**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**




**FORM
      10-K**


(Mark
      One)




x  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934** for the
      fiscal year ended December 31, 2007.





o  **TRANSITION
      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 o       Accelerated
      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 $133.4 million, computed by
      reference to the price at which the Common Stock was last sold on June 29,
      2007,
      as reported on the Nasdaq National Market.




The
      number of shares of Common Stock outstanding as of March 3, 2008 was 10,855,000
      shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Document
            
            Part
                of Form 10-KProxy
                Statement For 2007 Annual Meeting of Stockholders
            
            Part
                III










**I.D.
      SYSTEMS, INC.**




**TABLE
      OF CONTENTS**




**Page****PART
                I.**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            15Item
                1B.
            Unresolved
                Staff Comments
            26Item
                2.
            Properties
            26Item
                3.
            Legal
                Proceedings
            26Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            26**PART
                II.**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            27Item
                6.
            Selected
                Financial Data
            29Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            30Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            40Item
                8.
            Financial
                Statement and Supplementary Data
            41Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            60Item
                9A.
            Controls
                and Procedures
            60Item
                9B.
            Other
                Information
            62**PART
                III.**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            63Item
                11.
            Executive
                Compensation
            63Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            63Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            64Item
                14.
            Principal
                Accountant Fees and Services
            64**PART
                IV.**Item
                15.
            Exhibits,
                Financial Statement Schedules
            65










**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®,  MACTM,
      Vehicle Asset Communicator®, Battery ChaMPTM, ChaMPTM, Wireless Asset Net®,
      AvRampTM, Opti-KanTM, Line Asset CommunicatorTM and WiFreeTM.





**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 2007,
      our
      top customers are:




· U.S.
                Postal Service;




·  
        Wal-Mart Stores, Inc.




·  
        Ford Motor Company;


1





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 graphical user
                interface
                that utilizes client-server architecture and a
                database.




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




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




***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.




2




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.





3




***Rental
      Fleet Management***




Our
      solution for rental fleet management is designed both to enhance the consumer’s
      rental experience and benefit the rental company by providing information that
      can be used to increase revenues, reduce costs and improve customer service.
      Our
      system automatically uploads vehicle identification number, mileage and fuel
      data as a vehicle enters and exits the rental lot, which can significantly
      expedite the rental 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 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;




4




·
            is
                compatible with most existing facility access security
                systems;




·
            generates
                paperless electronic safety checklists via a built-in display and
                keypad;




·
            wirelessly
                and automatically uploads and downloads data to and from other system
                components;




·
            performs
                monitoring 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.* Each of
      our Wireless Asset Net system deployments requires 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.





5




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 the Wireless Asset Managers. Our server
      software:




·
            is
                a set of Windows services;




·
            automatically
                processes data between our Wireless Asset Managers 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, Windows-based interface. The console is deployed in
      a
      standard client-server network architecture or as a thin-client. The console
      interfaces only with the database, not directly with our communication
      infrastructure or on-asset hardware, which restricts access to, and limits
      corruption of, system information and minimizes network bandwidth usage. An
      unlimited number of consoles can be used on a network at any given
      time.




The
      Wireless Asset Net console:




·
            shows
                the location, status and inventory of vehicles - in real time and
                historically - in each area of a
                facility;




·
            allows
                real-time, two-way text communications, including broadcast text
                paging to
                all operators simultaneously;




6




·
            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




7




·
            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.




*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 on a limited basis, both as a stand-alone
      service to study the potential benefits of implementing a wireless fleet
      management system, and as part of the system implementation itself.




**Sales
      and Marketing**




Our
      sales
      and marketing objective is to achieve broad market penetration, with an emphasis
      both on expanding business opportunities with existing customers and on securing
      new customers. As of March 3, 2008, we had 26 employees, including two based
      in
      Germany, devoted to sales and marketing.




8




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




We
      sell
      our systems to both executive and division-level management. Typically, our
      initial system deployment serves as a basis for potential expansion across
      the
      customer’s organization. Ford, Walgreens, the U.S. Postal Service, 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, 2007, 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, 2007, we had deployed our system at 8 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, 2007, we had deployed our system at 80
                facilities.




·
            Beginning
                in 2003, Target utilized our system on a limited number of vehicles
                at one
                of its facilities. As of December 31, 2007, 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 deployed our system in 20 additional
                facilities.




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. Customers that
      have
      implemented our system include:




9




3M
                Company
            Nissan
                North America, Inc.Advanced
                Technology Institute
            Northrop
                Grumman CorporationAeroVironment,
                Inc.
            Nucor
                CompanyAmerican
                Axle & Manufacturing, Inc.
            Premier
                Manufacturing Support Services, Inc.Archer
                Daniels Midland Company
            Rite
                Aid CorporationAvis
                Rent A Car System, Inc.
            Target
                CorporationCanadian
                Tire Corporation, Limited
            Toyota
                Motor Manufacturing Kentucky, Inc.DaimlerChrysler
                Corp.
            Tyler
                Pipe CompanyDeere
                & Company
            U.S.
              Department of DefenseFMC
                Technologies
            U.S.
                Department of Homeland SecurityFord
                Motor Company
            U.S.
                NavyKellogg
                Company
            U.S.
                Postal ServiceGeneral
                Dynamics Corporation
            Walgreen
                Co.Golub
                Corporation
            Wal-Mart
                Stores, Inc.Longview
                Fibre Company
            Weyerhauser
                CompanyMeijer,
                Inc.
            WinCo
                Foods, Inc.




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. During the year ended December 31, 2006, the U.S. Postal Service
      and Wal-Mart Stores, Inc. accounted for 61% and 14% 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, summarized below, illustrates this
      effort.




·
            In
                1995, under a U.S. Postal Service research and development contract,
                we
                finalized the development of our patented RFID-based asset tracking
                system
                and created a product called the FlexTag designed to track test packages
                through the U.S. mail distribution
                system.




·
            In
                1997, we deployed the FlexTag test mail tracking system across several
                U.S. Postal Service facilities and, at the same time, began developing
                a
                related system for tracking and managing the industrial trucks that
                operate in those facilities.




·
            In
                1998 and 1999, we deployed early versions of our Wireless Asset Net
                industrial vehicle management system at certain U.S. Postal Service
                facilities.




·
            In
                2003, we introduced an upgraded version of the Wireless Asset Net
                system at a U.S. Postal Service facility in Buffalo, New
                York.




·
            In
                2004, the U.S. Postal Service solicited bids for deployment of an
                enterprise-wide Powered Industrial Vehicle Management System (“PIVMS”),
                and subsequently awarded us a national contract to deploy our Wireless
                Asset Net technology as its PIVMS at up to 460 U.S. Postal Service
                facilities across the United States. As of December 31, 2007, we
                had
                implemented the PIVMS in 80 U.S. Postal Service
                facilities.




·
            In
                2006, the U.S. Postal Service awarded us a development contract to
                integrate automated material flow management and human resource planning
                capabilities into the PIVMS.




10




**Competition**




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




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




In
      each
      of our markets, we encounter different competitors due to the competitive
      dynamics of each segment. In the industrial fleet management and security
      market, the wireless control, tracking and management of enterprise assets
      is
      relatively new. Although we are not aware of any current competitors that
      provide the precise capabilities of our systems, we are aware of competitors
      that offer subsets of our system capabilities or alternate approaches to the
      needs our products address. Those companies include both emerging companies
      with
      limited operating histories, such as 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
      March 3, 2008, including our executive vice president of engineering, our
      research and development group was comprised of 17 full-time employees. These
      employees have expertise in areas such as software and hardware design, wireless
      communications and mechanical and electrical engineering.




11




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.




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.




We
      spent
      $2.8 million, $2.6 million and $1.6 million for research and development during
      years ended December 31, 2007, 2006 and 2005, 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 four U.S. patents and twenty-four 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), and our U.S. patent that covers our
      Wireless Asset Net system (U.S. Patent Number 7,171,381) expires on December
      20,
      2019.




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.




12




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, South Korea,
      Australia and Mexico covering our Wireless Asset Net system. We also have patent
      applications for our Wireless Asset Net system pending in Japan 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®,  MACTM, Vehicle Asset Communicator®, Battery ChaMPTM,
      ChaMPTM, Wireless Asset Net®, AvRampTM, Opti-KanTM, Line Asset CommunicatorTM and
      WiFreeTM.




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




·
            obtain
                licenses to continue offering such products without substantial
                reengineering;




·
            reengineer
                our products successfully to avoid
                infringement;




·
            obtain
                licenses on commercially reasonable terms, if at all;
                or




·
            litigate
                an alleged infringement successfully or settle without substantial
                expense
                and damage awards.




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




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




13




**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.




14





**Employees**




As
      of
      March 3, 2008, we had 99 full-time employees, of which 33 are engaged in
      customer service, 17 in product development (which includes engineering), 9
      in
      operations, 26 in sales and marketing, and 14 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.




**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 and $7.3 million for the
      years
      ended December 31, 2006, and 2007, respectively, and have incurred additional
      net losses since inception. At December 31, 2007, we had an accumulated deficit
      of approximately $19.5 million. During 2007, our revenues decreased and our
      expenses increased, primarily as a result of an increase in payroll and related
      expenses due to the hiring of additional staff within our sales and customer
      service departments. 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 2007, 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, 2007, the U.S. Postal Service, Wal-Mart Stores,
      Inc.
      and Ford Motor Company accounted for 37%, 32% and 10% of our revenues,
      respectively. During the year ended December 31, 2006, the U.S. Postal Service
      and Wal-Mart Stores, Inc. accounted for 61% and 14% 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.




15




**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. During the fiscal year ended December 31, 2007, our revenues
      declined by 30.9% from the prior year. If the market for our products and
      services does not redevelop or 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.**




We
      have
      grown our business rapidly over the past few years. Between the fiscal years
      ended December 31, 2001 and 2006, our revenues increased at a compounded annual
      growth rate of 93%, and between fiscal years ended December 31, 2006 and 2007,
      our revenues decreased by 30.9%. During 2007, 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 from 2001 to 2006 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




·
            effectively
                manage and expand our relationships with customers, subcontractors
                and
                other third parties responsible for manufacturing and delivering
                our
                products.




16




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




We
      expect
      that customers who utilize our solutions will do so as part of a large-scale
      deployment of these solutions across multiple or all divisions of their
      organizations. A customer’s decision to deploy our solutions throughout its
      organization will involve a significant commitment of its resources.
      Accordingly, initial implementations may precede any decision to deploy our
      solutions enterprise-wide. Throughout this sales cycle, we may spend
      considerable time and expense educating and providing information to prospective
      customers about the benefits of our solutions.




The
      timing of the deployment of our solutions may vary widely and will depend on
      the
      specific deployment plan of each customer, the complexity of the customer’s
      organization and the difficulty of such deployment. Customers with substantial
      or complex organizations may deploy our solutions in large increments on a
      periodic basis. Accordingly, we may receive purchase orders for significant
      dollar amounts on an irregular and unpredictable basis. Because of our limited
      operating history and the nature of our business, we cannot predict the timing
      or size of these sales and deployment cycles. Long sales cycles, as well as
      our
      expectation that customers will tend to place large orders sporadically with
      short 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.




17




**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




·
            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.




18


**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. For example, during
      the
      year ended December 31, 2007, we relied on Flextronics International Ltd. for
      the purchase of approximately 47% of our components and finished goods. Any
      quality or performance failures by our subcontractors or changes in their
      financial or business condition could disrupt our ability to supply quality
      products to our customers in a timely manner. If we are unable to fulfill orders
      from our customers in a timely manner, we could experience business
      interruption, increased costs, damage to our reputation and loss of our
      customers. In addition, we may be subject to claims from our customers for
      failing to meet our contractual obligations. Although we have several sources
      for production, the inability to provide our products to our customers in a
      timely manner could result in the loss of customers and our revenues could
      be
      materially reduced. In addition, there is great competition for the most
      qualified and competent subcontractors. If we are unable to hire qualified
      subcontractors, the quality of our services and products could decline.
      Furthermore, third-party manufacturers in the electronic component industry
      are
      consolidating. The consolidation of third-party manufacturers may give remaining
      manufacturers greater leverage to increase the prices that they charge, thereby
      increasing our manufacturing costs. If we are unable to pass the increased
      costs
      onto our customers, our profitability could be materially and adversely
      affected.




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




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




·
            unavailability
                of materials and interruptions in delivery of components and raw
                materials
                from our suppliers, which could result in manufacturing delays;
                and




·
            fluctuations
                in the quality and price of components and raw
                materials.




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




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




We
      are
      dependent on the continued employment and performance of our executive officers,
      particularly Jeffrey M. Jagid, Chief Executive Officer, Kenneth S. Ehrman,
      Chief
      Operating Officer, Ned Mavrommatis, Chief Financial Officer, Michael Ehrman,
      Executive Vice President Engineering, and Peter Fausel, Executive Vice President
      Sales, Marketing and Customer Service. 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.




19




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




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




·
            advances
                in technology;




·
            new
                product introductions;




·
            evolving
                industry standards;




·
            product
                improvements;




·
            rapidly
                changing customer needs;




·
            intellectual
                property invention and protection;




·
            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.




20




**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:




·
            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.




21




**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 December 31, 2007, we have hired two salespersons in Germany to 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.




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




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




·
              issue
                  stock that would dilute our current stockholders’ percentage
                  ownership;




·
              incur
                  debt;




·
              assume
                  liabilities;




·
              incur
                  expenses related to the impairment of goodwill;
                  or




·
              incur
                  large and immediate
                  write-offs.




Our
      operation of any acquired business will also involve numerous risks,
      including:




22




·
            problems
                combining the acquired operations, technologies or
                products;




·
            unanticipated
                costs;




·
            diversion
                of management’s time and attention from our core
                business;




·
            adverse
                effects on existing business relationships with suppliers and
                customers;




·
            risks
                associated with entering markets in which we have no or limited prior
                experience; and




·
            potential
                loss of key employees, particularly those of acquired
                companies.




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




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




As
      of
      March 3, 2008, our executive officers and directors beneficially owned, in
      the
      aggregate, 9.3% of our outstanding common stock, not including 1,619,508 shares
      of common stock that our executive officers and directors may acquire upon
      the
      exercise of outstanding options or if they otherwise acquire additional shares
      of common stock in the future. As a 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;


23




·
              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
      10,855,000 shares of common stock outstanding as of March 3, 2008, of which
      9,849,000 shares are freely transferable without restriction and 1,006,000
      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 March 3, 2008, options to purchase 2,794,000 shares
      of
      our common stock were issued and outstanding, of which 1,939,000 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 $7.47. 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.




**A
      decline in the value of the auction rate securities included in our investments
      could materially adversely affect our liquidity and income.**




Our
      investments include auction rate securities, with estimated fair value of $25
      million at December 31, 2007. Auction rate securities are securities with
      short-term interest rate reset dates of generally less than ninety days but
      with
      contractual maturities that can be well in excess of ten years. At the end
      of
      each reset period, investors typically can sell at auction or continue to hold
      the securities. These securities are subject to fluctuations in fair value
      depending on the supply and demand at each auction. Our auction rate securities
      consist of interests in pools of student loan receivables issued by agencies
      established by counties, cities, states and other municipal entities. Liquidity
      for our auction rate securities typically is provided by an auction process
      that
      resets the applicable interest rate every 28 days.




In
      February 2008, our auction rate securities failed to sell at auction due to
      sell
      orders exceeding buy orders. Prior to the auction rate failures, we sold
      approximately $5 million of auction rate securities in 2008. In 2008, the funds
      associated with our auction rate securities that have failed auction, may not
      be
      accessible until a successful auction occurs, a buyer is found outside of the
      auction process, the security is called or the underlying securities have
      matured. As a result of the recent instability in the market for auction rate
      securities, there may be a future decline in the value of our auction rate
      securities. A decline in the value of these securities that is not temporary
      could materially adversely affect our liquidity and income.




**Interest
      rate fluctuations may adversely affect our income and results of
      operations.**




As
      of
      December 31, 2007, we had cash,
      cash equivalents and marketable securities of $65.0 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..





**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
      2008, it appears that the United States economy is beginning to experience
      a
      slowdown in growth.  It is possible that this slowdown will have an
      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:




·
            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




24




·
            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.”





25




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.




**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
      March
      2007, we entered into a lease for office space located in Suwanee, Georgia
      for
      sales, marketing and customer service. The lease expired in September 2007
      and
      was subsequently renewed until March 2008. 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 expires in September 2008 and 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
      March 3, 2008, we were not involved in any material litigation.





**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**




None.





26




**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**
            
            **Low****2006**March
                31, 2006
            
            $
            25.03
            
            $
            19.40June
                30, 2006
            
            
            25.84
            
            
            16.21September
                30, 2006
            
            
            23.84
            
            
            15.14December
                31, 2006
            
            
            23.59
            
            
            18.00**2007**March
                31, 2007
            
            $
            18.90
            
            $
            11.82June
                30, 2007
            
            
            14.85
            
            
            11.13September
                30, 2007
            
            
            13.09
            
            
            8.96December
                31, 2007
            
            
            14.75
            
            
            11.89





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 86 publicly traded communication equipment companies)
      (“Hemscott Group Index”) for the period from January 1, 2002 through December
      31, 2007.





I.D.


COMPANY/INDEX/MARKET
              
              12/31/2002
              
              12/31/2003
              
              12/31/2004
              
              12/30/2005
              
              12/29/2006
              
              12/31/2007I.D.
                  Systems Inc
              
              
              100.00
              
              
              159.59
              
              
              426.03
              
              
              544.52
              
              
              429.68
              
              
              284.47Communication
                  Equipment
              
              
              100.00
              
              
              151.96
              
              
              184.62
              
              
              208.16
              
              
              222.61
              
              
              240.43NASDAQ
                  Market Index
              
              
              100.00
              
              
              150.36
              
              
              163.00
              
              
              166.58
              
              
              183.68
              
              
              201.91
  27
  (b) Holders . As of
        March 3, 2008, there were 25 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, 2007:




**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 programs**10/1/07
                through 10/31/07
            
            
            31,616
            
            
            12.62
            
            
            31,616
            
            $
            4,632,96011/1/07
                through 11/30/07
            
            
            7,047
            
            
            12.60
            
            
            7,047
            
            $
            4,544,19412/1/07
                through 12/31/07
            
            
            10,000
            
            
            12.75
            
            
            10,000
            
            $
            4,416,675**Total**
            
            
            48,663
            
            
            12.64
            
            
            48,663
            
            $
            4,416,675




(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.





28




**Item
        6.** **Selected
        Financial Data**


*The
      following table sets forth selected financial data for each of the five years
      ended December 31, 2007 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 2005, 2006
      and 2007 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,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007****Statement
                of Operations Data:**Revenues
            
            $
            7,959,000
            
            $
            13,741,000
            
            $
            19,004,000
            
            $
            24,740,000
            
            $
            17,083,000Cost
                of revenues
            
            
            4,075,000
            
            
            6,509,000
            
            
            9,708,000
            
            
            13,701,000
            
            
            8,929,000Gross
                profit
            
            
            3,884,000
            
            
            7,232,000
            
            
            9,296,000
            
            
            11,039,000
            
            
            8,154,000Operating
                expenses:Selling,
                general and administrative expenses
            
            
            4,456,000
            
            
            5,879,000
            
            
            7,140,000
            
            
            12,943,000
            
            
            15,963,000Research
                and development expenses
            
            
            891,000
            
            
            1,234,000
            
            
            1,625,000
            
            
            2,639,000
            
            
            2,849,000Income
                (loss) from operations
            
            
            (1,463,000
            )
            
            (119,000
            )
            
            531,000
            
            
            (4,543,000
            )
            
            (10,658,000
            )Interest
                income
            
            
            269,000
            
            
            195,000
            
            
            222,000
            
            
            2,801,000
            
            
            3,238,000Interest
                expense
            
            
            (59,000
            )
            
            (63,000
            )
            
            (53,000
            )
            
            (29,000
            )
            
            (10,000
            )Other
                income
            
            
            54,000
            
            
            147,000
            
            
            151,000
            
            
            155,000
            
            
            89,000Net
                income (loss)
            
            $
            (1,199,000
            )
            $
            398,000
            
            $
            851,000
            
            $
            (1,616,000
            )
            $
            (7,341,000
            )Net
                income (loss) per share - basic
            
            $
            (0.17
            )
            $
            0.05
            
            $
            0.11
            
            $
            (0.15
            )
            $
            (0.66
            )Net
                income (loss) per share - diluted
            
            $
            (0.17
            )
            $
            0.05
            
            $
            0.09
            
            $
            (0.15
            )
            $
            (0.66
            )Weighted
                average common shares outstanding - basic
            
            
            6,905,000
            
            
            7,455,000
            
            
            7,771,000
            
            
            10,501,000
            
            
            11,205,000Weighted
                average common shares outstanding - diluted
            
            
            6,905,000
            
            
            8,783,000
            
            
            9,332,000
            
            
            10,501,000
            
            
            11,205,000




**Balance
                Sheet Data (at end of period):**Cash
                and cash equivalents
            
            
            3,179,000
            
            
            8,440,000
            
            
            2,138,000
            
            
            9,644,000
            
            
            5,103,000Marketable
                securities
            
            
            3,339,000
            
            
            3,195,000
            
            
            5,463,000
            
            
            60,716,000
            
            
            59,900,000Total
                assets
            
            
            13,470,000
            
            
            17,159,000
            
            
            19,840,000
            
            
            84,905,000
            
            
            74,796,000Long-term
                debt
            
            
            836,000
            
            
            648,000
            
            
            449,000
            
            
            240,000
            
            
            19,000Total
                stockholders’ equity
            
            
            10,979,000
            
            
            13,572,000
            
            
            15,166,000
            
            
            81,284,000
            
            
            71,670,000




29




**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, 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, 2007, 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, 2007, we had deployed our system at 8 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, 2007, we had deployed our system at 80
                facilities.




·
            Beginning
                in 2003, Target utilized our system on a limited number of vehicles
                at one
                of its facilities As of December 31, 2007, 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 deployed our system in 20 additional
                facilities.





We
      work
      closely with customers like these to help maximize the utilization and benefits
      of our system and demonstrate the value of enterprise-wide
      deployments.




Although
      we generated net income of $851,000 for the year ended December 31, 2005, we
      incurred net losses of approximately $1.6 million and $7.3 million for the
      years
      ended December 31, 2006 and 2007, respectively, and have incurred additional
      net
      losses since inception. At December 31, 2007, we had an accumulated deficit
      of
      approximately $19.5 million. During 2007, our revenue decreased, and our
      expenses increased, primarily as a result of an increase in payroll and related
      expenses due to the hiring of additional staff within our sales and customer
      service departments.




During
      the year ended December 31, 2007, we generated revenues of $17.1 million, the
      U.S. Postal Service, Wal-Mart Stores, Inc. and Ford Motor Company accounted
      for
      37%, 32% and 10% of our revenues, respectively. During the year ended December
      31, 2006, we generated revenues of $24.7 million, and the U.S. Postal Service
      and Wal-Mart Stores, Inc. accounted for 61% and 14% 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.




30




**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.




31




***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
      our fiscal year ended December 31, 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 and $3,288,000 for the fiscal years ended December 31, 2006 and
      2007,
      respectively.




32
 
  **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,**2005
            
            2006
            
            **2007**Revenue:Product
            
            
            78.4
            %
            
            65.5
            %
            
            **64.6**
            **%**Services
            
            
            21.6
            
            
            34.5
            
            
            **35.4**100.0
            
            
            100.0
            
            
            **100.0**Cost
                of Revenues:Product
                cost of revenue
            
            
            41.1
            
            
            33.3
            
            
            **34.3**Service
                cost of revenue
            
            
            10.0
            
            
            22.1
            
            
            **18.0**Total
                Gross Profit
            
            
            48.9
            
            
            44.6
            
            
            **47.7**Selling,
                general and administrative expenses
            
            
            37.6
            
            
            52.3
            
            
            **93.4**Research
                and development expenses
            
            
            8.6
            
            
            10.7
            
            
            **16.7**Income
                (loss) from operations
            
            
            2.8
            
            
            (18.4
            )
            
            **(62.4**
            **)**Interest
                income
            
            
            1.2
            
            
            11.3
            
            
            **19.0**Interest
                expense
            
            
            (0.3
            )
            
            (0.1
            )
            
            **(0.1**
            **)**Other
                income
            
            
            0.8
            
            
            0.6
            
            
            **0.5****Net
                income (loss)**
            
            
            4.5
            %
            
            (6.5
            )%
            
            **(43.0**
            **)%**





33




***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 the same period in 2006. The decrease in product revenue was
      primarily attributable to a decrease in product revenue from the United States
      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 the same period in 2006. The decrease in revenues was primarily
      attributable to a decrease in service revenue from the United States Postal
      Service of approximately $2.7 million, partially offset by an increase in
      service revenue from other customers.




***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 an increase to the
      inventory reserve of $417,000 in 2007. Excluding the impact of the increase
      in
      inventory reserve, gross profit was 51.6% in 2007.




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.




34





***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 the
      same
      period 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.




***Year
      Ended December 31, 2006 Compared to the Year Ended December 31,
      2005***




***REVENUES.*** Revenues
      increased by $5.7 million, or 30.2%, to $24.7 in 2006 from $19.0 million in
      2005.




Revenues
      from product increased by $1.3 million, or 8.7%, to $16.2 million in 2006 from
      $14.9 million in the same period in 2005. The increase in product revenues
      was
      attributable primarily to increased sales of our wireless system for tracking
      and managing industrial vehicles to U.S. Postal Service and Wal-Mart Stores,
      Inc.




Revenues
      from service increased $4.4 million, or 108.2%, to $8.5 million in 2006 from
      $4.1 million in the same period in 2005. The increase in service revenues was
      attributable primarily to the increase in implementation services to the U.S.
      Postal Service.




***COST
      OF REVENUES*** .
      Cost of
      revenues increased by $4.0 million, or 41.1%, to $13.7 million in 2006 from
      $9.7
      million in 2005. Gross profit was $11.0 million in 2006 compared to $9.3 million
      in 2005. As a percentage of revenues, gross profit decreased to 44.6% in 2006
      from 48.9% in 2005.




Cost
      of
      product increased by $413,000, or 5.3%, to $8.2 million in 2006 from $7.8
      million in the same period in 2005. Gross profit from product revenue was $8.0
      million in 2006 compared to $7.1 million in 2005. As a percentage of product
      revenues, gross profit increased to 49.2% in 2006 from 47.6% in 2005. Included
      in costs of revenues for 2005 was $480,000 of amortized capitalized costs
      associated with the application of the cost recovery method of revenue
      recognition. In accordance with the cost recovery method, these capitalized
      contract costs were reduced dollar for dollar by the amount of revenue
      recognized. Excluding the amortization of these capitalized contract costs,
      gross profit as a percentage of revenues would have been 50.2%




Cost
      of
      service increased by $3.6 million, or 189.2%, to $5.5 million in 2006 from
      $1.9
      million in the same period in 2005. Gross profit from service revenue was $3.1
      million in 2006 compared to $2.2 million in 2005. As a percentage of service
      revenues, gross profit decreased to 35.9% in 2006 from 53.8% in 2005. The
      decrease was primarily due to the hiring of third party subcontractors to
      perform implementation services at the U.S. Postal Service.




***Selling,
      General and Administrative Expenses*** .
      Selling, general and administrative expenses increased $5.8 million, or 81.3%,
      to $12.9 million in 2006 compared to $7.1 million in 2005. This increase was
      attributable primarily to (i) the adoption of SFAS No. 123(R) in which we
      expensed $2.2 million of the value of stock based employee compensation and
      (ii)
      the increase in payroll and related expenses due to the hiring of additional
      personnel to support our continued growth. As a percentage of revenues, selling,
      general and administrative, expenses increased to 52.3% in 2006 from 37.6%
      in
      2005.





***Research
      and Development Expenses.*** Research
      and development expenses increased $1.0 million, or 62.4%, to $2.6 million
      in
      2006 from $1.6 million in 2005. This increase was attributable primarily to
      (i)
      the adoption of SFAS No. 123(R) in which we expensed $723,000 of the value
      of
      stock based employee compensation and (ii) the increase in payroll and payroll
      related expenses. As a percentage of revenues, research and development expenses
      increased to 10.7% in 2006 from 8.6% in 2005.




35





***Interest
      Income.*** Interest
      income increased $2.6 million, or 1,161.7%, to $2.8 million in 2006 from
      $222,000 in 2005. 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 $24,000, or 45.3%, to $29,000 in 2006 from $53,000 in 2005.
      The decrease was attributable to a reduction in the principal amount of our
      outstanding debt in 2006.




***Other
      Income.*** Other
      income, which increased slightly to $155,000 in 2006 from $151,000 in 2005,
      reflects rental income earned from a sublease arrangement.




***Net
      Income (Loss).*** Net loss
      was $1.6 million or $(0.15) per basic and diluted share in the year ended
      December 31, 2006 as compared to net income of $851000 or $0.11 per basic and
      $0.09 per diluted share for the year ended December 31, 2005. The increase
      in
      net loss was due primarily to the reasons described above.





**L** **iquidity
      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, 2007, we had cash, cash equivalents and marketable securities
      of
      $65.0 million and working capital of $70.4 million compared to $31.9 million
      and
      $80 million, respectively, as of December 31, 2006.


Our
        marketable securities include auction rate securities with estimated fair
        value
        of $25 million at December 31, 2007. Auction rate securities are securities
        with
        short-term interest rate reset dates of generally less than ninety days but
        with
        contractual maturities that can be well in excess of ten years. At the end
        of
        each reset period, investors typically can sell at auction or continue to
        hold
        the securities. These securities are subject to fluctuations in fair value
        depending on the supply and demand at each auction. Our auction rate securities
        consist of interests in pools of student loan receivables issued by agencies
        established by counties, cities, states and other municipal entities. Liquidity
        for our auction rate securities typically is provided by an auction process
        that
        resets the applicable interest rate every 28 days.
  In
        February 2008, our auction rate securities failed to sell at auction due
        to sell
        orders exceeding buy orders. Prior to the auction rate failures, we sold
        approximately $5 million of these auction rate securities in 2008. The funds
        associated with our auction rate securities that have failed auction, may
        not be
        accessible until a successful auction occurs, a buyer is found outside of
        the
        auction process, the security is called or the underlying securities have
        matured. As of February 29, 2008, the collateral related to the
        auction rate securities have not been impacted, credit ratings have not changed
        and the fair market values have not fallen below par value. As a result of
        the
        recent instability in the market for auction rate securities, there may be
        a
        future decline in the value of our auction rate securities. A decline in
        the
        value of these securities that is not temporary could materially adversely
        affect our liquidity and income.


***Operating
      Activities***




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 in 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.





Net
      cash
      used in operating activities was $1.1 million for the year ended December 31,
      2006 compared to net cash used in operating activities of $4.1 million in the
      year ended December 31, 2005. The decrease was due primarily to a significant
      decrease in accounts receivable resulting from improved collections, offset
      by
      (i) an increase in net loss, (ii) an increase in finished goods inventory
      manufactured to meet anticipated customer orders and (iii) an increase to
      accounts payable and accrued expenses attributable to an increase to operating
      expenses.




36




***Investing
      Activities***




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.




Net
      cash
      used in investing activities was $56.0 million for the year ended December
      31,
      2006 compared to net cash used in investing activities of $2.8 million for
      the
      year ended December 31, 2005. The increase was due primarily to a significant
      increase in the purchase of investments with the net proceeds received in
      connection with the public offering that was completed by us in March
      2006.




***Financing
      Activities***




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.




Net
      cash
      provided by financing activities was $64.5 million for the year ended December
      31, 2006 compared to $544,000 for the year ended December 31, 2005. The increase
      was due primarily to the proceeds received in connection with the public
      offering that was completed by us in March 2006.





***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.




37




**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. The loan is secured by all
      of
      our assets and we are in compliance with the covenants under the term loan.
      The
      fair value of the interest rate swap is not material to our financial condition
      or results of operations. At December 31, 2006 and 2007, the outstanding balance
      on the loan was $240,000 and $19,000, respectively.




**Contractual
      Obligations and Commitments**




The
      following table summarizes our significant contractual obligations and
      commitments as of December 31, 2007:





**Payment
                due by Period****Total**
            
            **Less
                thanone year**
            
            **1
                to 3 years**
            
            **3
                to 5 years**
            
            **After
                5years**Long-Term
                Debt Obligations
            
            $
            19,000
            
            $
            19,000
            
            $
            —
            
            $
            —
            
            $
            —Operating
                Leases
            
            
            951,000
            
            
            429,000
            
            
            522,000
            
            
            —
            
            
            —Total
                Contractual Cash Obligations
            
            $
            970,000
            
            $
            448,000
            
            $
            522,000
            
            $
            —
            
            $
            —





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




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




38




**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
      September 2006, the FASB issued SFAS No. 157, *"Fair
      Value Measurements"* ,
      to
      define fair value, establish a framework for measuring fair value in accordance
      with generally accepted accounting principles, and expand disclosures about
      fair
      value measurements. SFAS No. 157 will be effective for fiscal years beginning
      after November 15, 2007, the beginning of our 2008 fiscal year. We are currently
      assessing the impact of the adoption of SFAS No. 157 will have on our financial
      position and results of operations.




In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities” including an amendment of SFAS No. 115. SFAS
      No. 159 provides companies with an option to report selected financial assets
      and financial liabilities at fair value. Unrealized gains and losses on items
      for which the fair value option has been elected are reported in earnings.
      SFAS
      No. 159 is effective for fiscal years beginning after November 15, 2007,
      the beginning of our 2008 fiscal year. We are currently assessing the impact
      of
      the adoption of SFAS No. 159 will have on our financial position and results
      of
      operations.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      141R, “Business Combinations” (“SFAS No. 141R”), which replaces FASB Statement
      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. We have not yet
      determined the impact, if any, that the implementation of SFAS No. 141R will
      have on our results of operations or financial condition.





In
      December 2007, the FASB issued FASB Statement 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 an 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 require 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. We
      have
      not yet determined the impact, if any, that the implementation of SFAS No.
      160
      will have on our results of operations or financial condition.





39




**Item 7A.** **Quantitative
        and Qualitative Disclosures About Market Risk**




We
      are
      subject to market risks in the form of changes in corporate 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, 2007, we had cash, cash equivalents and marketable securities
      of $65.0 million.




As
      of
      December 31, 2007 the carrying value
      of
      our cash and cash equivalents approximated fair value. Due to the conservative
      nature and relatively short duration of our investments, interest rate risk
      is
      mitigated. However, in a declining interest rate environment, as short-term
      investments mature, reinvestment occurs at less favorable market rates,
      negatively impacting future investment income.




Our
          investments include auction rate securities, these securities have an estimated
          fair value of $25 million at December 31, 2007. Auction rate securities
          are
          securities that are structured with short-term interest rate reset dates
          of
          generally less than ninety days but with contractual maturities that can
          be well
          in excess of ten years. At the end of each reset period, investors typically
          can
          sell at auction or continue to hold the securities at par. These securities
          are
          subject to fluctuations in fair value depending on the supply and demand
          at each
          auction. Our auction rate securities consist of interests in collateralized
          pools of student loan receivables issued by agencies established by counties,
          cities, states and other municipal entities. Liquidity for our auction
          rate
          securities typically is provided by an auction process that resets the
          applicable interest rate every 28 days. In February 2008, our auction rate
          securities failed to sell at auction due to sell orders exceeding buy orders.
          Prior to the auction rate failures, we sold approximately $5 million of
          auction
          rate securities in 2008. In 2008, the funds associated with our auction
          rate
          securities that have failed auction, may not be accessible until a successful
          auction occurs, a buyer is found outside of the auction process, the security
          is
          called or the underlying securities have matured. As a result of the recent
          instability in the market for auction rate securities, there may be a future
          decline in the value of our auction rate securities. A decline in the value
          of
          these securities that is not temporary could materially adversely affect
          our
          liquidity and income.


40




**Item
        8.** **Financial
        Statements and Supplementary Data**


**INDEX
      TO FINANCIAL STATEMENTS**




**Page**Financial
                Statements as of December 31, 2005, 2006 and 2007Report
                of Independent Registered Public Accounting Firm
            
            42Balance
                Sheets at December 31, 2006 and 2007
            
            43Statements
                of Operations for the YearsEnded
                December 31, 2005, 2006 and 2007
            
            44Statements
                of Changes in Stockholders' Equity for the YearsEnded
                December 31, 2005, 2006 and 2007
            
            45Statements
                of Cash Flows for the YearsEnded
                December 31, 2005, 2006 and 2007
            
            46Notes
                to the Financial Statements
            
            47




41




**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, 2006 and 2007 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, 2007. Our audits also included the
      financial statement schedule II - Valuation and Qualifying Accounts. 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 audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in
      all material respects, the financial position of I.D. Systems, Inc. as of
      December 31, 2006 and 2007, and the results of their operations and their
      cash flows for each of the years in the three year period ended December 31,
      2007, 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 financial statements, taken as a
      whole, presents fairly, in all material respects, the information stated
      therein.





As
      discussed in Note B to the financial statements, effective January 1, 2006,
      the
      Company adopted the provisions of Statement of Financial Accounting Standards
      No. 123 (R), "Share-Based Payment" applying the modified - prospective
      method.





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, 2007, 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 11, 2008
      expressed an unqualified opinion thereon.




/s/
      Eisner LLP




New
      York,
      New York


March
      11,
      2008




42




**I.D.
      SYSTEMS, INC.**


**Balance
      Sheets**





**As of December 31,****2006**
            
            **2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            9,644,000
            
            $
            5,103,000Marketable
                securities – short term
            
            
            60,716,000
            
            
            21,385,000Accounts
                receivable, net of allowance for doubtful accounts of $239,000 in
                2006 and
                2007
            
            
            5,101,000
            
            
            2,875,000Unbilled
                receivables
            
            
            1,042,000
            
            
            580,000Inventory
            
            
            6,430,000
            
            
            4,420,000Interest
                receivable
            
            
            179,000
            
            
            142,000Officer
                loan
            
            
            8,000
            
            
            —Prepaid
                expenses and other current assets
            
            
            271,000
            
            
            291,000Total
                current assets
            
            
            83,391,000
            
            
            34,796,000Marketable
                securities –long term
            
            
            —
            
            
            38,515,000Fixed
                assets, net
            
            
            1,394,000
            
            
            1,398,000Deferred
                contract costs
            
            
            33,000
            
            
            —Other
                assets
            
            
            87,000
            
            
            87,000$
            84,905,000
            
            $
            74,796,000**LIABILITIES**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            2,950,000
            
            $
            2,594,000Current
                portion of long term debt
            
            
            221,000
            
            
            19,000Deferred
                revenue
            
            
            221,000
            
            
            291,000Total
                current liabilities
            
            
            3,392,000
            
            
            2,904,000Long
                term debt
            
            
            19,000
            
            
            —Deferred
                revenue
            
            
            133,000
            
            
            167,000Deferred
                rent
            
            
            77,000
            
            
            55,0003,621,000
            
            
            3,126,000Commitments
                and Contingencies (Note J)**STOCKHOLDERS'
                EQUITY**Preferred
                stock; authorized 5,000,000 shares, $0.01 par value; none
                issued
            
            
            —
            
            
            —Common
                stock; authorized 50,000,000 shares, $.01 par value; 11,337,000 and
                11,561,000 shares issued at December 31, 2006 and 2007, respectively,
                shares outstanding, 11,297,000 and 11,015,000 at December 31, 2006
                and
                2007, respectively
            
            
            113,000
            
            
            115,000Additional
                paid-in capital
            
            
            93,423,000
            
            
            97,076,000Accumulated
                deficit
            
            
            (12,151,000
            )
            
            (19,492,000
            )Comprehensive
                income
            
            
            12,000
            
            
            11,00081,397,000
            
            
            77,710,000Treasury
                stock; 40,000 shares and 546,000 shares at cost at December 31, 2006
                and
                2007, respectively
            
            
            (113,000
            )
            
            (6,040,000
            )Total
                stockholders’ equity
            
            
            81,284,000
            
            
            71,670,000Total
                liabilities and stockholders’ equity
            
            $
            84,905,000
            
            $
            74,796,000





SEE
      ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


43


**I.D.
      SYSTEMS, INC.**


**Statements
      of Operations**





Year Ended December 31,2005
            
            2006
            
            2007Revenue:Product
            
            $
            14,905,000
            
            $
            16,205,000
            
            $
            11,037,000Service
            
            
            4,099,000
            
            
            8,535,000
            
            
            6,046,00019,004,000
            
            
            24,740,000
            
            
            17,083,000Cost
                of Revenue:Cost
                of product
            
            
            7,816,000
            
            
            8,229,000
            
            
            5,859,000Cost
                of service
            
            
            1,892,000
            
            
            5,472,000
            
            
            3,070,0009,708,000
            
            
            13,701,000
            
            
            8,929,000Gross
                Profit
            
            
            9,296,000
            
            
            11,039,000
            
            
            8,154,000Operating
                expenses:Selling,
                general and administrative expenses
            
            
            7,140,000
            
            
            12,943,000
            
            
            15,963,000Research
                and development expenses
            
            
            1,625,000
            
            
            2,639,000
            
            
            2,849,0008,765,000
            
            
            15,582,000
            
            
            18,812,000Income
                (loss) from operations
            
            
            531,000
            
            
            (4,543,000
            )
            
            (10,658,000
            )Interest
                income
            
            
            222,000
            
            
            2,801,000
            
            
            3,238,000Interest
                expense
            
            
            (53,000
            )
            
            (29,000
            )
            
            (10,000
            )Other
                income
            
            
            151,000
            
            
            155,000
            
            
            89,000Net
                income (loss)
            
            $
            851,000
            
            $
            (1,616,000
            )
            $
            (7,341,000
            )Net
                income (loss) per share - basic
            
            $
            0.11
            
            $
            (0.15
            )
            $
            (0.66
            )Net
                income (loss) per share - diluted
            
            $
            0.09
            
            $
            (0.15
            )
            $
            (0.66
            )Weighted
                average common shares outstanding - basic
            
            
            7,771,000
            
            
            10,501,000
            
            
            11,205,000Weighted
                average common shares outstanding - diluted
            
            
            9,332,000
            
            
            10,501,000
            
            
            11,205,000





SEE
      ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


44


**I.D.
      SYSTEMS, INC.**


**Statements
      of Changes in Stockholders' Equity**




**Accumulated****Common Stock**
              
              **Additional**
              
              
              
              **Other****Number of**
              
              
              
              **Paid-in**
              
              **Accumulated**
              
              **Comprehensive**
              
              **Treasury**
              
              **Stockholders'****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Income**
              
              **Stock**
              
              **Equity****Balance
                  at January 1, 2005**
              
              
              7,690,000
              
              $
              77,000
              
              $
              24,994,000
              
              $
              (11,386,000
              )
              
              —
              
              $
              (113,000
              )
              $
              13,572,000Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              851,000
              
              
              
              
              
              
              
              
              851,000Comprehensive
                  income (loss) - unrealized gain(loss) on investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              851,000
              
              
              -
              
              
              
              
              
              851,000Shares
                  issued pursuant to exercise of stock options
              
              
              161,000
              
              
              2,000
              
              
              741,000
              
              
              
              
              
              
              
              
              
              
              
              743,000**Balance
                  at December 31, 2005**
              
              
              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
              
              
              
              
              
              
              
              
              
              
              
              (1,616,000
              )
              
              12,000
              
              
              
              
              
              (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
              
              
              
              
              
              
              
              
              
              
              
              1,895,000**Balance
                  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
              
              
              
              
              
              
              
              
              
              
              
              (7,341,000
              )
              
              (1,000
              )
              
              
              
              
              (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
              
              
              
              
              
              
              
              
              
              
              
              2,347,000**Balance
                  at December 31, 2007**
              
              
              11,561,000
              
              $
              115,000
              
              $
              97,076,000
              
              $
              (19,492,000
              )
              $
              11,000
              
              $
              (6,040,000
              )
              $
              71,670,000





SEE
      ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


45


**I.D.
      SYSTEMS, INC.**


**Statements
      of Cash Flows**




**Year Ended December 31,****2005**
            
            **2006**
            
            **2007****Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            851,000
            
            $
            (1,616,000
            )
            $
            (7,341,000
            )Adjustments
                to reconcile net income (loss) to cash (used in) provided by operating
                activities:Inventory
                reserve
            
            
            105,000
            
            
            100,000
            
            
            517,000Accrued
                interest income
            
            
            42,000
            
            
            (153,000
            )
            
            20,000Stock
                based compensation
            
            
            —
            
            
            2,975,000
            
            
            3,288,000Depreciation
                and amortization
            
            
            362,000
            
            
            468,000
            
            
            544,000Deferred
                rent expense
            
            
            (13,000
            )
            
            (22,000
            )
            
            (22,000
            )Deferred
                revenue
            
            
            (41,000
            )
            
            109,000
            
            
            104,000Provision
                for uncollectible accounts
            
            
            20,000
            
            
            211,000
            
            
            —Deferred
                contract costs
              Changes
                  in:
            
            
            423,000
            
            
            20,000
            
            
            33,000Accounts
                receivable
            
            
            (4,656,000
            )
            
            756,000
            
            
            2,226,000Unbilled
                receivables
            
            
            (891,000
            )
            
            251,000
            
            
            462,000Inventory
            
            
            (1,318,000
            )
            
            (3,578,000
            )
            
            1,493,000Prepaid
                expenses and other assets
            
            
            85,000
            
            
            (130,000
            )
            
            (20,000
            )Investment
                in sales type leases
            
            
            (394,000
            )
            
            467,000
            
            
            —Accounts
                payable and accrued expenses
            
            
            1,340,000
            
            
            (931,000
            )
            
            (700,000
            )Net
                cash (used in) provided by operating activities
            
            
            (4,085,000
            )
            
            (1,073,000
            )
            
            604,000**Cash
                flows from investing activities:**Purchase
                of fixed assets
            
            
            (512,000
            )
            
            (703,000
            )
            
            (548,000
            )Purchase
                of investments
            
            
            (5,963,000
            )
            
            (68,481,000
            )
            
            (15,691,000
            )Maturities
                of investments
            
            
            3,703,000
            
            
            13,214,000
            
            
            16,523,000Net
                cash (used in) provided by investing activities
            
            
            (2,772,000
            )
            
            (55,970,000
            )
            
            284,000**Cash
                flows from financing activities:**Repayment
                of term loan
            
            
            (199,000
            )
            
            (209,000
            )
            
            (221,000
            )Proceeds
                from exercise of stock options
            
            
            743,000
            
            
            786,000
            
            
            367,000Net
                proceeds from public offering
            
            
            —
            
            
            63,961,000
            
            
            —Collection
                of officer loan
            
            
            11,000
            
            
            11,000
            
            
            8,000Purchase
                of treasury shares
            
            
            —
            
            
            —
            
            
            (5,583,000
            )Net
                cash provided by (used in) financing activities
            
            
            555,000
            
            
            64,549,000
            
            
            (5,429,000
            )**Net
                (decrease) increase in cash and cash equivalents**
            
            
            (6,302,000
            )
            
            7,506,000
            
            
            (4,541,000
            )Cash
                and cash equivalents -beginning of period
            
            
            8,440,000
            
            
            2,138,000
            
            
            9,644,000**Cash
                and cash equivalents**-**end
                of period**
            
            $
            2,138,000
            
            $
            9,644,000
            
            $
            5,103,000**Supplemental
                disclosure of cash flow information:**Cash
                paid for:Interest
            
            $
            53,000
            
            $
            29,000
            
            $
            10,000





SEE
      ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


46


**I.D.
      SYSTEMS, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006 and 2007**




**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 market value of auction rates and any other non readily tradable
      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.




**[3]**
            **Marketable
                securities:**




The
      Company has marketable debt
      securities, including, government and state agency bonds, corporate bonds and
      auction rate certificates ,
      which
      are classified as either available for sale or held to maturity, depending
      on
      management’s investment intentions relating to these securities. Available for
      sale securities, except for auction rate securities which are discussed
      below, 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 short term
      securities for those securities that mature within one year, and all other
      securities are classified as long term.




The
      Company’s auction rate securities estimated fair value of $25
      million at December 31, 2007 represent interest in collateralized pools of student loan receivables issued
      by
      agencies established by counties, cities, states and other municipal entities.
      During 2006, the Company had the ability to readily convert these instruments
      in
      to cash to fund operation, or satisfy other cash requirements as needed.
      Accordingly, in 2006 we had classified these securities as short term. In
      February 2008, these auction rate securities failed to sell at auction due
      to
      sell orders exceeding buy orders. Liquidity for these auction rate securities
      is
      typically provided by an auction process that resets the applicable interest
      rate every 28 days. The funds associated with failed auctions will not be
      accessible until a successful auction occurs or a buyer is found outside of
      the
      auction process. As a result, as of December 31, 2007, the Company has
      classified these securities as long term.





**[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. At December 31, 2006 and 2007,
      the
      Company’s inventory consisted of components of approximately $465,000 and
      $155,000 and finished goods of approximately $5,965,000 and $4,265,000,
      respectively.





**[5]**
            **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, 2006 and 2007, unbilled receivables were $1,042,000 and $580,000,
      respectively and deferred revenue was $354,000 and $458,000,
      respectively.


47


**[6]**
            **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.




**[7]**
            **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, 2005, 2006 and 2007, the Company has not incurred an
      impairment charge.




**[8]**
            **Research
                and development:**




Research
      and development costs are charged to expense as incurred.




**[9]**
            **Patent
                costs:**




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




**[10]**
            **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.




**[11]**
            **Benefit
                plan:**




The
      Company maintains a retirement plan under Section 401(k) of the Internal Revenue
      Code, which covers all eligible employees. The Company did not make any
      contributions to the plan during the years ended December 31, 2005, 2006 and
      2007.


48


**[12]**
            **Rent
                expense:**




Expense
      related to the Company's facility lease is recorded on a straight-line basis
      over the lease term. The difference between rent expense incurred and the
      amounts required to be paid in accordance with the lease term is recorded as
      deferred rent and is amortized over the lease term.




**[13]**
            **Stock-based
                compensation:**




Commencing
      January 1, 2006, the Company adopted 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.




Prior
      to
      adopting SFAS 123R, the Company accounted for stock-based employee compensation
      under Accounting Principles Board Opinion No. 25, *“Accounting
      for Stock Issued to Employees”* and
      related interpretations. No stock-based compensation cost was recognized in
      the
      statement of operations for the year ended December 31 2005, as all options
      granted under the Plans had an exercise price equal to the market value of
      the
      underlying common stock on date of grant. The Company has applied the modified
      prospective transition method in adopting SFAS 123R. Accordingly, periods prior
      to adoption have not been restated. As a result of adoption, the Company
      recorded stock based compensation expense of $2,975,000 and $3,288,000 for
      the
      years ended December 31, 2006 and 2007, respectively, resulting in a
      corresponding increase in loss from operations and net loss and a reduction
      of $0.28
      per
      basic and $ 0.26 per diluted share for the year ended December 31,
      2006 and
      $0.29 per basic and diluted share for the year ended December 31,
      2007.




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 and 2007 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. In the Company’s pro forma information
      required under SFAS 123 for the periods prior to 2006, the Company accounted
      for
      forfeitures as they occurred. SFAS 123R also requires estimated forfeitures
      to
      be revised, if necessary, in subsequent periods if actual forfeitures differ
      from those estimates.




The
      following table illustrates the effect on reported net income and earnings
      per
      share if the fair value based method had been applied to the year ended December
      31, 2005.




Reported
                net income
            
            $
            851,000Stock-based
                employee compensation expense included in reported net income, net
                of
                related tax effects
            
            
            0Stock-based
                employee compensation determined under the fair value based method,
                net of
                related tax effects
            
            
            (1,612,000
            )Pro
                forma net loss
            
            $
            (761,000
            )Net
                income (loss) per share basicAs
                reported
            
            $
            0.11Pro
                forma
            
            $
            (0.10
            )Net
                income (loss) per share dilutedAs
                reported
            
            $
            0.09Pro
                forma
            
            $
            (0.10
            )




49


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,****2005**
            
            **2006**
            
            **2007**Expected
                volatility
            
            
            51
            %
            
            60
            %
            
            53
            %Expected
                life of options
            
            
            5
                years
            
            
            5
                years
            
            
            5
                yearsRisk
                free interest rate
            
            
            4
            %
            
            5
            %
            
            5
            %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.





**[14]**
            **Income
                taxes:**




The
      Company uses the asset and liability method of accounting for deferred income
      taxes. Deferred income taxes are measured by applying enacted statutory rates
      to
      net operating loss carryforwards and to the differences between the financial
      reporting and tax bases of assets and liabilities. Deferred tax assets are
      reduced, if necessary, by a valuation allowance if it is more likely than not
      that some portion or all of the deferred tax assets will not be
      realized.





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, 2007, 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, 2007, there was no such interest or penalty.





**[15]**
            **Net
                income (loss) per share:**




**December
                31,****Basic
                income (loss) per share**
            
            **2005**
            
            **2006**
            
            **2007**Net
                income (loss)
            
            $
            851,000
            
            $
            (1,616,000
            )
            $
            (7,341,000
            )Weighted
                average shares outstanding
            
            
            7,771,000
            
            
            10,501,000
            
            
            11,205,000Basic
                income (loss) per share
            
            $
            0.11
            
            $
            (0.15
            )
            $
            (0.66
            )**Diluted
                income (loss) per share**Net
                income (loss)
            
            $
            851,000
            
            $
            (1,616,000
            )
            $
            (7,341,000
            )Weighted
                average shares outstanding
            
            
            7,771,000
            
            
            10,501,000
            
            
            11,205,000Dilutive
                effect of stock options
            
            
            1,561,000
            
            
            —
            
            
            —Weighted
                average shares outstanding, diluted
            
            
            9,332,000
            
            
            10,501,000
            
            
            11,205,000Diluted
                income (loss) per share
            
            $
            0.09
            
            $
            (0.15
            )
            $
            (0.66
            )




Basic
      income (loss) per share is calculated by dividing net income (loss) by the
      weighted average number of common shares outstanding during the period. Diluted
      income (loss) per share reflects the potential dilution assuming common shares
      were issued upon the exercise of outstanding options and the proceeds thereof
      were used to purchase outstanding common shares For the years ended December
      31,
      2006 and 2007, 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 and 2,761,000, respectively, would have been
      anti-dilutive.


50




**[16]**
            **Financial
                instruments:**




The
      carrying amounts of cash equivalents, accounts receivable, marketable securities
      (excluding auction rate securities), and other liabilities approximate their
      fair values due to the short period to maturity of these instruments. For
      auction rate securities, for which there are no available observable market
      prices, the Company establishes fair value by reference to public available
      indexes of securities with the same rating and comparable or similar underlying
      collaterals or industries’ exposure, using “mark to market” bids and “mark to
      model” valuations received from the structuring financial
      institutions.




**[17]**
            **Advertising
                and Marketing Expense:**




Advertising
      and marketing costs are expensed as incurred. Advertising and marketing expense
      for the years ended December 31, 2005, 2006 and 2007 amounted to $143,000,
      $217,000 and $314,000, respectively.




**[18]**
            **Reclassifications:**




Certain
      prior year amounts have reclassified to conform with the current year
      presentation.




**[19]**
            **Recently
                Issued Accounting
                Pronouncements:**





In
      September 2006, the FASB issued SFAS No. 157, *"Fair
      Value Measurements"* ,
      to
      define fair value, establish a framework for measuring fair value in accordance
      with generally accepted accounting principles, and expand disclosures about
      fair
      value measurements. SFAS No. 157 will be effective for the beginning of our
      2008
      fiscal year. We are currently assessing the impact of the adoption of SFAS
      No.
      157 will have on our financial position and results of operations.




In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities” including an amendment of SFAS No. 115. SFAS
      No. 159 provides companies with an option to report selected financial assets
      and financial liabilities at fair value. Unrealized gains and losses on items
      for which the fair value option has been elected are reported in earnings.
      SFAS
      No. 159 is effective for the beginning of our 2008 fiscal year. We are currently
      assessing the impact of the adoption of SFAS No. 159 will have on our financial
      position and results of operations.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      141R, “Business Combinations” (“SFAS No. 141R”), which replaces FASB Statement
      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. We have not yet
      determined the impact, if any, that the implementation of SFAS No. 141R will
      have on our results of operations or financial condition.





In
      December 2007, the FASB issued FASB Statement 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 an 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 require 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. We
      have
      not yet determined the impact, if any, that the implementation of SFAS No.
      160
      will have on our results of operations or financial condition.





**NOTE
      C - MARKETABLE SECURITIES**





The
      Company has marketable debt securities, including, government and state agency
      bonds, corporate bonds and auction rate certificates, which are classified
      as
      either available for sale or held to maturity, 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 short term securities
      for those securities that mature within one year, and all other securities
      are
      classified as long term.




The
      Company’s auction rate securities with estimate fair value of $25 million
      at December 31, 2007, represent interest in pools of student loan
      receivables issued by agencies established by counties, cities, states and
      other
      municipal entities. During 2006, the Company had the ability to readily convert
      these instruments in to cash to fund operation, or satisfy other cash
      requirements as needed. Accordingly, in 2006 we had classified these securities
      as short term. In February 2008, these auction rate securities failed to sell
      at
      auction due to sell orders exceeding buy orders. Liquidity for these auction
      rate securities is typically provided by an auction process that resets the
      applicable interest rate every 28 days. Prior to the auction rate failure,
      we
      sold approximately $5 million of these auctionable securities in 2008. As of
      February 29, 2008, the collateral related to the auction rate securities have
      not been impacted, credit ratings have not changed and the fair market values
      have not fallen below par value. The funds associated with failed auctions
      will
      not be accessible until a successful auction occurs or a buyer is found outside
      of the auction process. As a result, as of December 31, 2007, the Company has
      classified these securities as long term.





The
      cost,
      gross unrealized gains (losses) and fair value of available for sale and held
      to
      maturity securities by major security type at December 31, 2006 and 2007 were
      as
      follows:




51


Unrealized
              
              Unrealized
              
              FairDecember
                  31, 2006
              
              Cost
              
              Gain
              
              Loss
              
              ValueAvailable
                  for sale securities:Government
                  agency bonds
              
              $
              6,662,000
              
              $
              11,000
              
              
              -
              
              $
              6,673,000State
                  bonds
              
              
              36,550,000
              
              
              -
              
              
              -
              
              
              36,550,000Corporate
                  bonds
              
              
              261,000
              
              
              1,000
              
              
              -
              
              
              262,000Mutual
                  funds
              
              
              3,257,000
              
              
              -
              
              
              -
              
              
              3,257,000Total
                  available for sale securities
              
              
              46,730,000
              
              
              12,000
              
              
              -
              
              
              46,742,000Held
                  to maturity securities:Certificates
                  of deposit
              
              
              190,000
              
              
              -
              
              
              -
              
              
              190,000Government
                  agency bonds
              
              
              9,255,000
              
              
              -
              
              
              -
              
              
              9,255,000Corporate
                  bonds
              
              
              4,529,000
              
              
              -
              
              
              -
              
              
              4,529,000Total
                  held to maturity securities
              
              
              13,974,000
              
              
              -
              
              
              -
              
              
              13,974,000Total
                  marketable securities
              
              $
              60,704,000
              
              $
              12,000
              
              
              -
              
              $
              60,716,000


December
                    31, 2007
                
                Cost
                
                Unrealized
                  Gain
                
                Unrealized
                    Loss
                
                Fair
                    ValueMarketable
                    securities - 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
                    marketable securities - 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
                    marketable securities - long term
                
                
                38,499,000
                
                
                16,000
                
                
                -
                
                
                38,515,000Total
                    marketable securities
                
                $
                59,889,000
                
                $
                18,000
                
                $
                (7,000
                )
                $
                59,900,000


52




**NOTE
      D - FIXED ASSETS**




Fixed
      assets are stated at cost, less accumulated depreciation and amortization,
      and
      at December 31, 2006 and 2007, are summarized as follows:




**As
                of December 31,****2006**
            
            **2007**Equipment
            
            $
            1,059,000
            
            $
            1,144,000Computer
                software
            
            
            475,000
            
            
            695,000Computer
                hardware
            
            
            531,000
            
            
            654,000Furniture
                and fixtures
            
            
            206,000
            
            
            238,000Automobile
            
            
            —
            
            
            35,000Leasehold
                improvements
            
            
            447,000
            
            
            500,0002,718,000
            
            
            3,266,000Accumulated
                depreciation and amortization
            
            
            (1,324,000
            )
            
            (1,868,000
            )$
            1,394,000
            
            $
            1,398,000




Depreciation
      expense was $310,000, $416,000 and $544,000 for the years ended December 31,
      2005, 2006 and 2007, respectively.




**NOTE
      E - OFFICER LOAN**




In
      June
      2002, the Company loaned $56,000 to an officer. The loan was payable together
      with interest of 4% in semi-monthly installments of $500 through August 2007.
      The loan was repaid and there was no amount due at December 31, 2007. At
      December 31, 2006, $8,000 was due to the Company. This loan was made prior
      to
      the enactment of the Sarbanes-Oxley Act of 2002. The Company is prohibited
      from
      making any loans to officers in the future.




**NOTE
      F – LONG TERM DEBT**




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. The loan is secured by all
      of
      our assets and we are in compliance with the covenants under the term loan.
      The
      fair value of the interest rate swap is not material to our financial condition
      or results of operations. At December 31, 2006 and 2007, the outstanding balance
      on the loan was $240,000 and $19,000, respectively.




53





**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, 2005,
      2006
      and 2007 and changes during the years then ended, is presented
      below:





**2005**
            
            **2006**
            
            **2007****Weighted**
            
            
            
            **Weighted**
            
            
            
            **Weighted****Average**
            
            
            
            **Average**
            
            
            
            **Average****Shares**
            
            **Exercise
                Price**
            
            **Shares**
            
            **Exercise**
              **Price**
            
            **Shares**
            
            **Exercise**
              **Price**Outstanding
                at beginning of year
            
            
            2,291,000
            
            $
            5.04
            
            
            2,730,000
            
            $
            6.94
            
            
            2,784,000
            
            $
            8.97Granted
            
            
            677,000
            
            
            13.10
            
            
            388,000
            
            
            21.30
            
            
            308,000
            
            
            13.37Exercised
            
            
            (161,000
            )
            
            4.61
            
            
            (200,000
            )
            
            3.92
            
            
            (205,000
            )
            
            1.79Forfeited
            
            
            (77,000
            )
            
            9.30
            
            
            (134,000
            )
            
            10.94
            
            
            (126,000
            )
            
            18.26Outstanding
                at end of year
            
            
            2,730,000
            
            $
            6.94
            
            
            2,784,000
            
            $
            8.97
            
            
            2,761,000
            
            $
            9.57Exercisable
                at end of year
            
            
            1,320,000
            
            $
            4.27
            
            
            1,535,000
            
            $
            5.49
            
            
            1,677,000
            
            $
            7.13




54




**I.D.
      SYSTEMS, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**




The
      following table summarizes information about stock options at December 31,
      2007:




**Options
                Outstanding**
            
            
            
            **Options
                Exerciseable****Exercise**
              **Prices**
            
            **Number**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Aggregate**
              **Intrinsic**
              **Value**
            
            **Number**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Aggregate**
              **Intrinsic**
              **Value**1.20
                - 3.81
            
            
            319,000
            
            
            1
                years
            
            $
            1.64
            
            
            
            
            
            319,000
            
            $
            1.644.07
                - 10.00
            
            
            1,238,000
            
            
            5
                years
            
            
            6.12
            
            
            
            
            
            1,004,000
            
            
            6.1110.25 –
                19.94
            
            
            943,000
            
            
            8
                years
            
            
            13.24
            
            
            
            
            
            291,000
            
            
            13.3120.06 –
                25.38
            
            
            261,000
            
            
            8
                years
            
            
            22.36
            
            
            
            
            
            63,000
            
            
            22.632,761,000
            
            
            6
                years
            
            $
            9.57
            
            $
            11,883,000
            
            
            1,677,000
            
            $
            7.13
            
            $
            10,041,000




**Number**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Aggregate**
              **Intrinsic**
              **Value**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life**Options
                exercisable at December 31, 2007
            
            
            1,677,000
            
            $
            7.13
            
            $
            10,041,000
            
            
            4.37Vested
                and expected to vest at December 31,2007
            
            
            2,687,000
            
            $
            9.43
            
            $
            11,826,000
            
            
            5.62





The
      weighted average fair value of options granted during the years ended December
      31, 2005, 2006 and 2007 were $7.02, $11.88 and $7.05, respectively. The total
      intrinsic value of options exercised during the years ended December 31, 2005,
      2006 and 2007 was $1,327,000, $3,601,000 and $1,899,000,
      respectively.




A
      summary
      of the status of the Company's non-ovested stock options as of December 31,
      2007
      and changes during the year then ended, is presented below:





**Weighted****Average****Non-vested**
              **Shares**
            
            
            **Grant
                Date**
              **Fair
                Value**Non-vested
                at January 1, 2007
            
            
            1,249,000
            
            $
            7.11Granted
            
            
            308,000
            
            
            7.05Vested
            
            
            (369,000
            )
            
            6.09Forfeited
            
            
            (104,000
            )
            
            10.35Non-vested
                at December 31, 2007
            
            
            1,084,000
            
            $
            7.16




As
      of
      December 31, 2007, there was $5,810,000 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 2.59 years




**[4]**
            **Restricted
                stock awards and performance
                shares:**




As
      of
      December 31, 2007, there were 65,000 shares of unvested restricted stock that
      were outstanding and granted to employees, including executive officers,
      pursuant to the 1999 Stock Option Plan, as amended and restated effective April
      20, 2005. The Plan is administered by the Compensation Committee, which has
      the
      authority to determine the terms of those shares. For the year ended December
      31, 2007, the Company recorded a $941,000 stock based compensation expense
      in
      connection with the restricted stock grant. As of December 31, 2007, there
      was
      $539,000 of total unrecognized compensation cost related to non-vested shares.
      That cost is expected to be recognized over the next two years.




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.





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, the performance criteria
      was not met, and 31,250 shares were returned to the plan.





**[5]**
            **Stock
                repurchase program:**




On
      May 3,
      2007, the Company announced that it’s 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, 2007,
      the
      Company purchased approximately 483,000 shares in open market transactions
      under
      the program at an average cost of $11.55 per share.





55




**NOTE
      H- INCOME TAXES**




At
      December 31, 2007, the Company has an aggregate net operating loss carryforward
      of approximately $25,187,000 for United States federal income tax
      purposes of which $5,930,000 relates to stock options for which there were
      no compensation charges for financial reporting. At December 31, 2007, the
      Company had an aggregate net operating loss carryforward of approximately
      $20,555,000 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 2027 for federal purposes and from 2008 through 2014 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 $6,292,000 and $8,332,000
      at
      December 31, 2006 and 2007, respectively.  The increase in the deferred tax
      asset is primarily attributed to $3,288,000 of stock based compensation
      expensed during 2007 in accordance with SFAS 123R, and operating loss for the
      year. At
      December 31, 2006, certain of the Company’s stock options were treated as
      non-qualified options during the preparation of the Company’s 2006 income tax
      provision.  During 2007, management determined that these awards were
      incentive stock options and the Company adjusted the deferred tax assets
      relating thereto.  As the Company’s net deferred tax assets at December 31,
      2006 and 2007 have a full valuation allowance, this change did not impact the
      Company’s balance sheets or statements of operations.There were no other
      significant temporary differences between financial and tax
      reporting.





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 increased during 2005, decreased in
      2006 and increased in 2007 by $129,000 and $(150,000) and $2,040,000,
      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,****2005**
            
            **2006**
            
            **2007**Income
                tax expense (benefit) at the federal statutory rate
            
            $
            289,000
            
            $
            (549,000
            )
            $
            (2,496,000
            )State
                and local income taxes, net of effect on federal taxes
            
            
            (20,000
            )
            
            (81,000
            )
            
            (436,000
            )Increase
                (decrease) in valuation allowance
            
            
            129,000
            
            
            (150,000
            )
            
            2,040,000Fixed
                assets accumulated book/tax difference - prior year
            
            
            -
            
            
            117,000
            
            
            —ISO
                grants and restricted shares
            
            
            —
            
            
            599,000
            
            
            837,000Stock
                options
            
            
            (451,000
            )
            
            -
            
            
            -Other
            
            
            53,000
            
            
            64,000
            
            
            55,000$
            0
            
            $
            0
            
            $
            0





56




**NOTE
      I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS**




**[1]**
            **Operating
                leases:**




The
      Company is obligated under an operating lease for its facility. The Company's
      operating lease provides for minimum annual rental payments as
      follows:





**Year
                Ending****December
                31,**2008
            
            
            429,0002009
            
            
            418,0002010
            
            
            104,000$
            951,000





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 $398,000, $396,000 and $389,000
      for
      the years ended December 31, 2005, 2006 and 2007, respectively.




During
      2003, the Company entered into an agreement to sublease a portion of its space
      through the end of the lease. The sublease provides for monthly payments of
      approximately $12,000 and also provides for escalations relating to increases
      in
      real estate taxes and certain operating expenses. Other income of $151,000,
      $155,000 and $89,000 for the years ended December 31, 2005, 2006 and 2007,
      respectively reflects rent received by the Company under the
      sublease.  In
      July
      2007, the Company released the sublessee from the sublease and reassumed the
      space.





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




In
      September 2007, we began leasing warehouse space in Clifton, NJ. The lease
      expires in September 2008 and the rent is currently $800 per month.




**[2]**
            **Concentration
                of customers:**





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 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.




Two
      customers accounted for 45% and 18%, respectively, of the Company’s revenue
      during the year ended December 31, 2005. One of these customers accounted for
      72% of the Company’s accounts receivable and unbilled receivables at December
      31, 2005.




**[3]**
            **Officers
                bonus:**




The
      Board
      has awarded bonuses of approximately $135,000 and $128,000 to certain officers
      for the years ended December 31, 2006 and 2007, respectively. The bonuses are
      based on certain operating criteria, and is in addition to their base
      salaries.




57




**NOTE
      J - QUARTERLY SELECTED FINANCIAL DATA (UNAUDITED)**




The
      following tables contain selected quarterly financial data for each quarter
      for
      the years ended December 31, 2006 and 2007. 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.




58




**Year
                Ended December 31, 2006****1st
                Quarter**
            
            **2nd
                Quarter**
            
            **3rd
                Quarter**
            
            **4th
                Quarter**Revenue:Product
            
            $
            4,132,000
            
            $
            4,582,000
            
            $
            5,751,000
            
            $
            1,740,000Service
            
            
            2,258,000
            
            
            1,781,000
            
            
            2,323,000
            
            
            2,173,0006,390,000
            
            
            6,363,000
            
            
            8,074,000
            
            
            3,913,000Cost
                of revenue:Cost
                of product
            
            
            2,010,000
            
            
            2,241,000
            
            
            2,995,000
            
            
            984,000Cost
                of service
            
            
            1,193,000
            
            
            1,232,000
            
            
            1,504,000
            
            
            1,542,0003,203,000
            
            
            3,473,000
            
            
            4,499,000
            
            
            2,526,000Gross
                Profit
            
            
            3,187,000
            
            
            2,890,000
            
            
            3,575,000
            
            
            1,387,000Selling,
                general and administrative expense
            
            
            2,748,000
            
            
            2,910,000
            
            
            3,162,000
            
            
            4,123,000Research
                and development expense
            
            
            493,000
            
            
            560,000
            
            
            673,000
            
            
            913,000Other
                income and (expense)
            
            
            179,000
            
            
            761,000
            
            
            892,000
            
            
            1,095,000Net
                income (loss)
            
            $
            125,000
            
            $
            181,000
            
            $
            632,000
            
            $
            (2,554,000
            )Income
                (loss) per share - basic
            
            $
            0.01
            
            $
            0.02
            
            $
            0.06
            
            $
            (0.23
            )Income
                (loss) per share - diluted
            
            $
            0.01
            
            $
            0.01
            
            $
            0.05
            
            $
            (0.23
            )





**Year
                Ended December 31, 2007****1st
                Quarter**
            
            **2nd
                Quarter**
            
            **3rd
                Quarter**
            
            **4th
                Quarter**Revenue:Product
            
            $
            2,310,000
            
            $
            705,000
            
            $
            5,466,000
            
            $
            2,556,000Service
            
            
            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 product
            
            
            1,146,000
            
            
            411,000
            
            
            2,725,000
            
            
            1,577,000Cost
                of service
            
            
            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
            )Income
                (loss) per share – basic and diluted
            
            $
            (0.13
            )
            $
            (0.23
            )
            $
            (0.07
            )
            $
            (0.22
            )




59




**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, 2007, 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, 2007, 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, 2007 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, 2007.




Eisner
      LLP, the independent registered accounting firm that audited our consolidated
      financial statements included in this Annual Report on Form 10-K, has audited
      management’s assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2007. The report, which expresses
      unqualified opinions on management’s assessment and on the effectiveness of our
      internal control over financial reporting as of December 31, 2007, is included
      below.




60




**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, 2007, 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, 2007, 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, 2006 and 2007, 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, 2007, and our report dated March 11, 2008 expressed
      an
      unqualified opinion thereon.




/s/
      Eisner LLP




New
      York,
      New York


March
      11,
      2008




61




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.




62




**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 2007 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 2007 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 2007 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.




63





**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 2007 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 2007 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.





64




**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, 2006 and 2007




Statements
      of Operations for the Years Ended December 31, 2005, 2006 and 2007




Statements
      of Changes in Stockholders’ Equity for the Years Ended December 31, 2005, 2006
      and 2007




Statements
      of Cash Flows for the Years Ended December 31, 2005, 2006 and 2007




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.
                (incorporated herein by reference to the I.D. Systems, Inc.’s Form SB-2
                filed with the SEC on June 30,
                1999).




3.2
            Amended
                and Restated By-Laws of I.D. Systems, Inc. (incorporated herein by
                reference to I.D. Systems, Inc.’s Form SB-2 filed with the SEC on June 30,
                1999).




4.1
            Specimen
                Certificate of I.D. Systems, Inc.’s Common Stock (incorporated herein by
                reference to I.D. Systems, Inc.’s Form SB-2 filed with the SEC on June 30,
                1999).




10.1
            Agreement
                between I.D. Systems, Inc. and the United States Postal Service:
                Offer and
                Award Standard dated August 22, 1997, as modified on May 12, 1998,
                September 8, 1998, and March 5, 1999 (incorporated herein by reference
                to
                I.D. Systems, Inc.’s Form SB-2 filed with the SEC on June 30,
                1999).




65




10.2
            Federal
                Supply Service Information Technology Schedule Award, effective April
                16,
                1999 through April 15, 2004 (incorporated herein by reference to
                I.D.
                Systems, Inc.’s Form SB-2 filed with the SEC on June 30,
                1999).




10.3
            1995
                Non-Qualified Stock Option Plan (incorporated herein by reference
                to I.D.
                Systems, Inc.’s Form SB-2 filed with the SEC on June 30,
                1999).




10.4
            1999
                Stock Option Plan (incorporated herein by reference to I.D. Systems,
                Inc.’s Form SB-2 filed with the SEC on June 30,
                1999).




10.5
            1999
                Director Option Plan (incorporated herein by reference to I.D. Systems,
                Inc.’s Form SB-2 filed with the SEC on June 30,
                1999).




10.6
            Office
                Lease dated November 4, 1999 between I.D. Systems, Inc. and Venture
                Hackensack Holding, Inc. (incorporated herein by reference to I.D.
                Systems, Inc.’s Annual Report on Form 10-KSB for the fiscal year ended
                December 31, 1999 filed with the SEC on March 29,
                2000).




10.7
            2007
                Equity Compensation Plan (incorporated by reference to I.D. Systems,
                Inc’s
                Form S-8 filed with the SEC on July 19,
                2007).





23.1
            Consent
                of Eisner LLP.




31.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.




31.2
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.




32.1
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.




32.2
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.




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




(c) Financial
      Statement Schedules and Other Financial Statements .




Schedule
      II - Valuation and Qualifying Accounts




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


66




**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
      14, 2008




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
                14, 2008(Principal
                Executive Officer)/s/
                Kenneth S. EhrmanKenneth
                S. Ehrman
            
            President,
                Chief Operating Office and Director
            
            March
                14, 2008/s/
                Ned MavrommatisNed
                Mavrommatis
            
            Chief
                Financial Officer (Principal Financial
            
            March
                14, 2008and
                Accounting Officer)/s/
                Lawrence BursteinLawrence
                Burstein
            
            Director
            
            March
                14, 2008/s/
                Michael Monaco
            
            Director
            
            March
                14, 2008Michael
                Monaco/s/
                Beatrice Yormark
            
            Director
            
            March
                14, 2008Beatrice
                Yormark


67




**I.D.
      SYSTEMS, INC.**


**SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS**





**Charged
                to****Balance
                at**
            
            **(Write-off)**
            
            **Balance
                at****Beginning**
            
            **to
                Costs and**
            
            **End
                of****Description**
            
            **Period**
            
            **Expenses******
            
            **Period**Year
                  ended December 31, 2007 Inventory
                  reserve
            
            $
            125
            
            $
            517
            
            $
            642Year
                  ended December 31, 2006 Inventory
                  reserve
            
            $
            305
            
            $
            (180
            )
            $
            125Year
                  ended December 31, 2005 Inventory
                  reserve
            
            $
            200
            
            $
            105
            
            $
            305





**Charged
                to****Balance
                at**
            
            **(Write-off
                )**
            
            **Balance
                at****Beginning**
            
            **to
                Costs and**
            
            **End
                of****Description**
            
            **Period**
            
            **Expenses**
            
            **Period**Year
                  ended December 31, 2007allowance for doubtful
                  accounts
            
            $
            239
            
            $
            —
            
            $
            239Year
                  ended December 31, 2006 allowance for doubtful
                  accounts
            
            $
            28
            
            $
            211
            
            $
            239Year
                  ended December 31, 2005allowance for doubtful
                  accounts
            
            $
            8
            
            $
            20
            
            $
            28




68