SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2004     Commission file number: 1-15087


                               I.D. SYSTEMS, INC.
                  ---------------------------------------------
                 (Name of small business issuer in its charter)

           Delaware                                      22-3270799
---------------------------------                    ------------------
(State or other jurisdiction                         (I.R.S. Employer
of incorporation or organization)                    Identification No.)


One University Plaza, Hackensack, New Jersey             07601
--------------------------------------------          ----------
(Address of Principal Executive Offices)              (Zip Code)

            Issuer's telephone number, including area code: (201) 996-9000
            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

Check  whether  the Issuer  (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]  No [_].

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

State issuer's revenues for its most recent fiscal year = $13,741,000.

The  aggregate  market  value of the Common Stock held by  nonaffiliates  of the
Issuer was  approximately  $72,210,000  based upon the last sales  price of such
stock on March 15, 2005, as disclosed on The NASDAQ National Market (IDSY).

The number of shares of common stock, par value $0.01 per share,  outstanding as
of March 15, 2005 was 7,707,000.

DOCUMENTS INCORPORATED BY REFERENCE

Part  III  incorporates  information  by  reference  from the  definitive  proxy
statement to be filed in  0connection  with the issuer's 2005 annual  meeting of
stockholders.

<PAGE>

                                TABLE OF CONTENTS
                                -----------------
<TABLE>
<CAPTION>
                                                                                           PAGE
                                                                                           ----

<S>      <C>        <C>                                                                    <C>
PART I.  .....................................................................................1

         Item 1.    Description of Business...................................................1

         Item 2.    Description of Properties................................................16

         Item 3.    Legal Proceedings........................................................17

         Item 4.    Submission of Matters to a Vote of Security Holders......................17

PART II. ....................................................................................18

         Item 5.    Market for Registrant's Common Equity and Related
                    Stockholder Matters......................................................18

         Item 6.    Management's  Discussion and Analysis of Financial Condition
                    and Results of Operations................................................18

         Item 7.    Financial Statements.....................................................25

         Item 8.    Changes In and  Disagreements  with Accountants on
                    Accounting and Financial Disclosure......................................26

         Item 8A.   Controls and Procedures..................................................26

         Item 8B.   Other Information........................................................26

PART III.....................................................................................27

         Item 9.    Directors,  Executive Officers,  Promoters and Control Persons,
                    Compliance With Section 16(a) of the Exchange Act........................27

         Item 10.   Executive Compensation...................................................27

         Item 11.   Security  Ownership of Certain Beneficial Owners and
                    Management and Related Stockholder Matters...............................27

         Item 12.   Certain Relationships and Related Transactions...........................27

         Item 13.   Exhibits.................................................................27

         Item 14.   Principal Accountant Fees and Services...................................28
</TABLE>

                                       i
<PAGE>

PART I.

ITEM 1.  DESCRIPTION OF BUSINESS

      I.D. Systems, Inc. (the "Company"), a Delaware corporation incorporated in
1993,  is a leading  provider  of  advanced  wireless  solutions  for  tracking,
managing,  and securing  enterprise  assets.  The  Company's  patented RF (radio
frequency)  technology  and  proprietary  software,  the Wireless  Asset Net(TM)
System, enables real-time,  automated,  cost-effective monitoring,  control, and
analysis of a broad range of objects.  The Company's solutions can benefit users
by reducing operating costs, increasing security and revenues, improving safety,
enhancing service,  and increasing  profits.  The Company's customers include 3M
Company,  American Axle, Archer Daniels Midland,  Avis Rent A Car System,  Inc.,
DaimlerChrysler,  Deere & Co., Ford Motor Company,  General  Dynamics,  Hallmark
Cards,  Northrop  Grumman,   Target  Corporation,   Toyota  Motor  Manufacturing
Kentucky,  Inc.,  Walgreen Co., the U.S. Navy, the U.S. Postal Service,  and the
U.S. Transportation Security Administration, among others. During the year ended
December  31,  2004,  Ford  Motor  Company,  Target  Corporation  and  the  U.S.
Transportation  Administration  accounted  for  approximately  49%, 15% and 12%,
respectively, of the Company's revenue. During the year ended December 31, 2003,
Ford Motor Company  accounted for approximately 58% of the Company's revenue and
no other customer accounted for more than 10% of the Company's revenue.

2004 HIGHLIGHTS

      o     Expansion of business with Ford Motor Company,  including additional
            orders  for I.D.  Systems'  industrial  vehicle  electronic  control
            systems (IVECS) for Ford's North American  manufacturing plants, and
            a new contract to provide  enterprise-wide  support and  maintenance
            for IVECS. The IVECS system is designed to enhance safety, security,
            and maintenance for forklifts and other  industrial  equipment.  The
            system is designed  to improve  safety and  security by  restricting
            vehicle  access to trained,  authorized  operators  (as  required by
            OSHA) and by providing electronic safety inspection checklists.  The
            system can reduce  maintenance  expenses by automatically  uploading
            vehicle data,  reporting  problems  identified on checklists in real
            time,  scheduling  maintenance  according  to actual  vehicle  usage
            rather than on a calendar basis,  and helping  management  determine
            the optimal economic time to replace equipment.

      o     Expansion of business  with Target  Corporation,  which rolled out a
            new version of I.D.  Systems'  Wireless Asset Net  industrial  fleet
            management system on approximately 400 material handling vehicles in
            Target  distribution  facilities  throughout the United States. This
            roll-out  program  followed a successful  pilot  initiative in which
            I.D.  Systems  demonstrated  the  value of new  system  enhancements
            designed specifically for warehouse/distribution environments.

      o     Continued  work with the United States  Postal  Service  (USPS),  to
            translate the previous  success of Wireless  Asset Net technology at
            individual USPS mail processing  facilities into an  enterprise-wide
            implementation of a wireless Powered  Industrial  Vehicle Management
            System (PIVMS). These efforts culminated in a USPS contract award to
            I.D.  Systems,  announced  in January  2005,  for a  national  PIVMS
            deployment  encompassing  up to 460  USPS  facilities  over the next
            three years. The PIVMS represents I.D. Systems' most technologically
            advanced   wireless   solution   to  date,   with   state-of-the-art
            functionality for controlling and tracking mobile equipment.


                                       1
<PAGE>

      o     Continued  development of homeland  security  applications  with the
            Transportation   Security   Administration   (TSA),   including  the
            successful  completion of a series of key functional tests at Newark
            Liberty International Airport, an increase in funding for the Newark
            program,  and the award of a new TSA  contract  to deploy a wireless
            vehicle security system at a seaport in Jacksonville,  Florida. This
            vehicle security system, a version of I.D.  Systems'  Wireless Asset
            Net, has advanced  capabilities to deter  potential  threats at port
            facilities,  including alerts when vehicles enter prohibited  areas,
            emergency  remote  disabling  of  vehicles,  and  reports  detailing
            vehicle and operator activity.

      o     Expansion  of business  with WinCo  Foods,  which placed a follow-on
            order for the Wireless Asset Net for its newest distribution center.
            I.D.  Systems'  continued  penetration  into the food processing and
            distribution industry resulted in the company being named to the "FL
            100," a list of 100 prominent technology solution providers selected
            by the food industry publication Food Logistics.

      o     Continued  development of rental car fleet  management  applications
            with  Avis Rent A Car  System,  Inc.,  which  has a  version  of the
            Wireless  Asset Net  deployed on its  2,000-vehicle  fleet in Puerto
            Rico. This system is designed to automate various aspects of the car
            rental and return  process,  helping  improve  customer  service and
            increasing  the  efficiency  of fleet  operations.  For example,  by
            accurately  detecting and automatically  transmitting  vehicle data,
            the system can help renters get on their way more quickly at the end
            of their rentals.

      o     Continued work with Northrop Grumman Ship Systems, General Dynamics'
            National  Steel  and  Shipbuilding  Company,  and  the  U.S.  Navy's
            Portsmouth  Naval  Shipyard  to develop  and  implement  an advanced
            Wireless  Equipment  Monitoring  and  Control  System  (WEMACS)  for
            commercial and shipyard  environments.  This project,  funded by the
            National  Shipbuilding   Research  Program,   includes  new  product
            development for monitoring complex machinery such as cranes.

      o     New business in the automotive  industry,  as Premier  Manufacturing
            Support  Services ordered the Wireless Asset Net on behalf of one of
            the world's largest automotive parts manufacturers. Premier provides
            management and support services for more than 120 automotive  plants
            worldwide and could potentially  develop into a strategic  marketing
            and system support partner for I.D. Systems.

      o     New business in the mass market retail distribution sector, as Wajax
            Industries  ordered  the  Wireless  Asset  Net on  behalf of a major
            Canadian  retailer,  as announced in January 2005. With a network of
            31 branches across Canada,  Wajax  distributes  mobile equipment and
            provides related services for a wide range of industries - including
            retail/wholesale  distribution,  manufacturing,  mining,  utilities,
            construction,   and  forestry  -  and  could  potentially  become  a
            foundation for I.D. Systems' dealer/ reseller program in Canada.

      o     New Wireless Asset Net system enhancements,  including the launch of
            a new  generation  of  wireless  vehicle  monitoring  hardware  (the
            Universal  Vehicle Asset  Communicator,  or UVAC 02) and a series of
            software  upgrades.   The  UVAC  02  has  expanded  data  management
            capabilities,  can be installed more quickly and easily than earlier
            hardware   generations,   simplifies   interactivity  for  equipment
            operators, and allows for easier maintenance.  The improved software
            includes  expanded server options for  enterprise-wide  deployments,
            augmented database support, increased data throughput, new reporting
            and   auto-emailing    tools,   and   enhanced   remote   diagnostic
            capabilities.


                                       2
<PAGE>

      o     New RFID-based product  developments,  including the Battery Charger
            Monitoring  Point(TM)  (Battery  ChaMP(TM)),  the AC  Power  Control
            Module (ACPCM), and the Machine Asset Communicator(TM) (MAC).

            o     The Battery ChaMP  provides  remote  management  and real-time
                  visibility  of batteries  and chargers used to power fleets of
                  electric vehicles.  I.D. Systems has already received an order
                  for  this  new  product,   as  announced  in  January  2005  -
                  AeroVironment,   Inc.   purchased  500  ChaMP  units  for  its
                  PosiCharge(TM)  fast-charging  system, which is being deployed
                  for a major automotive manufacturer.

            o     The ACPCM product,  developed as part of I.D. Systems' program
                  with the  National  Shipbuilding  Research  Program,  supports
                  Wireless Asset Net installations on complex machinery, such as
                  cranes.  The ACPCM is designed to  accommodate  virtually  any
                  power  input  and  monitor  multiple  motor  data  points  for
                  advanced   maintenance   management   and  asset   utilization
                  analysis.

            o     The MAC product  provides  advanced  wireless  monitoring  and
                  control  of  fixed  machinery,   including  automatic  quality
                  control  checks,   real-time  alerts  on  out-of-specification
                  machine  parameters,  automatic  machine  shut-down  based  on
                  user-defined criteria, and electronic maintenance  checklists.
                  The initial application of MAC technology is in the automotive
                  industry, where it is being used to enforce quality control on
                  adhesive-dispensing robots.

      o     A new cooperative relationship with Unisys Corporation,  which, as a
            subcontractor to I.D. Systems, will provide implementation  services
            and technical support for I.D. Systems' program with the U.S. Postal
            Service.  I.D.  Systems is also  working  with Unisys in an informal
            joint marketing capacity to explore other opportunities for Wireless
            Asset Net system deployments within the U.S. Government.

      o     The  transition  of trading in I.D.  Systems  common  stock from the
            NASDAQ Small Cap Market to the NASDAQ National Market on November 8,
            2004.

THE TECHNOLOGY

      The primary  hardware  components  of the  Company's  system are  wireless
programmable  "Asset  Communicators"  installed  on each  asset  and one or more
fixed-position  "System  Monitors"  which form a coverage  area.  These  devices
communicate with each other via low-power radio frequency  transmissions with no
ongoing communication costs.

      Asset  Communicators  are miniature  programmable  computers  that provide
significantly  more  functionality than conventional asset tracking "RFID tags".
For   example,   Asset   Communicators   can  control   access,   detect   asset
movement/location,  monitor asset  utilization,  provide two-way text messaging,
and store a large amount of dynamic,  configurable  asset data.  The firmware in
the devices can also be readily customized to meet specific customer needs.


                                       3
<PAGE>

      The system  does not  require a central or  controlling  computer  to make
decisions.  Asset Communicators and System Monitors make decisions autonomously,
which  significantly  reduces  the  overall  system  cost  and  improves  system
reliability.  System Monitors  incorporate a computer network connection as well
as a two-way  RF  transceiver,  and are  capable  of  linking to both the mobile
assets being monitored and to management software on the network.

      The Company  designs and  implements  software  as well as  hardware.  Its
modular  software  systems  are  user-friendly,   utilizing  a  robust  database
platform, a Windows-style browser-based graphical user interface and options for
both client-server and web-based delivery.

CURRENT TARGET MARKETS

      While there are diverse  applications  for its technology,  the Company is
currently  focused  on  companies  that  need to  monitor,  control  and  manage
industrial vehicles and rental fleet vehicles.

      INDUSTRIAL  VEHICLE  APPLICATIONS.  The Company's  WIRELESS  ASSET NET(TM)
fleet  management  system is designed to address the safety,  security  and cost
issues of the  material  handling  industry.

      To improve fleet safety and security, the system provides:

      o     wireless  vehicle access control to restrict  access of equipment to
            trained and authorized  personnel,  as required by the  Occupational
            Safety and Health Administration ("OSHA");

      o     electronic vehicle inspection checklists for paperless proof of OSHA
            compliance;

      o     early detection of emerging vehicle safety issues; and

      o     impact sensing to assign responsibility for accidents.

      The Company's  system is designed to prevent  unauthorized  personnel from
operating  equipment,  which we believe  results  in  optimizing  fleet  health,
eliminating  anonymous accidents and reducing  damage-related  costs. To further
reduce fleet  maintenance  costs,  the  Wireless  Asset Net also  automates  and
enforces preventative maintenance scheduling by:

      o     wirelessly  uploading true  "drive-time"  data from each  individual
            vehicle;

      o     automatically  prioritizing  maintenance  events  based on  weighted
            variables; and


                                       4
<PAGE>

      o     enabling remote lock-out of vehicles  overdue for  maintenance.  The
            system  can also  interface  seamlessly  with  existing  maintenance
            databases.

      To generate perhaps the most significant  impact on fleet operating costs,
the Wireless  Asset Net provides a set of tools to measure  vehicle and operator
utilization  and  justify  fleet  and  or  personnel   reductions.   The  system
automatically records the actual usage-time against idle-time of each individual
vehicle/operator  to benchmark  productivity,  compare  performance,  and enable
informed  decisions about vehicle  allocation,  disposal,  and replacement.  The
system also visually  monitors the location of vehicles -- both in real time and
historically  -- to locate  vehicles  that are idle or due for  maintenance,  to
instantly track vehicle inventory,  and to monitor vehicle travel-paths in order
to optimize  labor  efficiencies.  In  addition,  the system  communicates  work
instructions   to  vehicle   operators   via  two-way  text  paging  to  improve
productivity.

      The  Company  believes  its  Wireless  Asset  Net  technology  can  have a
significant  impact on the  security of airports and  military  bases.  Aircraft
ground support equipment includes aircraft tow tractors,  cargo loaders, baggage
tractors,  fuel trucks,  and catering trucks. The Company believes there are few
systems that effectively  control and monitor the use of these vehicles.  In the
absence of such  controls,  a  perpetrator  who gains access to the ramp area at
airports  could  access  ground  support  equipment  without  restriction.   The
Company's wireless solution prevents unauthorized use of aircraft ground support
equipment by linking vehicle ignition to a personal identification system and/or
biometrics.  The system  requires an  operator  to present an access  control ID
badge to the system's  intelligent  vehicle-mounted  hardware (and,  optionally,
enter a PIN code) prior to operating a vehicle that services aircraft.  A person
must be authorized and trained for a particular vehicle, in a particular area of
the  airport,  at a particular  time of day, in order to use the  vehicle.  This
driver tracking and control technology not only prevents the unauthorized use of
equipment, but it also allows equipment to be instantly and remotely deactivated
via radio frequency in the event of an emergency.

      The industrial vehicle market is the Company's most developed application.
Customers  that have piloted  and/or  deployed the Company's  Wireless Asset Net
system   include,   3M  Company,   American  Axle,   Archer   Daniels   Midland,
DaimlerChrysler,  Deere & Co., Ford Motor Company,  General  Dynamics,  Hallmark
Cards,  Northrop Grumman,  Target Corporation,  Walgreen Co., the U.S. Navy, the
U.S. Postal Service, and the U.S. Transportation Security Administration,  among
others.

      To expand the scope and variation of its industrial  equipment  management
applications,  the Company has  developed  several new  products,  including the
Battery Charger Monitoring Point(TM) (Battery  ChaMP(TM)),  the AC Power Control
Module (ACPCM), and the Machine Asset Communicator(TM) (MAC).

      The Battery ChaMP provides remote  management and real-time  visibility of
batteries  and  fast-chargers  used to power fleets of electric  vehicles.  This
wireless visibility ensures that fast-charge  systems are properly  administered
and maintained to maximize  return on investment  for the customer.  The Company
has provided  AeroVironment,  Inc.'s  PosiCharge(TM)  business unit with Battery
ChaMP systems in support of a  fast-charging  system being  deployed for a major
automotive manufacturer.


                                       5
<PAGE>

      The ACPCM  product,  developed as part of I.D.  Systems'  program with the
National   Shipbuilding   Research   Program,   supports   Wireless   Asset  Net
installations  on complex  machinery,  such as cranes.  The ACPCM is designed to
accommodate virtually any power input and monitor multiple motor data points for
advanced maintenance management and asset utilization analysis.

      The MAC product provides advanced wireless monitoring and control of fixed
machinery,  including  automatic  quality  control checks,  real-time  alerts on
out-of-specification  machine  parameters,  automatic machine shut-down based on
user-defined  criteria,  and  electronic  maintenance  checklists.  The  initial
application of MAC technology is in the automotive  industry,  where it is being
used to enforce quality control on adhesive-dispensing robots.

      RENTAL FLEET  APPLICATIONS.  The Company's  wireless rental car monitoring
system automatically uploads mileage and fuel data from rental vehicles,  and is
designed  to produce a  significant  impact on rental  revenues  and  quality of
customer service to the user's customers.

      There are many benefits  offered by the  Company's  solution to car rental
companies,  with  two  such  benefits  being  the most  significant.  First,  by
accurately  reporting  fuel  levels,  without  human  intervention,  rental  car
companies can potentially  increase revenues by accurately billing customers for
fuel used.  Second,  by utilizing the Company's  system,  the average car return
transaction,  including  customer wait time,  can be reduced as well.  This time
savings  can  allow the  rental  company  to reduce  staff  and/or  devote  more
attention  to  customer  service  or  vehicle  inspections,  which may result in
detecting damage that would otherwise go unnoticed and uncharged.

      The system also automates the car rental and car handling processes.  As a
customer  approaches the exit gate, the system recognizes the  identification of
the car and validates the rental for security purposes. In addition,  the system
prints the rental  agreement  for the  customer as he/she  leaves the lot.  This
functionality  eliminates the need to pre-assign  vehicles and pre-print  rental
contracts. The system is also designed to optimize fleet usage by automating the
inventory process and monitoring the flow of vehicles.

      The  Company  and Avis Rent A Car  System,  Inc.  commenced  a program  to
implement the Company's Wireless Asset Net fleet management  technology on Avis'
fleet of  approximately  2,000 rental  vehicles in Puerto Rico.  Puerto Rico was
selected  because it allows the use of the  Company's  system on a captive fleet
which is intended to be  representative of benefits that can also be achieved as
a result of broader based implementation.

FUTURE APPLICATIONS AND OTHER MARKETS

      Deployment of the Company's system infrastructure in customers' facilities
creates many new revenue  opportunities.  The Company's system enables virtually
any asset owned,  operated or  maintained  by a customer to be  monitored.  With
relatively simple customizations, the Company can create and deploy asset "tags"
to track pallets and containers, control the use of machinery, cranes and manage
other  assets.  Once these tags are  deployed,  the  customer  can  utilize  one
integrated  system for all of its asset tracking and monitoring  needs. To date,
the Company  delivered  effective  systems  that have  demonstrated  significant
benefits by providing companies with the ability to monitor,  control and manage
railcars, as well as letters and packages.


                                       6
<PAGE>

MANUFACTURING

      The Company  outsources its hardware  manufacturing  operations to leading
contract manufacturers,  including Flextronics  International Ltd. and NuVisions
Manufacturing  Inc.  This  strategy  enables  the  Company  to focus on its core
competency - designing hardware and software systems and delivering solutions to
customers   -  and  to  avoid   investing   in   capital-intensive   electronics
manufacturing  infrastructure.  Outsourcing  also  provides the Company with the
ability to ramp up deliveries  to meet  increases in demand  without  increasing
fixed expenses.

      The Company's  manufacturers  are  responsible for obtaining the necessary
components and supplies to manufacture the Company's products.  While components
and supplies are generally  available  from a variety of sources,  manufacturers
generally  depend  on a limited  number of  suppliers  for  several  components,
certain   subassemblies  and  products.  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  the  Company's
products,  the  Company  does  not  believe  that  the  loss  of  either  of its
manufacturers  would have a long-term  material  adverse effect on its business,
although there could be a short-term adverse effect on the business.

      The Company generally  attempts to maintain  sufficient  inventory to meet
customer  demand for products on short  notice,  as well as to meet  anticipated
sales levels. If the Company's product mix changes in unanticipated  ways, or if
sales for particular products do not materialize as anticipated, the Company may
have excess  inventory or inventory that becomes  obsolete.  In such cases,  the
Company's operating results could be negatively affected.

SALES AND MARKETING

      The  Company's  sales and  marketing  objective is to achieve broad market
penetration  through  targeted  sales  activities,  with  an  emphasis  both  on
expanding business opportunities and applications with existing customers and on
developing new customers and  applications.  The Company  currently  markets its
systems to large  corporations and government  agencies primarily through direct
sales.  In addition,  the Company has developed,  and will continue to focus on,
strategic  relationships  with  key  companies  in  target  markets,   including
equipment  dealers,   complementary  hardware  and  software  vendors,  original
equipment manufacturers (OEMs), and service providers.

      The  Company  has a new  United  States  General  Services  Administration
contract  pending  that  will  enable  any  government  agency to  purchase  the
Company's  products  on an  off-the-shelf  basis,  without  further  competitive
bidding.  This contract  will  supersede a previous GSA contract that expired in
September  2004 and will  incorporate  numerous  new  products  and services not
covered  under the  previous  contract.  The Company  believes  that the new GSA
contract will provide significant sales opportunities with government agencies.


                                       7
<PAGE>

RESEARCH AND DEVELOPMENT

      In the past,  we  focused  our  research  and  development  efforts on the
development and deployment of a "universal  system," which allows widespread use
of the Company's hardware and software on a broad and diverse base of industrial
equipment assets without requiring multiple or custom versions.

      In addition,  the Company customized its core fleet management  technology
to meet the needs of several emerging  markets,  including the rental car market
and the airport ground service  equipment  market.  As a result of the important
security  implications of the Company's  technology in the airport  environment,
our  internal  research  and  development  funding was  partially  offset by the
Transportation Security Administration.

      We  intend  to  continue  our   commitment  to   leading-edge   technology
development. Current research and development efforts have transitioned to:

      o     further expanding the list of features and benefits to customers;

      o     meeting the requirements of new classes of assets;

      o     reducing the size and cost of the Company's core products; and

      o     simplifying product manufacturing and deployment.

Additionally,  we believe that the Company's core digital, wireless and software
systems have and will continue to expand on cutting-edge technologies.

      The Company expended  $891,000 and $1,234,000 for research and development
during the years ended December 31, 2003 and 2004, respectively.

COMPETITION

      The market for wireless  tracking and  management of enterprise  assets is
relatively  new,  constantly  evolving,  and highly  competitive.  Although  the
Company's  current  competitors do not provide the precise  capabilities  of the
Company's systems, they do offer subsets of the Company's system capabilities or
alternate  approaches  to the  issues  the  Company's  products  address.  Those
companies include both emerging companies with limited operating histories, such
as WhereNet  Corp.,  Media  Recovery,  Inc.,  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 the
Company,  such as Savi  Technology,  Symbol  Technologies,  Inc.,  and  Intermec
Technologies Corp. The Company competes  principally on the basis of performance
and  the  quality  of its  products  and  services.  The  Company  expects  that
competition  will intensify in the near future.  However,  the Company  believes
there are significant barriers to entry for the Company's potential competitors.


                                       8
<PAGE>

INTELLECTUAL PROPERTY

      The  Company  currently  has one United  States  patent  which  expires in
October of 2014,  and pending  patent  applications  relating  to the  Company's
system architecture, system functionality and rental car technology. It also has
a  corresponding  patent and pending  patent  applications  in selected  foreign
countries.  The patents and patent applications may not provide the Company with
any  competitive  advantage.   Many  of  the  Company's  current  and  potential
competitors   dedicate   substantially   greater  resources  to  protection  and
enforcement of intellectual property rights.

      The Company attempts to avoid infringing known proprietary rights of third
parties  in its  product  development  efforts.  However,  the  Company  has not
conducted  and does not  conduct  comprehensive  patent  searches  to  determine
whether it infringes patents or other proprietary  rights held by third parties.
In addition,  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  when  filed,  with  regard to similar
technologies.  If the  Company  were  to  discover  that  its  products  violate
third-party proprietary rights, the Company may not be able to:

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

      o     reengineer   the   Company's   products    successfully   to   avoid
            infringement;

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


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

      Any claims against the Company 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 the Company's business, financial condition and results of operations.

      The Company's  software  products are susceptible to unauthorized  copying
and  uses  that  may  go  undetected,  and  policing  such  unauthorized  use is
difficult.  In  general,  the  Company's  efforts  to protect  its  intellectual
property rights through patent,  copyright,  trademark and trade secret laws 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 the  Company.  The  Company's  failure or
inability to protect its proprietary  rights could  materially  adversely affect
the Company's business, financial condition and results of operations.

GOVERNMENT REGULATIONS

      The use of radio  emissions are subject to regulation in the United States
by various  Federal  agencies  including the Federal  Communications  Commission
("FCC"), the OSHA and various State agencies have promulgated  regulations which
concern the use of lasers and/or radio/electromagnetic emissions standards.


                                       9
<PAGE>

      Regulatory  changes in the United  States and other  countries in which we
may operate in the future may  require  modifications  to some of the  Company's
products in order for it to continue to be able to manufacture  and market these
products.

      The Company's  products  intentionally  transmit  radio 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 these products.
Some of the Company's  products  transmit  narrow band and spread spectrum radio
signals as part of their normal operation.

      The  Company has  obtained  certification  from the FCC for the  Company's
narrow band and spread spectrum radio  products.  Users of these products in the
United  States do not require any license  from the FCC to use or operate  these
products.

      The   implementation   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.

      In addition,  some of the Company's  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.

EMPLOYEES

      The Company currently has fifty-five full time employees, of which sixteen
are  engaged in  customer  satisfaction,  twelve in product  development  (which
includes engineering), nine in operations, nine in sales and marketing, and nine
in finance and  general  administration.  None of the  Company's  employees  are
represented by union or collective bargaining  agreements.  The Company believes
that it's relationships with its employees are good.

RISK FACTORS

WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND A SUBSTANTIAL  ACCUMULATED
EARNINGS DEFICIT AND WE MAY NOT BE ABLE TO MAINTAIN OUR PROFITABILITY

      Although we generated  net income of  approximately  $400,000 for the year
ended   December  31,  2004,  we  have  incurred   substantial   net  losses  of
approximately  $1.2  million and $1.4  million for the years ended  December 31,
2003 and 2002, respectively. At December 31, 2004, we had an accumulated deficit
of  approximately  $11.4  million.  If  revenues  do not  continue to grow or if
operating expenses exceed our expectations or cannot be adjusted accordingly, we
may not be able to  continue  to  maintain  profitability  and the  value of our
common stock could decline significantly.


                                       10
<PAGE>

THE MARKET  FOR OUR  TECHNOLOGY  MIGHT NOT  CONTINUE  TO  DEVELOP,  CAUSING  OUR
REVENUES TO DECREASE

      Our success is highly dependent on the continued market  acceptance of our
wireless  monitoring and tracking system. The market for wireless monitoring and
tracking products and services is new and rapidly  evolving.  We are not certain
that our future  target  customers  will  purchase our wireless  monitoring  and
tracking system. Additionally, we cannot assure you that the market for wireless
monitoring   and  tracking   technology   will  continue  to  emerge  or  become
sustainable.  If the market for our products fails to grow, develops more slowly
than we expect or becomes  saturated with competing  products or services,  then
our revenues  will not increase and our  financial  condition  may be materially
adversely affected.

OUR  CONCENTRATION  OF REVENUE TO ONE MAJOR  CUSTOMER,  FORD MOTOR COMPANY,  MAY
ADVERSELY  AFFECT OUR BUSINESS IF FORD  DECIDES TO  DISCONTINUE  PURCHASING  OUR
PRODUCTS.

      During the year ended  December  31,  2004,  Ford  Motor  Company,  Target
Corporation   and  the  U.S.   Transportation   Administration   accounted   for
approximately 49%, 15% and 12%, respectively,  of the Company's revenue.  During
the year ended December 31, 2003, Ford Motor Company accounted for approximately
58% of the  Company's  revenue.  Our  revenue  and our  profitability  would  be
adversely  affected if these customers ceased  purchasing from us. We would have
no  guarantee  that we would be able to replace  the loss of such  revenue  with
existing or new  customers or in a timely  manner to avoid an adverse  financial
impact to our business.

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL  REQUIREMENTS,  LIMITING OUR ABILITY
TO DEVELOP AND EXPAND OPERATIONS

      Based on our current estimates, we believe that we have sufficient cash to
continue  operations  for at least the next 12  months.  Unplanned  expenses  or
development  opportunities may require us to raise additional capital. We cannot
be certain that additional financing will be available when we require it and to
the extent that we require it. If additional funds are unavailable to us, or are
not available to us on acceptable terms, we may be unable to fund our expansion,
develop or enhance our products or respond to competitive pressures.

IF WE RAISE ADDITIONAL CAPITAL THROUGH THE SALE OF COMMON STOCK, PREFERRED STOCK
OR CONVERTIBLE  DEBT SECURITIES,  THE PERCENTAGE  OWNERSHIP OF OUR THEN EXISTING
STOCKHOLDERS WILL BE DILUTED

      In order to raise  additional  capital,  we have issued  common  stock and
warrants to purchase our common stock, and in the future we may issue additional
shares of common stock,  options,  warrants,  preferred stock,  other securities
exercisable  for or  convertible  into our common stock or debt.  In addition at
March 15, 2005,  there were options to employees and directors  outstanding  for
the purchase of approximately 2,776,000 shares of our common stock. We expect to
continue to grant  employees  stock options.  Holders of our common stock do not
have  preemptive  rights.  Therefore,  issuances of additional  securities  will
dilute the percentage ownership of our stockholders.  If additional financing is
raised through debt financing,  it may involve significant restrictive covenants
which could affect our ability to operate our business.


                                       11
<PAGE>

OUR FAILURE TO PROTECT OUR  PROPRIETARY  TECHNOLOGY  MAY IMPAIR OUR  COMPETITIVE
POSITION

      We believe that we have a competitive  advantage  due to our  intellectual
property rights.  Although we seek to protect our  intellectual  property rights
through  patents,  copyrights,  trade secrets and other  measures,  we cannot be
certain that: we will be able to adequately protect our technology;  our patents
will not be  successfully  challenged by one or more third parties,  which could
result in our loss of the right to prevent others from exploiting the technology
described  in the  patent;  competitors  will  not be  able to  develop  similar
technology  independently;  and  intellectual  property laws will be adequate to
protect our intellectual property rights. Furthermore, policing the unauthorized
use of our products is difficult,  and expensive  litigation may be necessary to
enforce our intellectual property rights. Accordingly, we cannot be certain that
we will 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 the technological advantage we have over competitors.

WE COULD INCUR  SUBSTANTIAL  COSTS  DEFENDING OUR  INTELLECTUAL  PROPERTY FROM A
CLAIM OF INFRINGEMENT BY A THIRD PARTY

      In recent  years,  there has been  significant  litigation  in the  United
States   involving   claims  of  alleged   infringement  of  patents  and  other
intellectual  property  rights.  Any such litigation could result in substantial
costs and diversion of  management's  attention and our  resources.  We may be a
party to litigation from time to time as a result of an alleged  infringement of
another's  intellectual  property.  If a claim of  infringement  of intellectual
property  rights was decided against us, we could be required to: cease selling,
incorporating  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 or use the relevant  technology,  which license
may not be available on reasonable terms; or redesign those products or services
that incorporate such technology.

IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, WE MAY BE UNABLE TO
MEET THE NEEDS OF OUR CUSTOMERS

      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  enhancing  our current  products.  However,
research and development in our industry is complex and filled with uncertainty.
If we expend a  significant  amount of resources  and our efforts do not lead to
the  successful  introduction  of new or  improved  products,  there  could be a
material  adverse  effect on our revenues and market share.  In addition,  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, which may result in lost market opportunities.  In addition,
new products may not be  commercially  well received.  There could be a material
adverse effect on our revenues,  operating  results and market share due to such
delays or deficiencies  in the  development,  manufacturing  and delivery of new
products. In addition, our inability to meet customer needs would lead to a loss
of customers and a decrease in our revenues.


                                       12
<PAGE>

IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO RECRUIT ADDITIONAL PERSONNEL,  OUR
BUSINESS MAY SUFFER

      We are  dependent  on the  continued  employment  and  performance  of our
executive  officers  and key  employees,  particularly  Jeffrey M. Jagid,  Chief
Executive Officer,  Kenneth S. Ehrman, Chief Operating Officer, Ned Mavrommatis,
Chief Financial Officer,  Michael Ehrman,  Executive Vice President  Engineering
and Frederick Muntz, Executive Vice President Sales and Marketing.  We currently
do not have employment  agreements with our key employees.  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.
We cannot be certain that we will be able to maintain salaries at market levels.
Therefore,  we cannot be certain that we will be  successful  in  attracting  or
retaining qualified personnel in the future.

WE MIGHT NOT BE ABLE TO OBTAIN  THE  SERVICES  OF  QUALIFIED  SUBCONTRACTORS  TO
PRODUCE OUR PRODUCTS LEADING TO DISRUPTION IN PRODUCTION AND DISTRIBUTION OF OUR
PRODUCTS TO OUR CUSTOMERS

      In order to meet our  requirements  under  our  contracts,  we rely on the
efforts and skills of subcontractors for the manufacture of our products and the
delivery  of our  products  to our  customers.  Our  dependence  on  third-party
manufacturers  subjects  us to the risk of  failure  by these  third  parties to
provide us with our  products in a timely  manner and  customer  dissatisfaction
with the quality or  performance  of our  products  manufactured  by these third
parties.  Quality or performance  failures by our third-party  manufacturers  or
changes in their  financial or business  condition  could disrupt our ability to
supply  quality  products to our customers  and thereby have a material  adverse
effect on our business, revenues and financial condition. In addition, if we are
unable to  fulfill  orders  from our  customers,  we could  experience  business
interruption,  increased  costs,  damage  to  our  reputation  and  loss  of our
customers.  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  delayed and/or  reduced.
There is great competition for the most qualified and competent  subcontractors.
If we are unable to afford or hire qualified  subcontractors  the quality of our
services and products could decline. In addition,  third-party manufacturers are
consolidating  in  the  electronic  component  industry.  The  consolidation  of
third-party   manufacturers  may  give  the  remaining  and  larger  third-party
manufacturers  greater  leverage  to  increase  the prices  that they charge and
thereby increase our manufacturing costs.

THE  INDUSTRY  IN  WHICH WE  OPERATE  IS  HIGHLY  COMPETITIVE,  AND  COMPETITIVE
PRESSURES FROM EXISTING AND NEW COMPANIES MAY HAVE A MATERIAL  ADVERSE EFFECT ON
OUR BUSINESS, REVENUES, GROWTH RATES AND MARKET SHARE.

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

      o     advances in technology;

      o     New product introductions;


                                       13
<PAGE>

      o     evolving industry standards;

      o     product improvements;

      o     rapidly changing customer needs;

      o     intellectual property invention and protection;

      o     marketing and distribution capabilities;

      o     competition from highly capitalized companies;

      o     entrance of new competitors;

      o     ability of customers to invest in information technology; and

      o     price competition.

      If we do not keep pace with product and technology  advances,  there could
be a material adverse effect on our competitive position, revenues and prospects
for growth. There is also likely to be continued pricing pressure as competitors
attempt to maintain or increase market share.

      The  products  manufactured  and  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. We may not be able to compete  successfully
against  these  new  competitors,  and  competitive  pressures  may  result in a
material adverse effect on our revenues and our operating results.

THE FEDERAL  GOVERNMENT  MIGHT  IMPLEMENT  SIGNIFICANT  REGULATIONS  WHICH MIGHT
REQUIRE US TO INCUR SIGNIFICANT COMPLIANCE COSTS

      Our products  transmit radio frequency waves, the transmission of which is
governed by the rules and regulations of the Federal  Communication  Commission,
as well as other Federal and State agencies.. Our ability to design, develop and
sell our products  will continue to be subject to the rules and  regulations  of
the  Federal  Communication  Commission,  as well as  other  Federal  and  State
agencies  for  the  foreseeable   future.   The  implementation  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.

IF WE ARE  UNABLE  TO  EFFECTIVELY  MANAGE  OUR  GROWTH  WE  WILL BE  UNABLE  TO
SUCCESSFULLY OPERATE OUR BUSINESS IN THE FUTURE


                                       14
<PAGE>

      Our rapid  growth has placed,  and is  expected  to  continue to place,  a
significant  strain on our  managerial,  technical,  operational  and  financial
resources  and has caused  our  expenses  to  increase.  To manage our  expected
growth,  we will have to implement  and improve our  operational  and  financial
systems, and we will have to train and manage our growing employee base, each of
which will  result in  increased  expenses.  We will also need to  maintain  and
expand our relationships with customers, subcontractors and other third parties.
If we are unable to  effectively  manage our  growth,  our  business  may become
inefficient  and we might not be able to effectively  compete with  competitors,
increase our revenues and control our expenses.

OUR NEW PRODUCTS MAY CONTAIN  TECHNOLOGICAL  FLAWS AND WE MAY INCUR  SUBSTANTIAL
LIABILITY DUE TO THESE FLAWS

      Complex  technological  products like ours often contain undetected errors
or failures  when first  introduced  or when new  versions of the  products  are
introduced.  Despite our every effort to eliminate these flaws,  there still may
be  flaws  in our new  products,  even  after  the  commencement  of  commercial
shipments. These flaws could result in a delay of, or failure to, achieve market
acceptance  of our  products,  which,  since our  products  are used in business
critical applications, could lead to substantial product liability claims.

Although we maintain insurance, we cannot provide any assurance that:

      o     our  insurance  will provide  adequate  coverage  against  potential
            liabilities  if a  product  causes  harm  or  fails  to  perform  as
            promised;

      o     adequate product  liability  insurance will continue to be available
            in the future; or

      o     our insurance can be maintained on acceptable terms.

The  obligation  to pay any  product  liability  claim  in  excess  of  whatever
insurance  we are able to obtain would  increase our expenses and could  greatly
reduce our assets.  In addition,  any such claims could  permanently  injure our
reputation in our industry.

WHEN WE ARE  REQUIRED  TO TAKE A  COMPENSATION  EXPENSE  FOR THE  VALUE OF STOCK
OPTIONS OR OTHER COMPENSATORY AWARDS THAT WE ISSUE TO OUR EMPLOYEES, OUR RESULTS
OF OPERATIONS WILL BE NEGATIVELY IMPACTED.

We believe  that stock  options  are a key element in our ability to attract and
retain  employees  in the markets in which we operate.  In  December  2004,  the
Financial Accounting Standards Board issued Share-Based Payment: an amendment of
FASB  Statements  No. 123 and 95, which  requires a company to recognize,  as an
expense,  the fair value of stock option and other  stock-based  compensation to
employees  beginning in 2005.  We currently  use the  intrinsic  value method to
measure compensation expense for stock-based awards to our employees. Under this
standard,  we  generally do not consider  stock option  grants  issued under our
employee  stock option plans to be  compensation  when the exercise price of the
stock  option is equal to or greater  than the fair market  value on the date of
grant.  For 2005 and  thereafter,  we will be  required  to take a  compensation
charge as stock options or other stock-based  compensation  awards are issued or
as they vest,  including the unvested portion of options that were granted prior
to 2005.  This  compensation  charge will be based on a calculated  value of the
option or other stock-based award using a complex methodology, and which may not
correlate to the current market price of our stock.  The  calculations  required
under the new accounting rules are very complex. Recognizing this, the Financial
Accounting  Standard Board has made such rules  effective as of the beginning of
the first  interim or annual  reporting  period that begins after June 15, 2005.
For us, this will be our fiscal third  quarter,  which  commences  July 1, 2005.
However, under the new rules, we will be required to retroactively calculate and
recognize such expense as if the new rules had become effective January 1, 2005.
We believe that the effect of such  compensation  expense will be to  materially
increase our operating  expenses from  historical  levels,  resulting in reduced
earnings and earnings per share.

OUR  EXECUTIVE  OFFICERS  AND  DIRECTORS  OWN A  SIGNIFICANT  PERCENTAGE  OF OUR
OUTSTANDING  COMMON  STOCK AND HAVE THE ABILITY TO INFLUENCE  SIGNIFICANTLY  THE
OUTCOME OF CORPORATE  TRANSACTIONS  OR OTHER MATTERS  SUBMITTED FOR  STOCKHOLDER
APPROVAL.

      Our executive  officers and directors  beneficially own, in the aggregate,
approximately  12% of our  outstanding  common stock,  not  including  shares of
common stock that the officers and  directors may acquire in the event that they
exercise  any of the  options  granted  to  them or if  they  otherwise  acquire
additional shares of common stock. As a result,  our officers and directors have
the ability to  influence  significantly  the outcome of all  corporate  actions
requiring stockholder  approval,  irrespective of how our other stockholders may
vote, including the following actions:

      o     the election of directors;


                                       15
<PAGE>

      o     adoption of stock option plans;

      o     the amendment of charter documents; or

      o     the  approval  of certain  mergers and other  significant  corporate
            transactions, including a sale of substantially all of our assets.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE

      Sales of a substantial  number of shares of our common stock in the public
market  could cause a decrease in the market  price of our common  stock.  As of
December 31, 2004, we had 7,690,000 shares of common stock  outstanding.  Of the
7,690,000  shares of common  stock  outstanding,  6,744,000  shares  are  freely
tradable and 946,000  shares are  restricted as a result of securities  laws. In
addition,  stock options to purchase  2,291,000  shares of our common stock were
outstanding at December 31, 2004, of which 1,100,000 were vested.  The remainder
represents  stock  options  that  will  vest  over  the  next  five  years.  The
weighted-average  exercise prices of such stock options are substantially  lower
than the current market price of our common stock. We may also issue  additional
shares of stock in connection with our business 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.  The  terms on which we could  obtain  additional
capital during the life of our outstanding options and warrants may be adversely
affected,  and it should be expected that the holders of these  securities would
exercise  or  convert  them at a time  when we  would be able to  obtain  equity
capital on terms more  favorable  than those  provided  for by such  convertible
securities.  As a result,  any issuance of additional shares of common stock may
cause  our  current  stockholders  to  suffer  significant  dilution  which  may
adversely affect the market price of our common stock.

SUPERVISION AND REGULATION -- SECURITIES AND EXCHANGE COMMISSION

      The Company maintains a website at http://www.id-systems.com.  The Company
makes  available free of charge on our website all  electronic  filings with the
SEC (including  proxy statements and reports on Forms 8-K, 10-KSB and 10-QSB and
any  amendments to these reports) as soon as reasonably  practicable  after such
material is  electronically  filed with or furnished to the SEC. The Company has
also posted policies, codes and procedures that outline its corporate governance
principles,   including  the  charters  of  the  board's  audit  and  nominating
committees, and the Company's Code of Ethics for senior financial officers, Code
of Ethics covering  directors and all employees on the website.  These materials
also are available free of charge in print to  shareholders  who request them in
writing. The information  contained on the Company's website does not constitute
a part of this report.

ITEM 2. DESCRIPTION OF PROPERTIES

      In November 1999,  the Company  entered into a lease that expires on March
31, 2010 for a facility in Hackensack, New Jersey, covering approximately 22,500
square  feet,  which the  Company  first  occupied  in March  2000.  The rent is
currently $31,060 per month and will increase to $34,835 per month from the 61st
month  until the end of the lease.  During  2003,  the Company  entered  into an
agreement  to  sublease  6,270  square feet  through  the end of the lease.  The
sublease  provides  for  monthly  payments  of  $11,619  and also  provides  for
escalations  relating to increases  in real estate  taxes and certain  operating
expenses.


                                       16
<PAGE>

ITEM  3. LEGAL PROCEEDINGS

      On September 1, 2004, I.D. Systems,  Inc. filed a complaint against Access
Control  Group L.L.C.  ("Access")  in the United  States  District  Court in the
District of New Jersey asserting patent infringement (the "Action").

      The Action seeks an  injunction  against  continued  infringement,  treble
damages resulting from the infringement and the defendant's conduct, interest on
the damages,  and such further  relief as the Court deems just and  appropriate.
The Action has been settled on a confidential basis.

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

                                       17
<PAGE>


PART II.

ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Between June 30, 1999 and November 7, 2004, the Company's Common Stock had
been quoted on the Nasdaq SmallCap Market. Since November 8, 2004, the Company's
common  stock has been  quoted on The Nasdaq  National  Market  under the symbol
IDSY. The following table sets forth,  for the periods  indicated,  the high and
low sales price for the  Company's  common  stock as reported on such  quotation
systems.

QUARTER ENDING:                             HIGH            LOW
---------------                             ----            ---

2003
----
March 31, 2003                            $  5.19         $  4.02
June 30, 2003                             $  8.20         $  4.54
September 30, 2003                        $  9.24         $  7.08
December 31, 2003                         $ 10.00         $  5.77

2004
----
March 31, 2004                           $   8.50         $  6.05
June 30, 2004                            $  16.18         $  6.35
September 30, 2004                       $  16.54         $ 10.48
December 31, 2004                        $  19.96         $ 13.47

2005
----
January 1, 2005 - March 15, 2005         $  18.50         $ 10.50

      There were 21 registered holders and approximately 1,600 beneficial owners
of the  Company's  Common Stock of record as of March 15, 2005.  The Company has
not declared or paid dividends on its Common Stock to date and intends to retain
future earnings, if any, for use in its business for the foreseeable future.

ITEM  6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS

      The following discussion and analysis of the Company's financial condition
and  results of  operations  should be read in  conjunction  with its  financial
statements and notes thereto appearing elsewhere herein.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      This  discussion  and analysis of our  financial  condition and results of
operations are based on our financial  statements  that have been prepared under
accounting  principles  generally accepted in the United States of America.  The
preparation of financial  statements in conformity  with  accounting  principles
generally  accepted in the United States of America  requires our  management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities and the disclosure of contingent  assets and liabilities at the date
of the  financial  statements  and the reported  amounts of revenue and expenses
during the reporting  period.  Actual results could materially differ from those
estimates.  We have disclosed all significant  accounting  policies in note B to
the financial  statements included in this Form 10-KSB. The financial statements
and the related notes thereto should be read in  conjunction  with the following
discussion of our critical accounting policies. Our critical accounting policies
are:


                                       18
<PAGE>

REVENUE RECOGNITION

      The Company's  revenues are derived from contracts  with multiple  element
arrangements,  which  include  the  Company's  system,  training  and  technical
support. Revenues are recognized as each element is earned based on the relative
fair value of each element and when there are no  undelivered  elements that are
essential to the functionality of the delivered  elements.  The Company's system
is  typically  implemented  by the  customer  or a third party and, as a result,
revenue is recognized when title and risk of loss passes to the customer,  which
usually is upon  delivery of the system,  pervasive  evidence of an  arrangement
exists,  sales price is fixed and  determinable,  collectibility  is  reasonably
assured and contractual obligations have been satisfied.  Training and technical
support revenue are generally recognized at time of performance.

      The  Company  also  enters  into  post-contract  maintenance  and  support
agreements.  Revenue  is  recognized  over the  service  period  and the cost of
providing these services is expensed as incurred.

      The  Company  also  derives  revenues  under  leasing  arrangements.  Such
arrangements provide for monthly payments covering the system sale,  maintenance
and  interest.  These  arrangements  meet the  criteria to be  accounted  for as
sales-type  leases pursuant to Statement of Financial  Accounting  Standards No.
13,  "Accounting  for Leases".  Accordingly,  the system sale is recognized upon
delivery of the system,  provided all other revenue recognition criteria are met
as described above. Upon the recognition of revenue, an asset is established for
the "investment in sales-type  leases".  Maintenance revenue and interest income
are recognized monthly over the lease term.

RESULTS OF OPERATIONS

      The  following  table  sets  forth,  for the  periods  indicated,  certain
operating information expressed as a percentage of revenue:

                                               Year Ended
                                               December 31,
                                               -------------------------------
                                               2003              2004
                                               -------------     -------------

Revenues                                               100.0%            100.0%
Cost of revenues                                        51.2              47.4
                                               -------------     -------------

Gross profit                                            48.8              52.6
Selling, general and administrative expenses            56.0              42.8
Research and development expenses                       11.2               9.0
                                               -------------     -------------

Income (loss) from operations                          (18.4)              0.8
Net interest income                                      2.6               1.0
Other income                                             0.7               1.1
                                               -------------     -------------

Net income (loss)                                      (15.1)%             2.9%
                                               =============     =============


                                       19
<PAGE>

YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003

REVENUES.  Revenues  were  $13,741,000  for the year  ended  December  31,  2004
compared to  $7,959,000  in the year ended  December  31,  2003,  an increase of
$5,872,000,  or 72.6%.  The  increase  in  revenues  for the year was  primarily
attributable to increased  sales of the Company's  Wireless Asset Net system for
tracking and managing  fleets of industrial  equipment.  Included in revenues in
the year ended  December 31, 2004 was  $400,000 of revenues  related to the cost
recovery method as described in Note B [9] of the financial  statements included
herein.  The revenue was offset by $400,000 of amortized  capital costs included
in costs of revenues.

COST OF REVENUES.  Cost of revenues were  $6,509,000 for the year ended December
31, 2004 compared to $4,075,000 in the year ended December 31, 2003, an increase
of  $2,434,000,  or  59.7% . As a  percentage  of  revenues,  cost  of  revenues
decreased  to 47.4% in the year ended  December  31, 2004 from 51.2% in the year
ended December 31, 2003. This percentage decrease was primarily  attributable to
the sale of higher margin services during the year ended December 31, 2004, from
cost reductions to the hardware  components of the Company's  system, as well as
the write-off of approximately  $150,000 of obsolete  components during the year
ended December 31, 2003.  Gross profit was $7,232,000 in the year ended December
31, 2004  compared to  $3,884,000  in the year ended  December  31,  2003.  As a
percentage  of  revenues,  gross  profit  increased  to 52.6% in the year  ended
December 31, 2004 from 48.8% in the year ended  December  31, 2003.  Included in
costs of revenues in the year ended  December  31, 2004 is $400,000 of amortized
capitalized  costs associated with the cost recovery method as described in Note
B [9] of the financial statements included herein. In accordance,  with the cost
recovery method, the capitalized  contract costs were reduced by the same amount
equal to the revenue recognized in the period. Excluding the amortization of the
deferred  contract costs of $400,000 for the year ended December 31, 2004, gross
profit as a percentage  of revenues was 54.2% in comparison to 48.8% in the year
ended December 31, 2003.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative  expenses  were  $5,879,000  in the year ended  December 31, 2004
compared to  $4,456,000  in the year ended  December  31,  2003,  an increase of
$1,423,000,  or 31.9%.  The increase  was  primarily  attributable  to increased
payroll and related  expenses  as well as travel  expenses  due to the hiring of
additional  personnel  to support the  continued  growth in the  business.  As a
percentage of revenues,  selling,  general and administrative expenses decreased
to 42.8% in the year  ended  December  31,  2004  from  56.0% in the year  ended
December 31, 2003.

RESEARCH AND  DEVELOPMENT  EXPENSES.  Research  and  development  expenses  were
$1,234,000 in the year ended  December 31, 2004 compared to $891,000 in the year
ended  December 31, 2003,  an increase of $343,000 or 38.5%.  This  increase was
attributable to furthering our efforts to reduce costs, increase flexibility and
enhance the  functionality of the Company's system. As a percentage of revenues,
research and development  expenses  decreased to 9.0% in the year ended December
31, 2004 from 11.2% in the year ended December 31, 2003.


                                       20
<PAGE>

INTEREST INCOME AND EXPENSE.

Interest  income was $195,000 in the year ended December 31, 2004 as compared to
$269,000 in the year ended  December  31,  2003, a decrease of $74,000 or 27.5%.
This decrease was attributable to the assignment of certain sales type leases to
a third party  leasing  company.  During the year ended  December 31, 2003,  the
Company earned interest income in connection with sales type lease arrangements.
The Company  invests in investment  grade  commercial  paper and corporate bonds
which are classified as held to maturity.

INTEREST  EXPENSE.  Interest  expense was $63,000 in the year ended December 31,
2004 as compared to $59,000 in the year ended December 31, 2003.

OTHER INCOME.  Other income was $147,000 in the year ended  December 31, 2004 as
compared to $54,000 in the year ended December 31, 2003.  Other income  reflects
rental income from a sublease arrangement entered during 2003.

NET INCOME (LOSS). Net income was $398,000 or $0.05 per basic and diluted share,
in the year ended December 31, 2004 as compared to a net loss of $1,199,000,  or
$(0.17) per basic and diluted share,  in the year ended December 31, 2003.  This
was due primarily to the reasons described above.


                                       21
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      As of  December  31,  2004,  the Company had cash,  cash  equivalents  and
investments  of  $11,635,000  and working  capital of $12,697,000 as compared to
$8,618,000 and $8,180,000, respectively, at December 31, 2003.

      Net cash  provided by operating  activities  was  $1,623,000  for the year
ended December 31, 2004 as compared to net cash used in operating  activities of
$235,000 for the year ended  December 31, 2003.  Net cash  provided by operating
activities in the year ended  December 31, 2004 was primarily due to an increase
in accounts payable and accrued  expenses of $1,485,000,  a decrease in accounts
receivable of $779,000, net income of $398,000, depreciation and amortization of
$255,000  and  amortization  of deferred  contract  costs of $199,000  partially
offset by an increase in  inventory  of  $1,063,000  and an increase in unbilled
receivables of $402,000. Net cash used in operating activities in the year ended
December 31, 2003 was primarily due to a net loss of $1,199,000,  an increase in
accounts  receivable of  $1,110,000,  an increase in deferred  contract costs of
$675,000,  a decrease in accounts  payable and accrued expenses of $70,000 and a
decrease  in other  liabilities  of $100,000  partially  offset by a decrease in
installment  receivable  of $867,000,  a decrease in  inventory  of $715,000,  a
decrease in investment in sales type leases of $571,000, an increase in deferred
revenue of  $348,000,  amortization  of premium on  investments  of $174,000 and
depreciation and amortization of $173,000.

      Net cash provided by investing  activities for the year ended December 31,
2004 was  $1,767,000  as compared to net cash used in  investing  activities  of
$1,945,000  for the year ended December 31, 2003. Net cash provided by investing
activities in the year ended December 31, 2004 was primarily from  maturities of
investments  of  $3,385,000  partially  offset by  purchases of  investments  of
$1,235,000  and the  purchases  of fixed  assets of  $419,000.  Net cash used in
investing  activities  in the year ended  December 31, 2003 was  primarily  from
purchases of  investments  of  $5,698,000  and the  purchases of fixed assets of
$339,000 partially offset by maturities of investments of $4,084,000.

      Net cash provided by financing  activities for the year ended December 31,
2004 was $1,871,000 as compared to net cash provided in financing  activities of
$1,601,000  for the year ended December 31, 2003. Net cash provided by financing
activities  for the year ended  December 31, 2004,  resulted  primarily from the
proceeds of $1,171,000 received in connection with the exercise of stock options
and $1,025,000  received in connection with the exercise of warrants,  partially
offset by  $188,000  of  repayments  made  under the term loan and  $137,000  of
repayments  for the  Company's  line of credit.  Net cash  provided by financing
activities  for the year ended  December 31, 2003,  resulted  primarily from the
proceeds of $1,000,000  received in connection  with  obtaining a five year term
loan and $765,000 of proceeds  received from exercise of employee stock options,
partially offset by $164,000 of repayments made under the term loan.

      The Company has a working capital line of credit,  with maximum borrowings
of  $500,000.  Interest  at the 30 day LIBOR  Market  Index  Rate plus  1.75% is
payable  monthly.  At December 31, 2004,  the Company did not owe anything under
this line of credit.

      In  January  2003,  the  Company  closed  on a  five-year  term  loan  for
$1,000,000 with a financial institution. Interest at the 30-day LIBOR plus 1.75%
and principal are payable monthly. To hedge the loan's floating interest expense
the  Company  entered  into an  interest  rate swap  contemporaneously  with the
closing of the loan and fixed the rate of  interest  at 5.28% for the  five-year
term. The loan is secured by all the assets of the Company and the Company is in
compliance  with the  covenants  under  the  term  loan.  The fair  value of the
interest  rate swap is not material to the  financial  statements  or results of
operations.


                                       22
<PAGE>

Maturities of long-term debt are as follows:

       YEAR ENDING
       DECEMBER 31,

       2005        $ 199,000
       2006          209,000
       2007          221,000
       2008           19,000
       ----        ---------

                   $ 648,000
                   =========

      The  Company  believes  it  has  sufficient  cash,  cash  equivalents  and
investments for the next twelve months of operations.

      The Company  believes its operations have not been and, in the foreseeable
future,  will not be  materially  adversely  affected by  inflation  or changing
prices.

OFF-BALANCE SHEET ARRANGEMENTS

      The Company does not have any off-balance sheet  arrangements that have or
are  reasonably  likely to have a  current  or  future  effect on its  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

SFAS123(R)

      In  December  2004,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial Accounting Standards No. 123R, SHARE-BASED PAYMENT, which
is a revision of SFAS No. 123 and APB 25.  Generally,  the  approach in SFAS No.
123(R) is similar to the approach  described in SFAS No. 123. However,  SFAS No.
123(R)  requires all  share-based  payments to  employees,  including  grants of
employee stock options,  to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.  The new standard
will be effective for the Company  beginning  July 1, 2005.  The Company has not
yet  completed  their  evaluation  but expects  the  adoption to have a material
effect on the financial statements.

SFAS151

      In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting Standards ("SFAS") No. 151. "Inventory Costs,
an amendment of ARB No. 43,  Chapter 4." SFAS 151 amends ARB No. 43,  Chapter 4,
to clarify that abnormal  amounts of idle facility  expense,  freight,  handling
costs,  and wasted  material  (spoilage)  should be recognized as current period
charges.  In addition.  SFAS 151 requires that  allocation  of fixed  production
overhead  to the  cost of  conversion  be based on the  normal  capacity  of the
production  facilities.  The  provision of SFAS 151 shall be  effective  for the
Company  beginning  on September  1, 2005.  The Company is currently  evaluating
whether this statement will have a material effect on its financial statements.


                                       23
<PAGE>

SFAS153

EXCHANGES OF NONMONETATY  ASSETS - AN AMENDMENT OF APE OPINION NO. 29 - SFAS NO.
153

      SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets.
It eliminates the exception from fair value accounting for nonmonetary exchanges
of similar  productive  assets and replaces it with an exception  for  exchanges
that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange  has  commercial  substance  if the future  cash flows of an entity are
expected to change significantly as a result of the exchange.  This statement is
effective beginning in October 1, 2006 and is not expected to have a significant
impact on our financial statements.

EITF04-8

      In September  2004,  the ElTF reached a consensus on Issue No. 04-8,  "The
Effect of  Contingently  Convertible  Debt on Diluted  Earnings per Share." ElTF
04-8 requires that all issued securities that have embedded  conversion features
that  are  contingently  exercisable  upon  the  occurrence  of  a  market-price
condition should be in the calculation of diluted earnings per share, regardless
of whether  the market  price  trigger has been met ElTF 04-8 is  effective  for
reporting  periods ending after December 15. 2004 The adoption of EITF 04-8 will
not materially effect the diluted EPS calculation.

FORWARD LOOKING STATEMENTS

      Certain  statements  in this  Annual  Report  on Form  10-KSB,  under  the
sections "Management  Discussion and Analysis of Financial Condition and Results
of   Operations,"   "Business"  and  elsewhere   relate  to  future  events  and
expectations  and as such  constitute  "forward-looking  statements"  within the
meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  The words
"believes,"  "anticipates,"  "plans,"  "expects,"  and similar  expressions  are
intended to identify forward-looking statements. Such forward-looking statements
involve  known and unknown  risks,  uncertainties,  and other  factors which may
cause the actual  results,  performance  or  achievements  of the  Company to be
materially  different  from any  future  results,  performance  or  achievements
expressed   or  implied  by  such   forward-looking   statements   and  to  vary
significantly  from reporting period to reporting period.  These forward looking
statements  were based on various  factors and were derived  utilizing  numerous
important  assumptions  and other  factors  that could cause  actual  results to
differ materially from those in the forward looking statements,  including,  but
not limited to:  uncertainty as to the Company's  future  profitability  and the
Company's ability to develop and implement  operational and financial systems to
manage rapidly  growing  operations,  competition in the Company's  existing and
potential  future  lines of  business,  and other  factors.  Other  factors  and
assumptions  not identified  above were also involved in the derivation of these
forward  looking  statements,  and the failure of such other  assumptions  to be
realized,  as well as other  factors,  may also cause  actual  results to differ
materially  from those  projected.  The Company  assumes no obligation to update
these  forward  looking  statements  to  reflect  actual  results,   changes  in
assumptions  or  changes  in  other  factors   affecting  such  forward  looking
statements.


                                       24
<PAGE>

ITEM  7. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
      CONTENTS                                                                        PAGE
      --------                                                                        ----

<S>                                                                                    <C>
      Report of independent registered public accounting firm                          F-1

      Balance sheet as of December 31, 2004                                            F-2

      Statements of operations for the years ended December 31, 2003 and 2004          F-3

      Statements of changes in stockholders' equity for the years ended
      December 31, 2003 and 2004                                                       F-4

      Statements of cash flows for the years ended December 31, 2003 and 2004          F-5

      Notes to financial statements                                                    F-6
</TABLE>


                                       25
<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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


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

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

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

New York, New York
February 11, 2005


                                       F-1
<PAGE>


I.D. SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 2004

<TABLE>
<CAPTION>
<S>                                                                                  <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                         $  8,440,000
   Short-term investments                                                               3,195,000
   Accounts receivable, net                                                             1,432,000
   Unbilled receivables                                                                   402,000
   Inventory                                                                            1,739,000
   Investment in sales type leases                                                         39,000
   Interest receivable                                                                     50,000
   Officer loan                                                                            10,000
   Prepaid expenses and other current assets                                              225,000
                                                                                     ------------

         Total current assets                                                          15,532,000

Fixed assets, net                                                                       1,009,000
Investment in sales type leases                                                            34,000
Officer loan                                                                               20,000
Deferred contract costs                                                                   476,000
Other assets                                                                               88,000
                                                                                     ------------

                                                                                     $ 17,159,000
                                                                                     ============

LIABILITIES
Current liabilities:
   Accounts payable and accrued expenses                                             $  2,541,000
   Long term debt - current portion                                                       199,000
   Deferred revenue                                                                        95,000
                                                                                     ------------

         Total current liabilities                                                      2,835,000

Long term debt                                                                            449,000
Deferred revenue                                                                          191,000
Deferred rent                                                                             112,000
                                                                                     ------------

                                                                                        3,587,000
                                                                                     ------------
Commitments and Contingencies (Note J)

STOCKHOLDERS' EQUITY
Preferred stock; authorized 5,000,000 shares, $.01 par value; none issued
Common stock; authorized 15,000,000 shares, $.01 par value; issued and outstanding
   7,690,000 shares                                                                        77,000
Additional paid-in capital                                                             24,994,000
Treasury stock; 40,000 shares at cost                                                    (113,000)
Accumulated deficit                                                                   (11,386,000)
                                                                                     ------------

                                                                                       13,572,000
                                                                                     ------------

                                                                                     $ 17,159,000
                                                                                     ============
</TABLE>

See notes to accompanying financial statements.

                                       F-2


<PAGE>


I.D. SYSTEMS, INC.
STATEMENTS OF OPERATIONS

                                                       YEAR ENDED DECEMBER 31,
                                                   ----------------------------
                                                        2003            2004
                                                   ------------    ------------

Revenue                                            $  7,959,000    $ 13,741,000
Cost of revenue                                       4,075,000       6,509,000
                                                   ------------    ------------

Gross profit                                          3,884,000       7,232,000
                                                   ------------    ------------

Operating expenses:
    Selling, general and administrative expenses      4,456,000       5,879,000
    Research and development expenses                   891,000       1,234,000
                                                   ------------    ------------

                                                      5,347,000       7,113,000
                                                   ------------    ------------

Income (loss) from operations                        (1,463,000)        119,000
Interest income                                         269,000         195,000
Interest expense                                        (59,000)        (63,000)
Other income                                             54,000         147,000
                                                   ------------    ------------

NET INCOME (LOSS)                                  $ (1,199,000)   $    398,000
                                                   ============    ============

NET INCOME (LOSS) PER SHARE - BASIC                $       (.17)   $       0.05
                                                   ============    ============

NET INCOME (LOSS) PER SHARE - DILUTED              $       (.17)   $       0.05
                                                   ============    ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- BASIC                                               6,905,000       7,455,000
                                                   ============    ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- DILUTED                                             6,905,000       8,783,000
                                                   ============    ============

See notes to accompanying financial statements.

                                       F-3


<PAGE>


I.D. SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                     COMMON STOCK                    ADDITIONAL
                                     -----------------------------
                                     NUMBER OF                       PAID-IN         ACCUMULATED     TREASURY        STOCKHOLDERS'
                                     SHARES          AMOUNT          CAPITAL         DEFICIT         STOCK           EQUITY
                                     -------------   -------------   -------------   -------------   -------------   -------------

<S>                                   <C>            <C>             <C>             <C>             <C>             <C>
BALANCE - JANUARY 1, 2003                6,799,000   $      68,000   $  22,042,000   $ (10,585,000)  $    (113,000)  $  11,412,000
Shares issued pursuant to exercise
   of stock options                        298,000           3,000         762,000                                         765,000
Net loss for the year ended
   December 31, 2003                                                                    (1,199,000)                     (1,199,000)
                                     -------------   -------------   -------------   -------------   -------------   -------------

BALANCE - DECEMBER 31, 2003              7,097,000          71,000      22,804,000     (11,784,000)       (113,000)     10,978,000

Shares issued pursuant to exercise
   of stock options                        444,000           4,000       1,167,000                                       1,171,000
Shares issued pursuant to exercise
   of warrants                             149,000           2,000       1,023,000                                       1,025,000
Net income for the year ended
   December 31, 2004                                                                       398,000                         398,000
                                     -------------   -------------   -------------   -------------   -------------   -------------

BALANCE - DECEMBER 31, 2004              7,690,000   $      77,000   $  24,994,000   $ (11,386,000)  $    (113,000)  $  13,572,000
                                     =============   =============   =============   =============   =============   =============
</TABLE>


See notes to accompanying financial statements.

                                       F-4

<PAGE>


I.D. SYSTEMS, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                     2003           2004
                                                                 -----------    -----------
<S>                                                              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                $(1,199,000)   $   398,000
Adjustments  to reconcile  net income (loss) to cash (used in)
  provided by operating activities:
  Depreciation and amortization                                      173,000        255,000
  Deferred rent expense                                               23,000         23,000
  Deferred revenue                                                   348,000        (88,000)
  Bad debt expense                                                    20,000         (7,000)
  Deferred contract costs                                           (675,000)       199,000
  Amortization of premium on investments                             174,000         94,000
  Changes in:
    Accounts receivable                                           (1,110,000)       779,000
    Unbilled receivables                                                  --       (402,000)
    Inventory                                                        715,000     (1,063,000)
    Prepaid expenses and other assets                                 28,000        (87,000)
    Investment in sales type leases                                  571,000         37,000
    Installment receivable                                           867,000             --
    Other liabilities                                               (100,000)            --
    Accounts payable and accrued expenses                            (70,000)     1,485,000
                                                                 -----------    -----------
      Net cash (used in) provided by operating activities           (235,000)     1,623,000
                                                                 -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of fixed assets                                        (339,000)      (419,000)
    Purchase of investments                                       (5,698,000)    (1,235,000)
    Maturities of investments                                      4,084,000      3,385,000
    Increase (decrease) in interest receivable                        (2,000)        25,000
    Collection of officer loan                                        10,000         11,000
                                                                 -----------    -----------
      Net cash (used in) provided by investing activities         (1,945,000)     1,767,000
                                                                 -----------    -----------


CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from term loan                                          1,000,000             --
  Repayment of term loan                                            (164,000)      (188,000)
  Repayment of line of credit                                             --       (137,000)
  Proceeds from exercise of stock options                            765,000      1,171,000
  Proceeds from exercise of warrants                                      --      1,025,000
                                                                 -----------    -----------
      Net cash provided by financing activities                    1,601,000      1,871,000
                                                                 -----------    -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                (579,000)     5,261,000
Cash and cash equivalents - beginning of period                    3,758,000      3,179,000
                                                                 -----------    -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD                        $ 3,179,000    $ 8,440,000
                                                                 ===========    ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for:
      Interest                                                   $    59,000    $    63,000
</TABLE>


See notes to accompanying financial statements.

                                       F-5

<PAGE>


I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE A - THE COMPANY

I.D.  Systems,  Inc.  (the  "Company")  is a provider of wireless  solutions for
corporate  asset  management.   The  Company  designs,   develops  and  produces
innovative  wireless  monitoring and tracking products that utilize its patented
radio-frequency-based  system.  The  Company's  products  are designed to enable
users to improve operating efficiencies and reduce costs. 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.  These  estimates  include
      collectibility of accounts  receivable,  sales returns,  recoverability of
      inventory, realization of deferred tax assets, useful lives and impairment
      of tangible and intangible assets.

[2]   CASH AND CASH EQUIVALENTS:

      The Company considers all highly liquid debt instruments purchased with an
      original maturity of three months or less to be cash equivalents.

[3]   INVENTORY:

      Inventory,  which  consists of components  for the Company's  products and
      finished goods to be shipped to customers under existing orders, is stated
      at the lower of cost or market using the  first-in  first-out  method.  At
      December  31, 2004 the  Company's  inventory  consisted of  components  of
      approximately $499,000 and finished goods of approximately $1,240,000.

[4]   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.   Equipment  under  capital  leases  and  leasehold
      improvements are amortized using the  straight-line  method over the terms
      of the respective  leases,  or their estimated useful lives,  whichever is
      shorter.

[5]   LONG-LIVED ASSETS:

      The Company  evaluates its long-lived  assets in accordance with Statement
      of Financial  Accounting  Standards ("SFAS") No. 144,  "Accounting for the
      Impairment  or Disposal of Long-Lived  Assets,".  In the  evaluation,  the
      Company  compares  values  of such  assets to the  estimated  undiscounted
      future cash flows  expected from the use of the assets and their  eventual
      disposition.  When the estimated  undiscounted  future cash flows are less
      than the carrying  amount an impairment  loss is  recognized  equal to the
      difference  between the assets  fair value and their  carrying  value.  At
      December 31, 2004, the Company had not incurred an impairment charge.

                                       F-6
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

[6]   RESEARCH AND DEVELOPMENT:

      Research and development costs are charged to expense as incurred.

[7]   PATENT COSTS:

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

[8]   REVENUE RECOGNITION:

      The Company's  revenues are derived from contracts  with multiple  element
      arrangements,  which include the Company's system,  training and technical
      support.  Revenues are  recognized  as each element is earned based on the
      relative  fair value of each  element  and when  there are no  undelivered
      elements  that  are  essential  to  the  functionality  of  the  delivered
      elements. The Company's system is typically implemented by the customer or
      a third party and, as a result,  revenue is recognized when title and risk
      of loss  passes to the  customer,  which  usually is upon  delivery of the
      system,  pervasive evidence of an arrangement exists, sales price is fixed
      and  determinable,  collectibility  is reasonably  assured and contractual
      obligations  have been satisfied.  Training and technical  support revenue
      are generally recognized at time of performance.

      The  Company  also  enters  into  post-contract  maintenance  and  support
      agreements.  Revenue is recognized over the service period and the cost of
      providing these services is expensed as incurred.

      The  Company  also  derives  revenues  under  leasing  arrangements.  Such
      arrangements  provide  for  monthly  payments  covering  the system  sale,
      maintenance  and  interest.  These  arrangements  meet the  criteria to be
      accounted  for as  sales-type  leases  pursuant to  Statement of Financial
      Accounting  Standards No. 13,  "Accounting for Leases".  Accordingly,  the
      system sale is recognized upon delivery of the system,  provided all other
      revenue  recognition  criteria  are  met  as  described  above.  Upon  the
      recognition  of revenue,  an asset is established  for the  "investment in
      sales-type leases". Maintenance revenue and interest income are recognized
      monthly over the lease term.

[9]   DEFERRED CONTRACT COSTS:

      During 2003, the Company entered into a contract with a customer  pursuant
      to which the  Company's  system  will be  implemented  on a portion of the
      customer's fleet of vehicles.  The Company will be entitled to issue sixty
      monthly  invoices of up to $40,000 per month,  each of which is contingent
      upon certain  conditions  being met. Costs directly  attributable  to this
      contract,  consisting  principally of engineering and manufacturing costs,
      are being deferred until  implementation  of the system is completed.  The
      deferred  costs will be charged to cost of revenue in accordance  with the
      cost recovery method,  pursuant to which the deferred  contract costs will
      be reduced in each  period by an amount  equal to the  revenue  recognized
      until all of the deferred  costs are written off at which time the Company
      will  recognize  a gross  profit,  if any. As of December  31,  2004,  the
      Company deferred $876,000 of such contract costs and amortized $400,000 of
      such costs during the year then ended. The implementation of the system is
      substantially  completed and additional contract costs are not anticipated
      to be  significant.  The Company  will  continue to evaluate  the carrying
      amount of the deferred contract costs for potential impairment.

                                       F-7
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

[10]  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, 2003 and 2004.

[11]  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 amount paid is recorded as deferred  rent and is
      amortized over the lease term.

[12]  STOCK-BASED COMPENSATION:

      The  Company  accounts  for  stock-based   employee   compensation   under
      Accounting  Principles Board ("APB") Opinion No. 25, "Accounting for Stock
      Issued to Employees", and related interpretations. The Company has adopted
      the   disclosure-only   provisions  of  SFAS  No.  123,   "Accounting  for
      Stock-Based  Compensation"  and SFAS No. 148,  "Accounting for Stock-Based
      Compensation - Transition and Disclosure." The following table illustrates
      the effect on net income (loss) and earnings  (loss) per share if the fair
      value based method had been applied to all awards.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          --------------------------
                                                              2003           2004
                                                          -----------    -----------

<S>                                                       <C>            <C>
Reported net income (loss)                                $(1,199,000)   $   398,000
Stock-based  employee  compensation  expense included
  in reported net loss, net of related tax effects                  0              0
Stock-based  employee  compensation  determined  under
  the fair value based method, net of related tax effects    (862,000)    (1,187,000)
                                                          -----------    -----------


Pro forma net loss                                        $(2,061,000)   $  (789,000)
                                                          ===========    ===========

Net income (loss) per share (basic and diluted):
   As reported                                            $     (0.17)   $      0.05
                                                          ===========    ===========


   Pro forma                                              $     (0.30)   $     (0.11)
                                                          ===========    ===========
</TABLE>


                                      F-8
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

[12]  STOCK-BASED COMPENSATION: (CONTINUED)

      The fair  value  of each  option  grant on the date of grant is  estimated
      using the  Black-Scholes  option-pricing  model  reflecting  the following
      weighted average assumptions:

                                                       YEAR ENDED
                                                      DECEMBER 31,
                                               -------------------------
                                                 2003              2004
                                               -------           -------

           Volatility                            44%               52%
           Expected life of options            5 years           5 years
           Risk free interest rate                3%                3%
           Dividend yield                         0%                0%

      The weighted  average fair value of options granted during the years ended
      December 31, 2003 and 2004 were $3.52 and $3.74 respectively.

[13]  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  carry  forwards  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.

[14]  NET INCOME (LOSS) PER SHARE:

                                                     YEAR ENDED DECEMBER 31,
                                                  --------------------------
                                                      2003           2004
                                                  -----------    -----------

       BASIC EARNINGS (LOSS) PER SHARE
       -------------------------------
       Net income (loss)                          $(1,199,000)   $   398,000
                                                  -----------    -----------

       Weighted average shares outstanding          6,905,000      7,455,000
                                                  -----------    -----------

       Basic earnings (loss) per share            $     (0.17)   $      0.05
                                                  ===========    ===========

       DILUTED EARNINGS (LOSS) PER SHARE
       ---------------------------------
       Net income (loss)                          $(1,199,000)   $   398,000
                                                  -----------    -----------

       Weighted average shares outstanding          6,905,000      7,455,000
                                                  -----------    -----------

       Dilutive effect of stock options                     0      1,328,000
                                                  -----------    -----------

       Weighted average shares outstanding,
          diluted                                   6,905,000      8,783,000
                                                  -----------    -----------

       Diluted earnings (loss) per share          $     (0.17)   $      0.05
                                                  ===========    ===========

      Basic income (loss) per share is based on the weighted  average  number of
      common shares  outstanding  during each period.  Diluted income (loss) per
      share reflects the potential  dilution  assuming common shares were issued
      upon the  exercise of  outstanding  options and  warrants and the proceeds
      thereof  were used to purchase  outstanding  common  shares.  For the year
      ended  December 31, 2003,  the basic and diluted  weighted  average shares
      outstanding  are the same since the effect from the potential  exercise of
      outstanding  stock  options  and  warrants  of  2,436,000  would have been
      anti-dilutive.


                                       F-9
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

[15]  FINANCIAL INSTRUMENTS:

      The carrying amounts of cash equivalents, accounts receivable, investments
      and other  liabilities  approximate  their  fair  values  due to the short
      period  to  maturity  of  these  instruments.   The  carrying  amounts  of
      investment in sales-type  leases and "installment  receivable - noncurrent
      portion"  approximate  their fair value due to the market rate of interest
      charged to customers.

[16]  RECLASSIFICATIONS

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

[17]  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

SFAS123(R)

      In  December  2004,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial Accounting Standards No. 123R, SHARE-BASED PAYMENT, which
is a revision of SFAS No. 123 and APB 25.  Generally,  the  approach in SFAS No.
123(R) is similar to the approach  described in SFAS No. 123. However,  SFAS No.
123(R)  requires all  share-based  payments to  employees,  including  grants of
employee stock options,  to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.  The new standard
will be effective for the Company  beginning  July 1, 2005.  The Company has not
yet  completed  their  evaluation  but expects  the  adoption to have a material
effect on the financial statements.

SFAS151

      In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting Standards ("SFAS") No. 151. "Inventory Costs,
an amendment of ARB No. 43,  Chapter 4." SFAS 151 amends ARB No. 43,  Chapter 4,
to clarify that abnormal  amounts of idle facility  expense,  freight,  handling
costs,  and wasted  material  (spoilage)  should be recognized as current period
charges.  In addition.  SFAS 151 requires that  allocation  of fixed  production
overhead  to the  cost of  conversion  be based on the  normal  capacity  of the
production  facilities.  The  provision of SFAS 151 shall be  effective  for the
Company  beginning  on September  1, 2005.  The Company is currently  evaluating
whether this statement will have a material effect on its financial statements.

SFAS153

EXCHANGES OF NONMONETATY  ASSETS - AN AMENDMENT OF APE OPINION NO. 29 - SFAS NO.
153

      SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets.
It eliminates the exception from fair value accounting for nonmonetary exchanges
of similar  productive  assets and replaces it with an exception  for  exchanges
that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange  has  commercial  substance  if the future  cash flows of an entity are
expected to change significantly as a result of the exchange.  This statement is
effective beginning in October 1, 2006 and is not expected to have a significant
impact on our financial statements.

EITF04-8

      In September  2004,  the ElTF reached a consensus on Issue No. 04-8,  "The
Effect of  Contingently  Convertible  Debt on Diluted  Earnings per Share." ElTF
04-8 requires that all issued securities that have embedded  conversion features
that  are  contingently  exercisable  upon  the  occurrence  of  a  market-price
condition should be in the calculation of diluted earnings per share, regardless
of whether  the market  price  trigger has been met ElTF 04-8 is  effective  for
reporting  periods ending after December 15. 2004 The adoption of EITF 04-8 will
not materially effect the diluted EPS calculation.

                                      F-10
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE C - SHORT-TERM INVESTMENTS

The Company's  investments at December 31, 2004 consist principally of corporate
bonds and are  classified  as held to  maturity.  Accordingly,  investments  are
carried at amortized cost.

NOTE D - FIXED ASSETS

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

       Equipment                                       $  451,000
       Computer software                                  277,000
       Computer hardware                                  335,000
       Furniture and fixtures                             237,000
       Leasehold improvements                             447,000
                                                      -----------

                                                        1,747,000
       Accumulated depreciation and amortization          738,000
                                                      -----------

                                                      $ 1,009,000
                                                      ===========

NOTE E - OFFICER LOAN

In June 2002,  the Company  loaned  $56,000 to an  officer.  The loan is payable
together with interest of 4% in semi-monthly installments of $500 through August
2007. At December 31, 2004,  $30,000 is due to the Company,  $10,000 of which is
due in 2005. The loan is fully payable upon demand and is due if the employee is
terminated  from the  Company  for any  reason.  This loan was made prior to the
enactment of the  Sarbanes-Oxley  Act of 2002.  The Company is  prohibited  from
making any loans to officers in the future.

NOTE F - LINE OF CREDIT

The Company has a working  capital line of credit,  with maximum  borrowings  of
$500,000.  Interest at the 30 day LIBOR  Market Index Rate plus 1.75% is payable
monthly.  At December 31, 2004, the Company did not owe anything under this line
of credit.

NOTE G - LONG-TERM DEBT

In January 2003, the Company closed on a five-year term loan for $1,000,000 with
a financial  institution.  Interest at the 30-day LIBOR plus 1.75% and principal
are payable monthly.  To hedge the loan's floating  interest expense the Company
entered  into an interest  rate swap  contemporaneously  with the closing of the
loan and fixed the rate of interest at 5.28% for the five-year term. The loan is
secured by all the assets of the Company and the Company is in  compliance  with
the covenants  under the term loan.  The fair value of the interest rate swap is
not material to the financial statements or results of operations.

                                      F-11
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

Maturities of long-term debt are as follows:

       YEAR ENDING
       DECEMBER 31,

       2005         $ 199,000
       2006           209,000
       2007           221,000
       2008            19,000
       ----         ---------

                    $ 648,000
                    =========

NOTE H - STOCKHOLDERS' EQUITY

[1]   PREFERRED STOCK:

      The  Company is  authorized  to issue  5,000,000  shares of $.01 par value
      preferred  stock.  The  Company's  Board of Directors has the authority to
      issue  shares of preferred  stock and to determine  the price and terms of
      those shares.

[2]   STOCK OPTIONS:

      The Company has adopted the 1995 Stock Option Plan,  pursuant to which the
      Company  may grant  options to purchase up to an  aggregate  of  1,250,000
      shares of common stock. The Company has also adopted the 1999 Stock Option
      Plan and the 1999 Director Option Plan,  pursuant to which the Company may
      grant  options to purchase up to  2,813,000  and 300,000  shares of common
      stock, respectively. The Plans are administered by the Board of Directors,
      which has the  authority to determine  the term during which an option may
      be exercised (not more than 10 years), the exercise price of an option and
      the vesting provisions.

      A summary of the status of the Company's stock option plans as of December
      31, 2003 and 2004 and changes  during the years ended on those  dates,  is
      presented below:

                                      F-12
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                 2003                               2004
                                   --------------------------------   --------------------------------
                                                        WEIGHTED                           WEIGHTED
                                                        AVERAGE                            AVERAGE
                                       SHARES        EXERCISE PRICE       SHARES        EXERCISE PRICE
                                   --------------    --------------   --------------    --------------

<S>                                     <C>          <C>                   <C>          <C>
Outstanding at beginning of year        2,200,000    $         3.53        2,129,000    $         3.74
Granted                                   485,000              4.81          713,000              7.85
Exercised                                (298,000)             2.57         (444,000)             2.63
Forfeited                                (258,000)             5.35         (107,000)             7.96
                                   --------------                     --------------

Outstanding at end of year              2,129,000    $         3.74        2,291,000    $         5.04
                                   ==============                     ==============

Exercisable at end of year              1,258,000    $         2.89        1,100,000    $         3.61
                                   ==============                     ==============
</TABLE>

      As of December 31, 2004 there were 1,366,000  options  available for grant
      under the Company's stock option plans.

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

<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                  --------------------------------------   -------------------------
                                WEIGHTED
                                 AVERAGE      WEIGHTED                    WEIGHTED
                                REMAINING      AVERAGE                     AVERAGE
   EXERCISE        NUMBER      CONTRACTUAL    EXERCISE       NUMBER       EXERCISE
    PRICES       OUTSTANDING      LIFE          PRICE      OUTSTANDING      PRICE
--------------   -----------   -----------   -----------   -----------   -----------

<C>                  <C>         <C>            <C>            <C>           <C>
1.20                 542,000     3 years        1.20           542,000       1.20
2.31 - 3.81          151,000     6 years        2.93            80,000       3.02
4.07 - 7.05        1,198,000     8 years        5.71           258,000       5.32
7.56 - 18.90         400,000     6 years        9.02           220,000       7.77
                 -----------                               -----------

                   2,291,000     5 years        5.04         1,100,000       3.61
                 ===========                               ===========
</TABLE>

[3]   WARRANTS:

      In connection  with the Company's  initial  public  offering in June 1999,
      warrants to  purchase  200,000  shares of common  stock were issued to the
      underwriter for nominal consideration. The warrants were exercisable for a
      period of four years,  commencing  in June 2000,  at a price of $11.55 per
      share.  The warrants  were  exercised  during 2004 on a cashless  basis in
      accordance  with their original terms. In connection with the exercise the
      Company issued 42,000 shares.

      In  connection  with the  Company's  private  placement  in January  2002,
      warrants to  purchase  107,000  shares of common  stock were issued to the
      placement agent and a finder.  The warrants were  exercisable for a period
      of five years,  commencing  in January 2002 at a price of $9.58 per share.
      The warrants were exercised  during 2004. In connection  with the exercise
      the Company received proceeds of $1,025,000.

                                      F-13
<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE I - INCOME TAXES

The Company has a deferred tax asset of approximately $6,313,000 at December 31,
2004 primarily  relating to net operating loss  carryforward.  The Company has a
net operating loss carryforward of approximately  $15,921,000 for federal income
tax  purposes,  substantially  all of which  expires from 2020 through 2024 and,
certain  state  and  local  net  operating  loss  carryforwards.  There  were no
significant timing differences between financial and tax reporting.

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

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

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                                   2003           2004
                                                               -----------    -----------

<S>                                                            <C>            <C>
Income tax benefit at the federal statutory rate               $  (408,000)   $   135,000
State and local income taxes, net of effect on federal taxes       (59,000)      (129,000)
Increase in valuation allowance                                    789,000      1,045,000
Stock options                                                     (302,000)    (1,031,000)
Other                                                              (20,000)       (20,000)
                                                               -----------    -----------

                                                               $         0    $         0
                                                               ===========    ===========
</TABLE>

NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

[1]   OPERATING LEASES:

      The Company is obligated under operating leases for its facility, which it
      occupied in March 2000. The Company's operating leases provide for minimum
      annual rental payments as follows:

                                      F-14

<PAGE>

I.D. SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

              YEAR ENDING
              DECEMBER 31,
              ------------

              2005                $410,000
              2006                 410,000
              2007                 410,000
              2008                 410,000
              2009                 410,000
              Thereafter           205,000
                                ----------

                                $2,255,000
                                ==========

      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  $409,000
      and $499,000 for the years ended December 31, 2004 and 2003, 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  $147,000  and $54,000 for the year
      ended December 31, 2004 and 2003,  respectively  reflects rent received by
      the Company under the sublease.

[2]   CONCENTRATION OF CUSTOMERS:

      Three  customers  accounted  for 49%, 15%, and 12%,  respectively,  of the
      Company's  revenue  during the year ended  December 31, 2004. Two of those
      customers  accounted for 31% and 21% of the Company's account and unbilled
      receivables at December 31, 2004.

      One customer,  accounted for 58% of the Company's  revenue during the year
      ended December 31, 2003 and 54% of the Company's accounts receivable as of
      December 31, 2003.

[3]   LEGAL PROCEEDINGS:

      On September 1, 2004, I.D. Systems,  Inc. filed a complaint against Access
      Control Group L.L.C. ("Access") in the United States District Court in the
      District of New Jersey asserting patent infringement (the "Action").

      The Action seeks an  injunction  against  continued  infringement,  treble
      damages  resulting  from the  infringement  and the  defendant's  conduct,
      interest on the damages,  and such further  relief as the Court deems just
      and  appropriate.  The Action has been settled on a confidential basis.

                                      F-15

<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
      FINANCIAL DISCLOSURE

None.

ITEM  8A. CONTROLS AND PROCEDURES

      Disclosure controls and procedures are designed to ensure that information
required to be  disclosed in the reports  filed or submitted  under the Exchange
Act is recorded,  processed,  summarized  and reported,  within the time periods
specified  in the SEC's  rules and forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated  and  communicated  to management,  including the Chief Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding  required  disclosure.  As of the end of the  period  covered  by this
report,  the Company  carried out an evaluation,  under the supervision and with
the  participation  of the Company's  management,  including the Company's Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design and operation of the Company's  disclosure  controls and  procedures ( as
defined in Rule  13a-15(e) and 15d-15(e)  under the  Securities  Exchange Act of
1934).  Based upon and as of the date of that  evaluation,  the Chief  Executive
Officer and Chief  Financial  Officer  concluded  that the Company's  disclosure
controls and procedures are effective to ensure that information  required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.

      There were no changes in the Company's  internal  controls over  financial
reporting  that  occurred  during the last  fiscal  quarter to which this report
relates that have  materially  effected or is  reasonably  likely to  materially
effect, the Company's internal control over financial reporting.

ITEM  8B. OTHER INFORMATION

NONE


                                       26
<PAGE>

PART III.

ITEM  9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS,
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

      The information  required by this Item is incorporated herein by reference
to the  Company's  definitive  Proxy  Statement  to be filed for its 2005 Annual
Meeting of Stockholders.

ITEM  10. EXECUTIVE COMPENSATION

      The information  required by this Item is incorporated herein by reference
to the  Company's  definitive  Proxy  Statement  to be filed for its 2005 Annual
Meeting of Stockholders.

ITEM  11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS

      The information  required by this Item is incorporated herein by reference
to the  Company's  definitive  Proxy  Statement  to be filed for its 2005 Annual
Meeting of Stockholders.

ITEM  12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information  required by this Item is incorporated herein by reference
to the  Company's  definitive  Proxy  Statement  to be filed for its 2005 Annual
Meeting of Stockholders.

ITEM  13. EXHIBITS

      EXHIBITS

      The following  exhibits are filed herewith or are  incorporated  herein by
      reference, as indicated.


    Number  Description

     3.1    Amended and Restated  Certificate  of  Incorporation  of the Company
            (incorporated  herein by reference to the Company's  Form SB-2 filed
            with the Commission on June 30, 1999).

     3.2    Amended and Restated By-Laws of the Company  (incorporated herein by
            Reference to the  Company's  Form SB-2 filed with the  Commission on
            June 30, 1999).

     4.1    Specimen  Certificate  of the Company's  Common Stock  (incorporated
            herein  by  reference  to the  Company's  Form SB-2  filed  with the
            Commission on June 30, 1999).

     4.2    Form of Underwriter's  Warrant Agreement,  including Form of Warrant
            Certificate  (incorporated herein by reference to the Company's Form
            SB-2 filed with the Commission on June 30, 1999).


                                       27
<PAGE>

     10.1   Agreement  between  the  Registrant  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 the  Company's  Form SB-2  filed  with the
            Commission on June 30, 1999).

     10.2   Federal  Supply  Service   Information   Technology  schedule  Award
            effective April 16, 1999 through April 15, 2004 (incorporated herein
            by reference to the Company's Form SB-2 filed with the Commission on
            June 30, 1999).

     10.3   Form of Employment  Agreement  between the Company and its executive
            officers  (incorporated  herein by reference to the  Company's  Form
            SB-2 filed with the Commission on June 30, 1999).

     10.4   1995  Non-Qualified  Stock  Option  Plan  (incorporated   herein  by
            reference to the  Company's  Form SB-2 filed with the  Commission on
            June 30, 1999).

     10.5   1999 Stock  Option Plan  (incorporated  herein by  reference  to the
            Company's Form SB-2 filed with the Commission on June 30, 1999).

     10.6   Form of Indemnification  Agreement (incorporated herein by reference
            to the  Company's  Form SB-2 filed with the  Commission  on June 30,
            1999).

     10.7   1999 Director Option Plan  (incorporated  herein by reference to the
            Company's Form SB-2 filed with the Commission on June 30, 1999).

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

     23.1   Consent of Eisner LLP

     31.1   Written Certification of Chief Executive Officer Pursuant to Section
            302 of The Sarbanes-Oxley Act of 2002

     31.2   Written Certification of Chief Financial Officer Pursuant to Section
            302 of The Sarbanes-Oxley Act of 2002

     32     Written Certification of Chief Executive Officer Pursuant to Section
            906 of The Sarbanes-Oxley Act of 2002


ITEM  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information  required by this Item is incorporated herein by reference
to the  Company's  definitive  Proxy  Statement  to be filed for its 2005 Annual
Meeting of Stockholders. a.

                                       28
<PAGE>


SIGNATURES

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

Date:  March 22, 2005


                               I.D. SYSTEMS, INC.


                               By:   /s/ Jeffrey M. Jagid
                                    -----------------------------
                                    Jeffrey M. Jagid
                                    Chief Executive Officer
                                    (Principal Executive Officer)


                               By:   /s/ Ned Mavrommatis
                                    --------------------------------------------
                                    Ned Mavrommatis
                                    Chief Financial Officer
                                    (Principal Accounting and Financial Officer)

      Pursuant to the  requirements  of the Securities Act of 1934,  this Annual
Report on Form 10-KSB is signed below by the following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

     SIGNATURE                      TITLE                      DATE

      /s/ Jeffrey M. Jagid          Chief Executive Officer    March 22, 2005
     ----------------------
     Jeffrey M. Jagid               and Director

      /s/ Kenneth S. Ehrman         Chief Operating Officer    March 22, 2005
     ----------------------
     Kenneth S. Ehrman              and Director

     /s/ Lawrence Burstein          Director                   March 22, 2005
     ----------------------
     Lawrence Burstein

      /s/ Michael Monaco            Director                   March 22, 2005
     ----------------------
     Michael Monaco

      /s/ Beatrice Yormark          Director                   March 22, 2005
     ----------------------
     Beatrice Yormark