                                                            )
                                                                            
                                                                            
                                                                            10,000Investment
      in sales type leases
                                                                            
                                                                            
                                                                            467,000
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —Accounts
      payable and accrued expenses
                                                                            
                                                                            
                                                                            (931,000
                                                                            )
                                                                            
                                                                            
                                                                            (700,000
                                                                            )
                                                                            
                                                                            
                                                                            (843,000
                                                                            )Net
      cash (used in) provided by operating activities
                                                                            
                                                                            
                                                                            (1,073,000
                                                                            )
                                                                            
                                                                            
                                                                            604,000
                                                                            
                                                                            
                                                                            
                                                                            (4,891,000
                                                                            )Cash
      flows from investing activities:Purchase
      of fixed assets
                                                                            
                                                                            
                                                                            (703,000
                                                                            )
                                                                            
                                                                            
                                                                            (548,000
                                                                            )
                                                                            
                                                                            
                                                                            (188,000
                                                                            )Business
      acquisition
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            (573,000
                                                                            )Purchase
      of investments
                                                                            
                                                                            
                                                                            (68,481,000
                                                                            )
                                                                            
                                                                            
                                                                            (15,691,000
                                                                            )
                                                                            
                                                                            
                                                                            (28,513,000
                                                                            )Maturities
      of investments
                                                                            
                                                                            
                                                                            13,214,000
                                                                            
                                                                            
                                                                            
                                                                            16,523,000
                                                                            
                                                                            
                                                                            
                                                                            44,649,000Net
      cash (used in) provided by investing activities
                                                                            
                                                                            
                                                                            (55,970,000
                                                                            )
                                                                            
                                                                            
                                                                            284,000
                                                                            
                                                                            
                                                                            
                                                                            15,375,000Cash
      flows from financing activities:Repayment
      of term loan
                                                                            
                                                                            
                                                                            (209,000
                                                                            )
                                                                            
                                                                            
                                                                            (221,000
                                                                            )
                                                                            
                                                                            
                                                                            (19,000
                                                                            )Proceeds
      from exercise of stock options
                                                                            
                                                                            
                                                                            786,000
                                                                            
                                                                            
                                                                            
                                                                            367,000
                                                                            
                                                                            
                                                                            
                                                                            1,377,000Net
      proceeds from public offering
                                                                            
                                                                            
                                                                            63,961,000
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —Collection
      of officer loan
                                                                            
                                                                            
                                                                            11,000
                                                                            
                                                                            
                                                                            
                                                                            8,000
                                                                            
                                                                            
                                                                            
                                                                            —Purchase
      of treasury shares
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            (5,583,000
                                                                            )
                                                                            
                                                                            
                                                                            (4,387,000
                                                                            )Net
      cash provided by (used in) financing activities
                                                                            
                                                                            
                                                                            64,549,000
                                                                            
                                                                            
                                                                            
                                                                            (5,429,000
                                                                            )
                                                                            
                                                                            
                                                                            (3,029,000
                                                                            )Net
      increase (decrease) in cash and cash equivalents
                                                                            
                                                                            
                                                                            7,506,000
                                                                            
                                                                            
                                                                            
                                                                            (4,541,000
                                                                            )
                                                                            
                                                                            
                                                                            7,455,000Cash
      and cash equivalents - beginning of period
                                                                            
                                                                            
                                                                            2,138,000
                                                                            
                                                                            
                                                                            
                                                                            9,644,000
                                                                            
                                                                            
                                                                            
                                                                            5,103,000Cash and cash
      equivalents  -   end of
      period
                                                                            
                                                                            $
                                                                            9,644,000
                                                                            
                                                                            
                                                                            $
                                                                            5,103,000
                                                                            
                                                                            
                                                                            $
                                                                            12,558,000Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
                                                                            
                                                                            $
                                                                            29,000
                                                                            
                                                                            
                                                                            $
                                                                            10,000
                                                                            
                                                                            
                                                                            $
                                                                            —Non-
      Cash Financing Activity:Shares
      withheld pursuant to stock issuance
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            344,000
                                                                            
                                                                            
                                                                            $
                                                                            424,000


SEE
ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


41


I.D. SYSTEMS,
INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007 and 2008




NOTE
A - THE COMPANY




I.D.
Systems, Inc. (the “Company”) develops, markets and sells wireless solutions for
managing and securing high-value enterprise assets. These assets include
industrial vehicles, such as forklifts and airport ground support equipment, and
rental vehicles. The Company’s 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. The
Company’s solutions enable customers to achieve tangible economic benefits by
making timely, informed decisions that increase the security, productivity and
efficiency of their operations. The Company outsources its hardware
manufacturing operations to contract manufacturers. The Company was incorporated
in Delaware in 1993 and commenced operations in January 1994.




NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




[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.
The Company continually evaluates estimates used in the preparation of the
financial statements for reasonableness. The significant areas of estimation
include fair value of auction rates and any other non readily marketable
securities, collectability of accounts receivable, sales returns, recoverability
of inventory, realization of deferred tax assets, useful lives, and the
impairment of tangible and intangible assets.




[2]          Cash and cash
equivalents:




The
Company considers all highly liquid debt instruments with an original maturity
of three months or less when purchased to be cash equivalents unless they are
legally or contractually restricted.  The Company’s cash and cash
equivalent balances exceed FDIC limits.




[3]          Investments:




The
Company’s
investments include debt securities, government and state agency bonds,
corporate bonds and auction rate certificates, which are classified as either
available for sale, held to maturity or trading, depending on management’s
investment intentions relating to these securities. Available for sale
securities are marked to market based on quoted market values of the securities,
with the unrealized gain and (losses), reported as comprehensive income or
(loss). Investments categorized as held to maturity are carried at amortized
cost because the Company has both the intent and the ability to hold these
investments until they mature. The Company has classified as short term those
securities that mature within one year, and all other securities are classified
as long term.





The
Company’s investments include auction rate securities (“ARS”) and an auction
rate securities right (“ARSR”).





The
Company has classified its ARS investments as trading securities as set forth in
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities” and has elected to account for its ARSR investment using the
provisions of SFAS No. 159, “ The Fair Value Option for Financial Assets and
Liabilities.”  Trading securities are carried at fair value, with
unrealized holding gains and losses included in other income (expense) on our
consolidated statements of operations.





SFAS No
159, which the Company adopted on January 1, 2008, provides a fair value option
election that allows entities to irrevocably elect fair value as the initial and
subsequent measurement attribute for certain assets and liabilities. Changes in
fair value are recognized in earnings as they occur for those assets or
liabilities for which the election is made. The election is made on an
instrument by instrument basis at initial recognition of an asset or liability
or upon an event that gives rise to a new basis of accounting for that
instrument.




The
Company's investments are reported at fair value in accordance with SFAS
No, 159 “Fair Value
Market” which
was adopted on January 1, 2008 as described in Note
C.




[4]          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.


42





[5]          Revenue
recognition:




The
Company's revenues are derived from contracts with multiple element
arrangements, which include the Company's system, training and technical
support. Revenue is allocated to each element based upon vendor specific
objective evidence (VSOE) of the fair value of the element. VSOE of the fair
value is based upon the price charged when the element is sold separately.
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, persuasive 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.




[6]          Unbilled receivables and deferred
revenue:





Under
certain customer contracts the Company invoices progress billings once certain
milestones are met. The milestone terms vary by customer and can include upon
receipt of purchase order, delivery, installation and launch. 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, 2007 and 2008, unbilled receivables were $580,000 and $168,000, respectively
and deferred revenue was $458,000 and $655,000,
respectively.  Deferred revenue also includes prepayment of extended
maintenance and supports contracts.





[7]          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.




[8]          Long-lived assets:




The
Company evaluates impairment losses on 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
the carrying 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, 2006, 2007 and
2008, the Company has not incurred an impairment charge.





[9]          Goodwill
and Other Intangible Assets:





The
Company accounts for Goodwill and Other Intangible Assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets”. The Company tests goodwill and other intangible assets to
determine if impairment exists and if the use of indefinite lives is currently
applicable.  At December 31, 2008 the Company determined that no
impairment existed to the goodwill, customer list and trademark and trade name,
its acquired intangible assets. The Company also determined that the use of
indefinite lives for the customer list and trademark and trade name remains
applicable at December 31, 2008 and the Company expects to derive future
benefits from these intangible assets.




[10]        Research and
development:




Research
and development costs are charged to expense as incurred.




[11]        Patent costs:




Costs
incurred in connection with acquiring patent rights are charged to expense as
incurred.




[12]       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, 2006, 2007 and
2008.


43





[13]        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.




[14]        Stock-based
compensation:




The
Company accounts for stock based employee compensation under Statement of
Financial Accounting Standard No. 123R, “Share Based Payment” (“SFAS
123R”) , which requires all share-based payments, including grants of
stock options, to be recognized in the statement of operations as an operating
expense, based on their fair values on grant date.  In accordance with
SFAS 123R the Company recorded stock based compensation expense of $2,975,000,
$3,288,000, $2,989,000 for the years ended December 31, 2006, 2007 and 2008,
respectively.




SFAS 123R
requires companies to estimate the fair value of share based payment awards on
the grant date using an option pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service period in the Company’s statement of operations. SFAS 123
requires forfeitures to be estimated at the time of grant in order to estimate
the amount of share based awards that will ultimately vest. The estimate is
based on the Company’s historical rates of forfeitures. Share based compensation
expense recognized by the Company in 2006, 2007 and 2008 includes (i)
compensation expense for share based awards granted prior to, but not yet vested
as of December 31, 2005, based on the grant date fair value estimated in
accordance with the pro forma provisions of SFAS 123 and (ii) compensation
expense for the share based payment awards granted subsequent to December 31,
2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R. This is based on awards ultimately expected to vest and
hence it has been reduced for estimated forfeitures. SFAS 123R also requires
estimated forfeitures to be revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.





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:





December
      31,2006
                        
                        2007
                        
                        2008Expected
      volatility
                        
                        
                        60
                        %
                        
                        
                        53
                        %
                        
                        
                        67
                        %Expected
      life of options
                        
                        5
      years
                        
                        
                        5
      years
                        
                        
                        5
      yearsRisk
      free interest rate
                        
                        
                        5
                        %
                        
                        
                        5
                        %
                        
                        
                        3
                        %Dividend
      yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %
                        
                        
                        0
                        %





Expected
volatility is based on historical volatility of the Company’s stock and the
expected life of options is based on historical data with respect to employee
exercise periods.





[15]        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.





The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”)
on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.”  FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of an income tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. As of
December 31, 2008, the Company did not have any unrecognized tax benefits. The
Company recognizes any interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. For the year ended
December 31, 2008, there was no such interest or penalty.


44





[16]        Net loss per share:




December
      31,Basic
      and diluted loss per share
                                          
                                          2006
                                          
                                          
                                          2007
                                          
                                          
                                          2008Net
      loss
                                          
                                          $
                                          (1,616,000
                                          )
                                          
                                          $
                                          (7,341,000
                                          )
                                          
                                          $
                                          (4,175,000
                                          )Weighted
      average shares outstanding – Basic and diluted
                                          
                                          
                                          10,501,000
                                          
                                          
                                          
                                          11,205,000
                                          
                                          
                                          
                                          10,887,000Basic
      and diluted loss per share
                                          
                                          $
                                          (0.15
                                          )
                                          
                                          $
                                          (0.66
                                          )
                                          
                                          $
                                          (0.38
                                          )




Basic
loss per share is calculated by dividing net loss by the weighted average number
of common shares outstanding during the period. Diluted 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 years ended December 31, 2006, 2007and 2008, the basic and
diluted weighted average shares outstanding are the same since the effect from
the potential exercise of outstanding stock options of 2,784,000, 2,761,000 and
2,601,000, respectively, would have been anti-dilutive.





[17]        Financial
instruments:




The
carrying amounts of cash equivalents, accounts receivable, investments in
securities including ARS and ARSR are carried at fair value, and other
liabilities approximate their fair values due to the short period to maturity of
these instruments. The fair
value of the ARS was determined utilizing a discounted cash flow approach and
market evidence with respect to the ARS'S collateral, ratings and insurance to
assess default risk, credit spread risk and downgrade risk.





[18]        Advertising and Marketing
Expense:




Advertising
and marketing costs are expensed as incurred. Advertising and marketing expense
for the years ended December 31, 2006, 2007 and 2008 amounted to $217,000,
$314,000 and $379,000, respectively.




[19]        Recently Issued Accounting
Pronouncements:





In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment to SFAS No.
115” (“SFAS No. 159”) which is effective for fiscal years beginning after
November 15, 2007. This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reporting earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurements, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. The Company elected to use
fair value option as prescribed by SFAS No. 159 for ARSR investments as further
described in Note C. Therefore, material financial assets and liabilities such
as the Company's accounts receivables and payables are still reported at their
carrying value which approximates fair value.





In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
No. 157”), to define fair value, establish framework for measuring fair value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value measurements, which is effective for fiscal years beginning
after November 15, 2007, the beginning of our 2008 fiscal year. However, in
February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of
FASB Statement No. 157” (“FSP 157-2”), which provides a one year deferral of the
effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (that is, at least annually). FSP
157-2 defers the effective date of SFAS No. 157 as it relates to non-financial
assets to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of FSP
157-2.  The Company adopted the provisions of SFAS No. 157 effective
January 1, 2008 as discussed in Note C.





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


45


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





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





In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 142-3, Determination of the Useful Life of
Intangible Assets(“FSP FAS No. 142-3”). FSP
FAS No. 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The intent of this FSP is to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141
(revised 2007), Business
Combinations, and other US GAAP. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company has not yet determined
the impact, if any, FSP FAS No. 142-will have on the Company’s
financial position, results of operations or cash flows.




In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
United States Generally Accepted Accounting Principles. SFAS 162
became effective in September 2008 following the approval by the SEC. The Company currently
adheres to the hierarchy of U.S. GAAP as presented in SFAS 162, and
adoption is not expected to have a material impact on its consolidated financial
statements.




In
September 2008, the EITF issued EITF No. 08-6, Equity Method Investment Accounting
Considerations (“EITF 08-6”). EITF 08-6 addresses the effect of
SFAS No. 141(R) and SFAS No. 160 on the equity method of
accounting. EITF 08-0 is effective in fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal years. Currently the
Company has no equity investees and therefore this standard will have no current
impact on the Company’s financial position, results of operations or cash flows.
The impact, if any, that the implementation of EITF No. 08-06 will have on the
Company’s results of operations or financial condition will, in the future, be
dependent on future acquisition or investment activity, occurring after the
effective date, if any.





In
October 2008, the FASB issued FASB Staff Position (“FSP”) 157-3,
“Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active” (“FSP 157-3”).  FSP 157-3 clarified
the application of FAS 157.  FSP 157-3 demonstrated how the
fair value of a financial asset is determined when the market for that financial
asset is inactive. FSP 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued.  The
guidance provided by FSP 157-3 is consistent with our approach to valuing our
auction rate securities for which there is no active market.





NOTE
C - INVESTMENTS





The
Company’s
investments include marketable debt securities, including, government and state
agency bonds, corporate bonds and auction rate certificates, which are
classified as either available for sale, held to maturity or trading, depending
on management’s investment intentions relating to these securities. Available
for sale securities are marked to market based on quoted market values of the
securities, with the unrealized gain and (losses), reported as comprehensive
income or (loss). Investments categorized as held to maturity are carried at
amortized cost because the Company has both the intent and the ability to
hold these investments until they mature. Trading
securities are carried at fair value, with unrealized holding gains and losses
included in other income or loss in the Company's statements of
operations.The Company has classified as short term those securities
that mature within one year, and all other securities are classified as long
term.


46


At
December 31, 2007 and 2008, the Company held approximately $25.1 million ($25.1
million par value) and $18.1 million ($20.4 million par value), respectively, in
investments in ARS which represent interests in collateralized pools of student
loan receivables issued by agencies  established by counties, cities,
states and other municipal entities within the United States.  The
Company sold approximately $5.0 million of these investments in
2008.  However, starting on February 2008 and continuing in 2009, the
Company experienced difficulty in effecting additional sales of such securities
because of the failure of the auction mechanism as a result of sell orders
exceeding buy orders.  Liquidity for these ARS is typically provided
by an auction process that resets the applicable interest rate at pre-determined
intervals.  These failed auctions represent liquidity risk exposure
and are not defaults or credit events.  As holders of the securities,
the Company continues to receive interest on the investments, and the
securities continue to be auctioned at the pre-determined intervals (typically
every 28 days) until the auction succeeds, the issuer calls the securities, or
they mature.





In
October 2008, the Company received an offer (the “Offer”) from UBS for a put
right permitting the Company to sell to UBS at par value all ARS
previously purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010).  The Offer also included a commitment
to loan the Company 75% of the UBS-determined value of the ARS at any
time until the put is exercised at a
variable interest rate that will equal the lesser of: (i) the applicable
reference rate plus a spread set forth in the applicable credit agreement and
(ii) the then-applicable weighted average interest or dividend rate paid to the
Company by the issuer of the ARS that is pledged to UBS as collateral.The Offer was non-transferable and expired on November 14,
2008.  During  November  2008, the Company
accepted the Offer. In
exchange for the Offer, the Company provided UBS with a general release of
claims (other than certain consequential damages claims) concerning our auction
rate securities and granted UBS the right to purchase the Company's auction rate
securities at any time for full par value.The Company’s right under the
Offer is in substance a put option (with the strike price equal to the par value
of the ARS) which it recorded as an asset, measured at its fair value (pursuant
to election under SFAS No. 159), with the resultant gain recognized in
earnings. Pursuant to SFAS No. 159, the Company recorded the put option at
a fair value of $2.0 million and recognized the gain in operations. As the
company has classified the ARS as trading seurities, the $2.3 million decline in
fair value of the ARS was charged to operations in 2008. The net
charge to operations in 2008 was $338,000 which was included in other
expense.  The fair value of the ARSR was based on an approach in which
the present value of all expected future cash flows were subtracted from the
current fair market value of the security and the resultant value was calculated
as a future value at an interest rate reflective of counterparty
risk.




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





The cost,
gross unrealized gains (losses) and fair value of available for sale, held to
maturity and trading to maturity securities by major security type at December
31, 2007 and 2008 were as follows:




December 31, 2007
                                                
                                                Cost
                                                
                                                
                                                Unrealized
                                                  Gain
                                                
                                                
                                                Unrealized
                                                  Loss
                                                
                                                
                                                Fair
                                                  ValueInvestments -
      short termAvailable for saleGovernement agency bonds
                                                
                                                $
                                                12,086,000
                                                
                                                
                                                $
                                                2,000
                                                
                                                
                                                $
                                                (7,000
                                                )
                                                
                                                $
                                                12,081,000Mutual funds
                                                
                                                
                                                2,457,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,457,000Total available for sale
                                                
                                                
                                                14,543,000
                                                
                                                
                                                
                                                2,000
                                                
                                                
                                                
                                                (7,000
                                                )
                                                
                                                
                                                14,538,000Held to maturity securitiesGovernment agency bonds
                                                
                                                
                                                6,847,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                6,847,000Total investments
      - short term
                                                
                                                
                                                21,390,000
                                                
                                                
                                                
                                                2,000
                                                
                                                
                                                
                                                (7,000
                                                )
                                                
                                                
                                                21,385,000Marketable
      securities - long termAvailable for saleAuction rate securities
                                                
                                                
                                                25,125,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                25,125,000Government agency bonds
                                                
                                                
                                                8,895,000
                                                
                                                
                                                
                                                16,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                8,911,000Total available for sale
                                                
                                                
                                                34,020,000
                                                
                                                
                                                
                                                16,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                34,036,000Held to maturity securitiesGovernment agency bonds
                                                
                                                
                                                885,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                885,000Corporate bonds
                                                
                                                
                                                3,594,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,594,000Total held to maturity securities
                                                
                                                
                                                4,479,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                4,479,000Total investments
      - long term
                                                
                                                
                                                38,499,000
                                                
                                                
                                                
                                                16,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                38,515,000Total
      investments
                                                
                                                $
                                                59,889,000
                                                
                                                
                                                $
                                                18,000
                                                
                                                
                                                $
                                                (7,000
                                                )
                                                
                                                $
                                                59,900,000


47





December
      31, 2008
                                                                          
                                                                          Cost
                                                                          
                                                                          
                                                                          Unrealized
                                                                            Gain
                                                                          
                                                                          
                                                                          Unrealized
                                                                            Loss
                                                                          
                                                                          
                                                                          Fair
                                                                            ValueInvestments -
      short termAvailable for saleGovernement agency bonds
                                                                          
                                                                          $
                                                                          4,801,000
                                                                          
                                                                          
                                                                          $
                                                                          10,000
                                                                          
                                                                          
                                                                          $
                                                                          (7,000
                                                                          )
                                                                          
                                                                          $
                                                                          4,804,000Mutual funds
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Total available for sale
                                                                          
                                                                          
                                                                          4,801,000
                                                                          
                                                                          
                                                                          
                                                                          10,000
                                                                          
                                                                          
                                                                          
                                                                          (7,000
                                                                          )
                                                                          
                                                                          
                                                                          4,804,000Held to maturity securitiesGovernment agency bonds
                                                                          
                                                                          
                                                                          3,746,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          3,746,000Total investments
      - short term
                                                                          
                                                                          
                                                                          8,547,000
                                                                          
                                                                          
                                                                          
                                                                          10,000
                                                                          
                                                                          
                                                                          
                                                                          (7,000
                                                                          )
                                                                          
                                                                          
                                                                          8,550,000Investments -
      long termAvailable for saleGovernment agency bonds
                                                                          
                                                                          
                                                                          11,417,000
                                                                          
                                                                          
                                                                          
                                                                          43,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          11,460,000Total available for sale
                                                                          
                                                                          
                                                                          11,417,000
                                                                          
                                                                          
                                                                          
                                                                          43,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          11,460,000Held to maturity securitiesGovernment agency bonds
                                                                          
                                                                          
                                                                          1,846,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          1,846,000Corporate bonds
                                                                          
                                                                          
                                                                          1,518,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          1,518,000Total held to maturity securities
                                                                          
                                                                          
                                                                          3,364,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          3,364,000Trading securitiesAuction
      rate securities
                                                                          
                                                                          
                                                                          20,425,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (2,308,000
                                                                          )
                                                                          
                                                                          
                                                                          18,117,000Auction
      rate securities put right
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          1,970,000
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          1,970,000Total trading securities
                                                                          
                                                                          
                                                                          20,425,000
                                                                          
                                                                          
                                                                          
                                                                          1,970,000
                                                                          
                                                                          
                                                                          
                                                                          (2,308,000
                                                                          )
                                                                          
                                                                          
                                                                          20,087,000Total investments
      - long term
                                                                          
                                                                          
                                                                          35,206,000
                                                                          
                                                                          
                                                                          
                                                                          2,013,000
                                                                          
                                                                          
                                                                          
                                                                          (2,308,000
                                                                          )
                                                                          
                                                                          
                                                                          34,911,000Total
      investments
                                                                          
                                                                          $
                                                                          43,753,000
                                                                          
                                                                          
                                                                          $
                                                                          2,023,000
                                                                          
                                                                          
                                                                          $
                                                                          (2,315,000
                                                                          )
                                                                          
                                                                          $
                                                                          43,461,000





NOTE
D - FIXED ASSETS





Fixed
assets are stated at cost, less accumulated depreciation and amortization, and
at December 31, 2007 and 2008, are summarized as follows:




December
      31,2007
                      
                      
                      2008Equipment
                      
                      $
                      1,144,000
                      
                      
                      $
                      918,000Computer
      software
                      
                      
                      695,000
                      
                      
                      
                      528,000Computer
      hardware
                      
                      
                      654,000
                      
                      
                      
                      700,000Furniture
      and fixtures
                      
                      
                      238,000
                      
                      
                      
                      176,000Automobile
                      
                      
                      35,000
                      
                      
                      
                      47,000Leasehold
      improvements
                      
                      
                      500,000
                      
                      
                      
                      504,0003,266,000
                      
                      
                      
                      2,873,000Accumulated
      depreciation and amortization
                      
                      
                      (1,868,000
                      )
                      
                      
                      (1,823,000
                      )$
                      1,398,000
                      
                      
                      $
                      1,050,000




Depreciation
expense was $416,000, $544,000 and $540,000 for the years ended December 31,
2006, 2007 and 2008, respectively.




NOTE
E – Goodwill and Other Intangible Assets




On April
18, 2008, the Company acquired the assets of PowerKey, the industrial vehicle
monitoring products division of International Electronics, Inc., a manufacturer
of access control and security equipment for approximately $573,000, which
includes approximately $73,000 of direct acquisition costs. The tangible assets
acquired include inventory (totaling approximately $191,000), and fixed assets
(totaling approximately $4,000).


48


Allocation
of the purchase price of the intangible assets consists of the following:
goodwill (totaling approximately $200,000), trademarks and trade names (totaling
approximately $74,000), and a customer list (totaling approximately $104,000)
resulting from the acquisition of PowerKey are carried at cost.





In
accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible
Assets”  (“SFAS 142”), the Company tests the goodwill and other
intangible assets on an annual basis in the fourth quarter or more frequently if
the Company believes indicators of impairment exist. At December 31, 2008
the Company determined that no impairment existed to the goodwill, customer list
and trademark and trade name, its acquired intangible assets. The Company also
determined that the use of indefinite lives for the customer list and trademark
and trade name remains applicable at December 31, 2008 as the Company expects to
derive future benefits from these intangible assets.




NOTE
F – LONG TERM DEBT




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, we 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 fair value of the
interest rate swap is not material to our financial condition or results of
operations. The loan was secured by all of our assets and we were in
compliance with the covenants under the term loan for the years ended December
31, 2006 and 2007. At December 31, 2007 and 2008, the outstanding balance on the
loan was $19,000 and $-0-, respectively. This term-loan expired in
2008.





NOTE
G - STOCKHOLDERS' EQUITY




[1]          Common stock:




On March
15, 2006, the Company completed the sale of 2,750,000 shares of its common stock
in a public offering. In connection therewith, the Company received net proceeds
of approximately $55,528,000.




On March
28, 2006, the Company completed the sale of 412,500 shares of its common stock
pursuant to the full exercise by the underwriters of their over-allotment option
granted in connection with the Company's public offering of its common stock. In
connection therewith, the Company received net proceeds of approximately
$8,433,000.




At the
Company’s Annual Meeting of Stockholders, held on June 9, 2006, the stockholders
of the Company approved an amendment to the Company’s Amended and Restated
Certificate of Incorporation to increase the aggregate number of authorized
shares of the Company’s common stock from 15,000,000 shares to 50,000,000
shares.


[2]          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.


[3]          Stock
options:




The
Company adopted the 1995 Stock Option Plan, pursuant to which the Company had
the right to grant options to purchase up to an aggregate of 1,250,000 shares of
common stock. The Company also adopted the 1999 Stock Option Plan and the 2007
Equity Compensation Plan, pursuant to which the Company may grant stock awards
and options to purchase up to 2,813,000 and 2,000,000 shares, respectively, of
common stock. The Company also adopted the 1999 Director Option Plan, pursuant
to which the Company may grant options to purchase up to an aggregate of 600,000
shares of common stock. The Plans are administered by the Compensation Committee
of the Company’s 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, 2006, 2007
and 2008 and changes during the years then ended, is presented
below:


49





2006
                                                    
                                                    2007
                                                    
                                                    2008Weighted
                                                    
                                                    
                                                    
                                                    Weighted
                                                    
                                                    
                                                    
                                                    WeightedAverage
                                                    
                                                    
                                                    
                                                    Average
                                                    
                                                    
                                                    
                                                    AverageShares
                                                    
                                                    Exercise
                                                      Price
                                                    
                                                    Shares
                                                    
                                                    Exercise
                                                      Price
                                                    
                                                    Shares
                                                    
                                                    Exercise
                                                      PriceOutstanding
      at beginning of year
                                                    
                                                    
                                                    2,730,000
                                                    
                                                    
                                                    $
                                                    6.94
                                                    
                                                    
                                                    
                                                    2,784,000
                                                    
                                                    
                                                    $
                                                    8.97
                                                    
                                                    
                                                    
                                                    2,761,000
                                                    
                                                    
                                                    $
                                                    9.57Granted
                                                    
                                                    
                                                    388,000
                                                    
                                                    
                                                    
                                                    21.30
                                                    
                                                    
                                                    
                                                    308,000
                                                    
                                                    
                                                    
                                                    13.37
                                                    
                                                    
                                                    
                                                    602,000
                                                    
                                                    
                                                    
                                                    6.66Exercised
                                                    
                                                    
                                                    (200,000
                                                    )
                                                    
                                                    
                                                    3.92
                                                    
                                                    
                                                    
                                                    (205,000
                                                    )
                                                    
                                                    
                                                    1.79
                                                    
                                                    
                                                    
                                                    (505,000
                                                    )
                                                    
                                                    
                                                    2.73Forfeited
                                                    
                                                    
                                                    (134,000
                                                    )
                                                    
                                                    
                                                    10.94
                                                    
                                                    
                                                    
                                                    (126,000
                                                    )
                                                    
                                                    
                                                    18.26
                                                    
                                                    
                                                    
                                                    (257,000
                                                    )
                                                    
                                                    
                                                    13.74Outstanding
      at end of year
                                                    
                                                    
                                                    2,784,000
                                                    
                                                    
                                                    $
                                                    8.97
                                                    
                                                    
                                                    
                                                    2,761,000
                                                    
                                                    
                                                    $
                                                    9.57
                                                    
                                                    
                                                    
                                                    2,601,000
                                                    
                                                    
                                                    $
                                                    9.81Exercisable
      at end of year
                                                    
                                                    
                                                    1,535,000
                                                    
                                                    
                                                    $
                                                    5.49
                                                    
                                                    
                                                    
                                                    1,677,000
                                                    
                                                    
                                                    $
                                                    7.13
                                                    
                                                    
                                                    
                                                    1,485,000
                                                    
                                                    
                                                    $
                                                    9.37





The
following table summarizes information about stock options at December 31,
2008:




Options
      Outstanding
                                        
                                        
                                        
                                        Options
      ExercisableExercise
                                          Prices
                                        
                                        Number
                                          Outstanding
                                        
                                        Weighted
                                          Average
                                          Remaining
                                          Contractual
                                          Life
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price
                                        
                                        Aggregate
                                          Intrinsic
                                          Value
                                        
                                        Number
                                          Outstanding
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
                                          Price
                                        
                                        Aggregate
                                          Intrinsic
                                          Value1.20
      - 3.81
                                        
                                        
                                        56,000
                                        
                                        2 years
                                        
                                        $
                                        2.79
                                        
                                        
                                        
                                        
                                        56,000
                                        
                                        
                                        $
                                        2.793.82
      - 10.00
                                        
                                        
                                        1,517,000
                                        
                                        6 years
                                        
                                        
                                        6.47
                                        
                                        
                                        
                                        
                                        912,000
                                        
                                        
                                        
                                        6.5610.01 –
      19.94
                                        
                                        
                                        774,000
                                        
                                        7 years
                                        
                                        
                                        12.78
                                        
                                        
                                        
                                        
                                        402,000
                                        
                                        
                                        
                                        12.8819.95 –
      25.38
                                        
                                        
                                        254,000
                                        
                                        7 years
                                        
                                        
                                        22.31
                                        
                                        
                                        
                                        
                                        115,000
                                        
                                        
                                        
                                        22.512,601,000
                                        
                                        6 years
                                        
                                        $
                                        9.81
                                        
                                        $
                                        71,000
                                        
                                        
                                        1,485,000
                                        
                                        
                                        $
                                        9.37
                                        
                                        $
                                        71,000




Number
                        Outstanding
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      Aggregate
                        Intrinsic
                        Value
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        LifeOptions
      exercisable at December 31, 2008
                      
                      
                      1,485,000
                      
                      
                      $
                      9.37
                      
                      
                      $
                      71,000
                      
                      
                      
                      4.44Vested
      and expected to vest at December 31,2008
                      
                      
                      2,601,000
                      
                      
                      $
                      9.81
                      
                      
                      $
                      71,000
                      
                      
                      
                      6.08





The
weighted average fair value of options granted during the years ended December
31, 2006, 2007 and 2008 were $11.88, $7.05 and $3.87, respectively. The total
intrinsic value of options exercised during the years ended December 31, 2006,
2007 and 2008 was $3,601,000, $1,899,000 and 1,785,000,
respectively.





A summary
of the status of the Company's non-vested stock options as of December 31, 2008
and changes during the year then ended, is presented below:





WeightedAverageNon-vested
                              Options
                            
                            
                            Grant
      Date
                              Fair
      ValueNon-vested
      at January 1, 2008
                            
                            
                            1,084,000
                            
                            
                            $
                            7.16Granted
                            
                            
                            603,000
                            
                            
                            
                            3.87Vested
                            
                            
                            (366,000
                            )
                            
                            
                            4.45Forfeited
                            
                            
                            (205,000
                            )
                            
                            
                            7.24Non-vested
      at December 31, 2008
                            
                            
                            1,116,000
                            
                            
                            $
                            5.78


50


As of
December 31, 2008, there was $6,441,000 of total unrecognized compensation costs
related to non-vested options granted under the plans. That cost is expected to
be recognized over a weighted average period of 1.72 years


[4]          Restricted Stock
Awards:


In 2006,
Company began granting restricted stock to employees, whereby the employees are
restricted from transfering the shares until they are vested. The fair value of
each share is based on the Company’s closing stock price on the date of the
grant. A summary of the non-vested shares for the years ended December 31, 2006,
2007 and 2008 is as follows:




WeightedAverageNon-vested
                                                          Shares
                                                        
                                                        
                                                        Grant
      Date
                                                          Fair
      ValueNon-vested
      at January 1, 2006
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        -Granted
                                                        
                                                        
                                                        92,000
                                                        
                                                        
                                                        
                                                        18.98Vested
                                                        
                                                        
                                                        -Forfeited
                                                        
                                                        
                                                        (1,000
                                                        )
                                                        
                                                        
                                                        18.89Non-vested
      at December 31, 2006
                                                        
                                                        
                                                        91,000
                                                        
                                                        
                                                        $
                                                        18.99


Non-vested
      at January 1, 2007
                                                  
                                                  
                                                  91,000
                                                  
                                                  
                                                  $
                                                  18.99Granted
                                                  
                                                  
                                                  20,000
                                                  
                                                  
                                                  
                                                  13.85Vested
                                                  
                                                  
                                                  (45,000
                                                  )
                                                  
                                                  
                                                  18.99Forfeited
                                                  
                                                  
                                                  (1,000
                                                  )
                                                  
                                                  
                                                  18.89Non-vested
      at December 31, 2007
                                                  
                                                  
                                                  65,000
                                                  
                                                  
                                                  $
                                                  17.40


Non-vested
      at January 1, 2008
                                      
                                      
                                      65,000
                                      
                                      
                                      $
                                      17.40Granted
                                      
                                      
                                      21,000
                                      
                                      
                                      
                                      7.41Vested
                                      
                                      
                                      (50,000
                                      )
                                      
                                      
                                      17.96Forfeited
                                      
                                      
                                      (5,000
                                      )
                                      
                                      
                                      18.89Non-vested
      at December 31, 2008
                                      
                                      
                                      31,000
                                      
                                      
                                      $
                                      9.49





For the
year ended December 31, 2008, the Company recorded a $513,000 stock based
compensation expense in connection with the restricted stock grant. As of
December 31, 2008, there was $168,000 of total unrecognized compensation cost
related to non-vested shares. That cost is expected to be recognized over the
next two years.


[5]          Performance
Shares:





In June
2006, the Compensation Committee granted 85,000 performance shares to key
employees pursuant to the 1999 Stock Option Plan. The issuance of the shares of
the Company’s common stock underlying the performance shares is subject to the
achievement of revenue and gross margin levels during a two-year performance
period. If the performance criterion is not met during that two year period,
then the performance shares will not vest and will automatically be returned to
the Plan. If the performance trigger is met, then the shares will be issued to
the employees. For the year ended December 31, 2006, performance criteria was
met for 31,875 shares which were subsequently issued in 2007 and 10,625
performance shares were returned to the plan. For the year ended December 31,
2006, the Company recorded $602,000 of stock based compensation expense in
connection with the performance shares. For the year ended December 31, 2007,
the performance criteria was not met, and 42,500 shares were returned to the
plan.


51


In
January 2007, the Compensation Committee granted 62,500 performance shares to
key employees pursuant to the 1999 Stock Option Plan. The issuance of the shares
of the Company’s common stock underlying the performance shares is subject to
the achievement of revenue and gross margin levels during a two-year performance
period. If the performance criterion is not met during that two year period,
then the performance shares will not vest and will automatically be returned to
the Plan. If the performance trigger is met, then the shares will be issued to
the employees. For the year ended December 31, 2007 and 2008, the performance
criteria were not met, and 62,500 shares were returned to the plan.





In
January 2008, the Compensation Committee granted 52,500 performance shares to
key employees pursuant to the 1999 Stock Option Plan. The
issuance of the shares of the Company’s common stock underlying the performance
shares is subject to the achievement of revenue levels during a one-year
performance period. If the performance criterion is not met during that one-year
period, then the performance shares will not vest and will automatically be
returned to the Plan. If the performance trigger is met, then the shares will be
issued to the employees. For the year ended December 31, 2008, the performance
criteria was met for 39,375 shares which were issued in 2009 and 13,125 shares
were returned to the plan. For the year ended December 31, 2008, the Company
recorded $292,000 of stock based compensation expense in connection with the
performance shares.


[6]          Stock repurchase
program:




On May 3,
2007, the Company announced that its Board of Directors had authorized the
repurchase of issued and outstanding shares of our common stock having an
aggregate value of up to $10,000,000 pursuant to a share repurchase program
established under Rule 10b-18 of the Securities Exchange Act of 1934, as
amended. The amount and timing of such repurchases are dependent upon the price
and availability of shares, general market conditions and the availability of
cash, as determined in the discretion of our management. The repurchases are
funded from the Company’s working capital. The Company’s share repurchase
program does not have an expiration date, and it may discontinue or suspend the
share repurchase program at any time. All shares of common stock repurchased
under our share repurchase program are held as treasury stock. During 2008, the
Company purchased approximately 592,000 shares in open market transactions under
the program at an average cost of $7.41 per share. As of December 31, 2008 the
Company repurchased shares having an aggregate value of $9,970,000.


[7]          Shares
withheld:
 
 During
the year ended December 31, 2007, 22,000 shares of the Company’s common
stock were withheld to satisfy tax withholding obligations in the amount of
$344,000, in connection with the vesting of restricted and performance shares.
During the year ended December 31, 2008, 51,000 shares of the Company’s common stock
were withheld to satisfy tax withholding obligations and to pay the exercise
price in the aggregate amount of $424,000 in connection with the vesting of
restricted shares and the exercise of stock options.




NOTE H- INCOME
TAXES





At
December 31, 2008, the Company has an aggregate net operating loss carryforward
of approximately $27,738,000 for United States federal income tax
purposes of which $7,507,000 relates to stock options for which there were
no compensation charges for financial reporting. At December 31, 2008, the
Company had an aggregate net operating loss carryforward of approximately
$18,817,000 for state income tax purposes. Accordingly, any future tax benefit
upon utilization of that net operating loss would be credited to additional
paid-in capital.  The Company has not included this amount in deferred tax
assets.  Substantially all of the net operating loss carryforwards expire
from 2020 through 2028 for federal purposes and from 2009 through 2015 for state
purposes.  The net operating loss carryforwards maybe limited to use in any
particular year based on Internal Revenue Code sections related to change of
ownership restrictions.  In addition, future stock issuances may subject
the Company to annual limitiations on the utilization of its net operating loss
carryforwards under the same Internal Revenue Code provision.





The
Company has a deferred tax asset of approximately $8,332,000 and $8,867,000 at
December 31, 2007 and 2008, respectively.  The increase in the deferred tax
asset is primarily attributed to $1,203,000 of stock based compensation
expensed during 2008 in accordance with SFAS 123R, and operating loss for the
year.  The Company had other temporary differences between financial and
tax reporting for fixed asset depreciation expense and unrealized
losses.





The
Company has elected to use the incremental approach for financial statement
purposes. Under which the Company will utilize net operating loss carry forwards
before utilizing excess benefit from exercise of options during the current
year.  The Company has provided a valuation allowance against the full
amount of its deferred tax asset, since the likelihood of realization cannot be
determined.  The valuation allowance decreased in 2006 by $150,000 and
increased in 2007 and 2008 by $2,040,000 and $535,000 respectively.




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





Year
      Ended December 31,2006
                      
                      
                      2007
                      
                      
                      2008Income
      tax expense (benefit) at the federal statutory rate
                      
                      $
                      (549,000
                      )
                      
                      $
                      (2,496,000
                      )
                      
                      $
                      (1,419,000
                      )State
      and local income taxes, net of effect on federal taxes
                      
                      
                      (81,000
                      )
                      
                      
                      (436,000
                      )
                      
                      
                      (248,000
                      )Increase
      (decrease) in valuation allowance
                      
                      
                      (150,000
                      )
                      
                      
                      2,040,000
                      
                      
                      
                      535,000Fixed
      assets accumulated book/tax difference - prior year
                      
                      
                      117,000
                      
                      
                      
                      —
                      
                      
                      
                      (196,000
                      )ISO
      grants and restricted shares
                      
                      
                      599,000
                      
                      
                      
                      837,000
                      
                      
                      
                      990,000Stock
      options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Expiration
      of state net operating loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      254,000Other
                      
                      
                      64,000
                      
                      
                      
                      55,000
                      
                      
                      
                      84,000$
                      0
                      
                      
                      $
                      0
                      
                      
                      $
                      0


52


NOTE
I - Fair Value Measurements




On
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) for financial assets and liabilities. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. This standard does not require any new fair value measurements,
but rather applies to all other accounting pronouncements that require or permit
fair value measures. The adoption of SFAS No. 157 did not significantly
change our valuation of assets or liabilities. In February 2008, the FASB
issued Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement
No. 157.” This FSP delays the effective date of SFAS No. 157 for all
non-recurring nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008.




SFAS
No. 157 utilizes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The
following is a brief description of those levels:




§
            Level
      1: Unadjusted quoted prices in active markets for identical assets or
      liabilities.





§
              Level
      2: Inputs other than quoted prices that are observable for the asset or
      liability, either directly or indirectly. These include quoted prices for
      similar assets or liabilities in active markets and quoted prices for
      identical or similar assets or liabilities in markets that are not
      active.§





§
            Level
      3: Unobservable inputs that reflect the reporting entity’s own
      assumptions.







The
Company’s implementation of FAS 157 for financial assets and liabilities on
January 1, 2008, had no effect on its existing fair-value measurement
practices but requires disclosure of a fair-value hierarchy of inputs the
Company uses to value an asset or a liability.  The following table
summarizes the fair values of the Company’s investments in
the balance sheet:




Balance at
                          December
      31,
                        
                        
                        Basis of Fair Value Measurements2008
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3Assets:Investments –
      short term
                        
                        $
                        8,550,000
                        
                        
                        $
                        8,550,000
                        
                        
                        $
                        —
                        
                        
                        $
                        —Investments –
      long term
                        
                        
                        34,911,000
                        
                        
                        
                        14,824,000
                        
                        
                        
                        —
                        
                        
                        
                        20,087,000$
                        43,461,000
                        
                        
                        $
                        23,374,000
                        
                        
                        $
                        —
                        
                        
                        $
                        20,087,000





The table
below includes a roll forward of the Company’s investments in ARS and ARSR from
January 1, 2008 to December 31, 2008:
 
 Significant
                          Other
                          Observable
                          Inputs
                          (Level
      2)
                        
                        
                        Significant
                          Unobservable
                          Inputs
                          (Level 3)Fair
      value, January 1, 2008
                        
                        $
                        25,125,000
                        
                        
                        $
                        —Purchases
                        
                        
                        —
                        
                        
                        
                        —Sales
                        
                        
                        (4,700,000
                        )
                        
                        
                        —Transfers
      (out) in
                        
                        
                        (20,425,000
                        )
                        
                        
                        20,425,000Purchase
      of ARSR
                        
                        
                        —
                        
                        
                        
                        1,970,000Unrealized
      loss included in statement of operations
                        
                        
                        —
                        
                        
                        
                        (2,308,000
                        )Fair
      value, December 31, 2008
                        
                        $
                        —
                        
                        
                        $
                        20,087,000Change
      in unrealized loss
                        
                        
                        
                        
                        
                        $
                        ( 338,000
                        )


NOTE
J - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS


[1]          Operating
leases:




The
Company is obligated under operating leases for its facilities and offices. The
Company's operating leases provide for minimum annual rental payments as
follows:





Year
      EndingDecember
      31,2009
                          
                          
                          455,0002010
                          
                          
                          108,000$
                          563,000





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 $396,000, $389,000 and $568,000 for
the years ended December 31, 2006, 2007 and 2008, respectively.


53


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 $155,000 and
$89,000 for the years ended December 31, 2006 and 2007, respectively reflects
rent received by the Company under the sublease.   In July 2007, the
Company released the sub lessee from the sublease and reassumed the
space.





In
February 2007, we began leasing space in Edgewater, NJ. The lease expires in
February 2010 and the rent is currently $1,995 per month.





In March
2007, we began leasing office space in Suwanee, Georgia. The current 6 month
renewal option lease extension expired in September 2008 and has subsequently
been renewed until March 2009. The rent is currently $1,120 per
month.




In
September 2007, we began leasing warehouse space in Clifton, NJ. The lease
expired in September 2008 and automatically renews on an annual basis. The rent
is currently $800 per month.


[2]          Concentration of
customers:





Two
customers accounted for 61% and 14%, respectively, of the Company’s revenue
during the year ended December 31, 2006. One of these customers accounted for
47% of the Company’s accounts receivable and unbilled receivables at December
31, 2006.





Three
customers accounted for 37%, 32% and 10%, respectively, of the Company’s revenue
during the year ended December 31, 2007. Two of these customers accounted for
50% and 10%, respectively, of the Company’s accounts receivables and unbilled
receivables at December 31, 2007.





Two
customers accounted for 42% and 41%, respectively, of the Company’s revenue
during the year ended December 31, 2008. These two customers accounted for 28%
and 48%, respectively, of the Company’s accounts receivables and unbilled
receivables at December 31, 2008.


[3]          Officers
bonus:




The Board
has awarded bonuses of approximately $189,000 and $381,000 to certain officers
for the years ended December 31, 2007 and 2008, respectively. The bonuses are
based on certain operating criteria and are in addition to their base
salaries.




NOTE
K - Comprehensive Loss





Comprehensive
loss includes net loss and unrealized losses on available-for-sale investments.
Cumulative unrealized gains and losses on available-for-sale investments
are reflected as accumulated other comprehensive loss in stockholders’ equity on
the Company’s balance sheet.





For
the year ended December 31, 2006, comprehensive loss was $1,604,000
which includes a net loss of $1,616,000 and an unrealized gain on
available-for-sale investments of $12,000.





For
the year ended December 31, 2007, comprehensive loss was $7,342,000
which includes a net loss of $7,341,000 and an unrealized loss on
available-for-sale investments of $1,000.





For
the year ended December 31, 2008, comprehensive loss was $4,140,000
which includes a net loss of $4,175,000 and an unrealized gain on
available-for-sale investments of $35,000.





NOTE
L - QUARTERLY SELECTED FINANCIAL DATA (UNAUDITED)




The
following tables contain selected quarterly financial data for each quarter for
the years ended December 31, 2007 and 2008. 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 period
are not necessarily indicative of results for any future
periods.


54





Year Ended December 31, 20071st Quarter
                                        
                                        
                                        2nd Quarter
                                        
                                        
                                        3rd Quarter
                                        
                                        
                                        4th QuarterRevenue:Products
                                        
                                        $
                                        2,310,000
                                        
                                        
                                        $
                                        705,000
                                        
                                        
                                        $
                                        5,466,000
                                        
                                        
                                        $
                                        2,556,000Services
                                        
                                        
                                        2,311,000
                                        
                                        
                                        
                                        1,518,000
                                        
                                        
                                        
                                        1,052,000
                                        
                                        
                                        
                                        1,165,0004,621,000
                                        
                                        
                                        
                                        2,223,000
                                        
                                        
                                        
                                        6,518,000
                                        
                                        
                                        
                                        3,721,000Cost
      of revenue:Cost
      of products
                                        
                                        
                                        1,146,000
                                        
                                        
                                        
                                        411,000
                                        
                                        
                                        
                                        2,725,000
                                        
                                        
                                        
                                        1,577,000Cost
      of services
                                        
                                        
                                        1,233,000
                                        
                                        
                                        
                                        785,000
                                        
                                        
                                        
                                        546,000
                                        
                                        
                                        
                                        506,0002,379,000
                                        
                                        
                                        
                                        1,196,000
                                        
                                        
                                        
                                        3,271,000
                                        
                                        
                                        
                                        2,083,000Gross
      Profit
                                        
                                        
                                        2,242,000
                                        
                                        
                                        
                                        1,027,000
                                        
                                        
                                        
                                        3,247,000
                                        
                                        
                                        
                                        1,638,000Selling,
      general and administrative expense
                                        
                                        
                                        3,824,000
                                        
                                        
                                        
                                        3,880,000
                                        
                                        
                                        
                                        4,004,000
                                        
                                        
                                        
                                        4,255,000Research
      and development expense
                                        
                                        
                                        706,000
                                        
                                        
                                        
                                        594,000
                                        
                                        
                                        
                                        828,000
                                        
                                        
                                        
                                        721,000Other
      income and (expense)
                                        
                                        
                                        826,000
                                        
                                        
                                        
                                        803,000
                                        
                                        
                                        
                                        795,000
                                        
                                        
                                        
                                        893,000Net
      loss
                                        
                                        $
                                        (1,462,000
                                        )
                                        
                                        $
                                        (2,644,000
                                        )
                                        
                                        $
                                        (790,000
                                        )
                                        
                                        $
                                        (2,445,000
                                        )Loss
      per share – basic and diluted
                                        
                                        $
                                        (0.13
                                        )
                                        
                                        $
                                        (0.23
                                        )
                                        
                                        $
                                        (0.07
                                        )
                                        
                                        $
                                        (0.22
                                        )


55





Year Ended December 31, 20081st Quarter
                                        
                                        
                                        2nd Quarter
                                        
                                        
                                        3rd Quarter
                                        
                                        
                                        4th QuarterRevenue:Products
                                        
                                        $
                                        3,253,000
                                        
                                        
                                        $
                                        3,471,000
                                        
                                        
                                        $
                                        7,360,000
                                        
                                        
                                        $
                                        5,988,000Services
                                        
                                        
                                        1,075,000
                                        
                                        
                                        
                                        1,989,000
                                        
                                        
                                        
                                        1,977,000
                                        
                                        
                                        
                                        1,933,0004,328,000
                                        
                                        
                                        
                                        5,460,000
                                        
                                        
                                        
                                        9,337,000
                                        
                                        
                                        
                                        7,921,000Cost
      of revenue:Cost
      of products
                                        
                                        
                                        1,536,000
                                        
                                        
                                        
                                        1,678,000
                                        
                                        
                                        
                                        3,622,000
                                        
                                        
                                        
                                        3,160,000Cost
      of services
                                        
                                        
                                        680,000
                                        
                                        
                                        
                                        917,000
                                        
                                        
                                        
                                        948,000
                                        
                                        
                                        
                                        925,0002,216,000
                                        
                                        
                                        
                                        2,595,000
                                        
                                        
                                        
                                        4,570,000
                                        
                                        
                                        
                                        4,085,000Gross
      profit
                                        
                                        
                                        2,112,000
                                        
                                        
                                        
                                        2,865,000
                                        
                                        
                                        
                                        4,767,000
                                        
                                        
                                        
                                        3,836,000Selling,
      general and administrative expense
                                        
                                        
                                        4,261,000
                                        
                                        
                                        
                                        4,278,000
                                        
                                        
                                        
                                        3,910,000
                                        
                                        
                                        
                                        4,311,000Research
      and development expense
                                        
                                        
                                        711,000
                                        
                                        
                                        
                                        708,000
                                        
                                        
                                        
                                        672,000
                                        
                                        
                                        
                                        792,000Other
      income , net
                                        
                                        
                                        826,000
                                        
                                        
                                        
                                        593,000
                                        
                                        
                                        
                                        434,000
                                        
                                        
                                        
                                        35,000Net
      (loss) income
                                        
                                        $
                                        (2,034,000
                                        )
                                        
                                        $
                                        (1,528,000
                                        )
                                        
                                        $
                                        619,000
                                        
                                        
                                        $
                                        (1,232,000
                                        )(Loss)
      income per share – basic and diluted
                                        
                                        $
                                        (0.19
                                        )
                                        
                                        $
                                        (0.14
                                        )
                                        
                                        $
                                        0.06
                                        
                                        
                                        $
                                        (0.11
                                        )





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, 2008, 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 of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2008, 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 as of December 31, 2008 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 and that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.




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) for us. 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, 2008.


56


Eisner
LLP, the independent registered accounting firm that audited our consolidated
financial statements included in this Annual Report on Form 10-K, has also
audited our internal control over financial reporting as of December 31,
2008,  and expresses unqualified opinions on our internal control over
financial reporting as of December 31, 2008, is included
below.




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of
Directors and Stockholders of
 I.D.
Systems, Inc.
  We have
audited I.D. Systems, Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). I.D. Systems, Inc.'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,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, 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, ID Systems, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated Framework issued by the
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, 2007 and 2008, 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, 2008, and our report dated March 12, 2009 expressed an
unqualified opinion thereon, and included an explanatory paragraph with respect
to the Company’s election to adopt Statement of Financial Accounting Standard
No. 159, “The Fair Value Option for Financial Assets and
Liabilities.”
  /s/
Eisner LLP
  New York,
New York
 March 12,
2009




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.


57


PART
III.





Item 10.   Directors, Executive Officers and
Corporate Governance




The
registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2008 annual meeting of stockholders that is
responsive to the information required with respect to this Item 10; provided , however , that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 10 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the Securities and Exchange
      Commission prior to the filing of such definitive proxy statement;
      or•
            If
      such proxy statement is not mailed to stockholders and filed with the
      Securities and Exchange Commission within 120 days after the end of the
      registrant’s most recently completed fiscal year, in which case the
      registrant will provide such information by means of an amendment to this
      Annual Report on Form 10-K.




Item 11.   Executive
Compensation




The
registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2008 annual meeting of stockholders that is
responsive to the information required with respect to this Item 11; provided , however , that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 11 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the Securities and Exchange
      Commission prior to the filing of such definitive proxy statement;
      or•
            If
      such proxy statement is not mailed to stockholders and filed with the
      Securities and Exchange Commission within 120 days after the end of the
      registrant’s most recently completed fiscal year, in which case the
      registrant will provide such information by means of an amendment to this
      Annual Report on Form 10-K.




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




The
registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2008 annual meeting of stockholders that is
responsive to the information required with respect to this Item 12; provided , however , that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 12 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the Securities and Exchange
      Commission prior to the filing of such definitive proxy statement;
      or•
            If
      such proxy statement is not mailed to stockholders and filed with the
      Securities and Exchange Commission within 120 days after the end of the
      registrant’s most recently completed fiscal year, in which case the
      registrant will provide such information by means of an amendment to this
      Annual Report on Form 10-K.


58


Item 13.   Certain Relationships and Related
Transactions, and Director Independence




The
registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2008 annual meeting of stockholders that is
responsive to the information required with respect to this Item 13; provided , however , that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 13 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the Securities and Exchange
      Commission prior to the filing of such definitive proxy statement;
      or•
            If
      such proxy statement is not mailed to stockholders and filed with the
      Securities and Exchange Commission within 120 days after the end of the
      registrant’s most recently completed fiscal year, in which case the
      registrant will provide such information by means of an amendment to this
      Annual Report on Form 10-K.





Item 14.   Principal Accountant Fees and
Services




The
registrant incorporates by reference herein information to be set forth in its
definitive proxy statement for its 2008 annual meeting of stockholders that is
responsive to the information required with respect to this Item 14; provided , however , that such
information shall not be incorporated herein:




•
            if
      the information that is responsive to the information required with
      respect to this Item 14 is provided by means of an amendment to this
      Annual Report on Form 10-K filed with the Securities and Exchange
      Commission prior to the filing of such definitive proxy statement;
      or•
            If
      such proxy statement is not mailed to stockholders and filed with the
      Securities and Exchange Commission within 120 days after the end of the
      registrant’s most recently completed fiscal year, in which case the
      registrant will provide such information by means of an amendment to this
      Annual Report on Form 10-K.


59




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, 2007 and 2008




Statements
of Operations for the Years Ended December 31, 2006, 2007 and 2008




Statements
of Changes in Stockholders’ Equity for the Years Ended December 31, 2006, 2007
and 2008




Statements
of Cash Flows for the Years Ended December 31, 2006, 2007 and 2008




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.




3.1
            Amended
      and Restated Certificate of Incorporation of I.D. Systems, Inc. as
      amended.




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
                1995
      Non-Qualified Stock Option Plance (incorporated by reference to I.D.
      Systems Inc.’s Form SB-2
      filed with the SEC on June 30, 1999)10.2
                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).




10.3
                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).10.4
                2007
      Equity Compensation Plan (incorporated by reference to I.D. Systems,
      Inc.’s Form S-8 filed with the SEC on July 19, 2007).10.5
                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.


60


(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.


61




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:March 16,
2009




I.D.
      SYSTEMS, INC.By:
                  /s/
      Jeffrey M. JagidJeffrey
      M. JagidChief
      Executive Officer(Principal
      Executive Officer)By:
                  /s/
      Ned MavrommatisNed
      MavrommatisChief
      Financial Officer(Principal
      Financial and Accounting
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. JagidJeffrey
      M. Jagid
                        
                        Chief
      Executive Officer and Director
                        
                        March 16, 2009(Principal
      Executive Officer)/s/
      Kenneth S. EhrmanKenneth
      S. Ehrman
                        
                        President,
      Chief Operating Office and Director
                        
                        March 16, 2009/s/
      Ned MavrommatisNed
      Mavrommatis
                        
                        Chief
      Financial Officer (Principal Financial
                        
                        March 16, 2009and
      Accounting Officer)/s/
      Lawrence BursteinLawrence
      Burstein
                        
                        Director
                        
                        March 16, 2009/s/
      Harold D. Copperman
                        
                        Director
                        
                        March 16, 2009Harold
      D. Copperman/s/
      Michael Monaco
                        
                        Director
                        
                        March 16, 2009Michael
      Monaco


62





I.D.
SYSTEMS, INC.


SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS


(In
000’s)





Charged toBalance at
                            
                            (Write-off)
                            
                            Balance atBeginning
                            
                            to Costs and
                            
                            End ofDescription
                            
                            Period
                            
                            Expenses
                            
                            PeriodInventory
      reserveYear
      ended December 31, 2008
                            
                            
                            $
                            642
                            
                            
                            $
                            126
                            
                            
                            $
                            748Year
      ended December 31, 2007
                            
                            
                            $
                            125
                            
                            
                            $
                            517
                            
                            
                            $
                            642Year
      ended December 31, 2006
                            
                            
                            $
                            305
                            
                            
                            $
                            (180
                            )
                            
                            $
                            125





Charged toBalance at
                            
                            (Write-off )
                            
                            Balance atBeginning
                            
                            to Costs and
                            
                            End ofDescription
                            
                            Period
                            
                            Expenses
                            
                            PeriodAllowance for doubtful accountsYear
      ended December 31, 2008
                            
                            
                            $
                            239
                            
                            
                            $
                            —
                            
                            
                            $
                            239Year
      ended December 31, 2007
                            
                            
                            $
                            239
                            
                            
                            $
                            —
                            
                            
                            $
                            239Year
      ended December 31, 2006
                            
                            
                            $
                            28
                            
                            
                            $
                            211
                            
                            
                            $
                            239


63