**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**




**FORM
      10-K**


(Mark
      One)




ý  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934** for the
      fiscal year ended December 31, 2006.





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





Commission
                File Number:**1-15087****I.D.
                SYSTEMS, INC.**(Exact
                name of registrant as specified in its
                charter)








**Delaware**
            
            **22-3270799**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (IRS
                Employer
              identification
                No.)







**One
                University Plaza, Hackensack, New
                Jersey**
            
            **07601**(Address
                of principal executive
                offices)
            
            (Zip
                Code)






**(201)
      996-9000**


(Registrant's
      telephone number, including area code)




Securities
      registered pursuant to Section 12(b) of the Act: **N** **one**





Securities
      registered pursuant to Section 12(g) of the Act:





**Common
      Stock, par value $0.01 per share**


(Title
      of
      class)





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





Indicate
      by checkmark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of 1934.


Yes  ̈ or No ý





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes ý or No  ̈




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











Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act
      of 1934.


Large
      accelerated filer  ̈   Accelerated
      filer ý    Non-accelerated  ̈





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





The
      aggregate market value of the registrant’s common stock, par value $0.01 per
      share (“Common Stock”), held by non-affiliates is $181.4 million, computed by
      reference to the price at which the Common Stock was last sold on June 30,
      2006,
      as reported on the Nasdaq National Market.




The
      number of shares of Common Stock outstanding as of March 1, 2007 was 11,339,000
      shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE**







Document
            Part of Form 10-KProxy Statement For 2006 Annual Meeting
              of
              Stockholders
            Part III














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




**TABLE
      OF CONTENTS**




**Page****PART
                      I.**Item
                      1.
                  Business
                  1Item
                      1A.
                  Risk
                      Factors
                  14Item
                      1B.
                  Unresolved
                      Staff Comments
                  25Item
                      2.
                  Properties
                  25Item
                      3.
                  Legal
                      Proceedings
                  25Item
                      4.
                  Submission
                      of Matters to a Vote of Security Holders
                  25**PART
                      II.**Item
                      5.
                  Market
                      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                      Purchases of Equity Securities
                  26Item
                      6.
                  Selected
                      Financial Data
                  28Item
                      7.
                  Management’s
                      Discussion and Analysis of Financial Condition and Results
                      of
                      Operation
                  29Item
                      7A.
                  Quantitative
                      and Qualitative Disclosures About Market Risk
                  39Item
                      8.
                  Financial
                      Statement and Supplementary Data
                  40Item
                      9.
                  Changes
                      in and Disagreements with Accountants on Accounting and Financial
                      Disclosure
                  61Item
                      9A.
                  Controls
                      and Procedures
                  61Item
                      9B.
                  Other
                      Information
                  63**PART
                      III.**Item
                      10.
                  Directors,
                      Executive Officers and Corporate Governance
                  64Item
                      11.
                  Executive
                      Compensation
                  64Item
                      12.
                  Security
                      Ownership of Certain Beneficial Owners and Management and Related
                      Stockholder Matters
                  64Item
                      13.
                  Certain
                      Relationships and Related Transactions, and Director
                      Independence
                  65Item
                      14.
                  Principal
                      Accountant Fees and Services
                  65**PART
                      IV.**Item
                      15.
                  Exhibits,
                      Financial Statement Schedules
                  66





**PART
      I.**




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




**Item
      1.**  **Business**




**Overview**




We
      develop, market and sell wireless solutions for managing and securing high-value
      enterprise assets. These assets include industrial vehicles, such as forklifts
      and airport ground support equipment, and rental vehicles. Our patented Wireless
      Asset Net system, which utilizes radio frequency identification, or RFID,
      technology, addresses the needs of organizations to control, track, monitor
      and
      analyze their assets. Our solutions enable customers to achieve tangible
      economic benefits by making timely, informed decisions that increase the
      security, productivity and efficiency of their operations.




We
      have
      focused our business activities on two primary applications - industrial fleet
      management and security, and rental fleet management. Our solution for
      industrial fleet management and security allows our customers to reduce
      operating costs and capital expenditures and to comply with certain safety
      regulations by accurately and reliably measuring and controlling fleet activity.
      This solution also enhances security at industrial facilities and areas of
      critical infrastructure, such as airports, by controlling access to, and
      restricting the use of, vehicles and equipment. Our solution for rental fleet
      management allows rental car companies to generate higher revenue by more
      accurately tracking vehicle data, such as fuel consumption and odometer
      readings, and improve customer service by expediting the rental and return
      processes. In addition to focusing on these core applications, we have adapted,
      and intend to continue to adapt, our solutions to meet our customers’ broader
      asset management needs.




We
      market
      and sell our solutions to a wide range of customers in the commercial and
      government sectors. Our customers operate in diverse markets, such as automotive
      manufacturing, heavy industry, retail and wholesale distribution, aerospace
      and
      defense, homeland security and vehicle rental. Based on revenues for 2006,
      our
      top customers are:


•  U.S.
        Postal Service;
  •  Wal-Mart
        Stores, Inc.
  •  Ford
        Motor Company;


Interest
      in, and customer adoption of, RFID-based technologies have increased
      substantially in recent years. Our differentiated technology and targeted
      solutions have allowed us to benefit from this marketplace growth. We have
      increased our revenues from $923,000 in the fiscal year ended December 31,
      2001
      to $24.7 million in the fiscal year ended December 31, 2006, representing a
      compounded annual growth rate of 93%.




1





We
      were
      incorporated in the State of Delaware in 1993.





**Our
      Solution**




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




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




•
            miniature
                wireless programmable computers attached to
                assets;




•
            fixed-position
                communication infrastructure consisting of network computers with
                two-way
                RF capabilities, RF-based location-emitting beacons and
                application-specific network servers;
                and




•
            proprietary
                software, which is a user-friendly, Windows-based graphical user
                interface
                that utilizes client-server architecture and a
                database.




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




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




***Industrial
      Fleet Management and Security***




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




2







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




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




•
            wirelessly
                uploading usage data from each
                vehicle;




•
            automatically
                prioritizing maintenance events based on weighted, user-defined
                variables;




•
            automatically
                sending reminders to individual vehicles or operators via the system’s
                text messaging module;




•
            enabling
                remote lock-out of vehicles overdue for maintenance;
                and




•
            allowing
                maintenance personnel to locate and retrieve vehicles due for service
                via
                the system’s graphical viewer
                software.




To
      help
      improve fleet safety and security, our system provides, among other
      things:




•
            compatibility
                with a variety of technologies that verify driver
                identity;




•
            wireless
                vehicle access control to ensure that only trained and authorized
                personnel use equipment as required by the Occupational Safety and
                Health
                Administration, or OSHA;




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




•
            automatic
                reporting of emerging vehicle safety
                issues;




•
            automatic
                on-vehicle intervention, such as alarms and the disabling of equipment,
                in
                response to user-definable safety and security
                parameters;




•
            remote
                vehicle deactivation capabilities, allowing a vehicle to be shut
                down
                manually or automatically under defined
                conditions;




•
            impact
                sensing to assign responsibility for abusive
                driving;




•
            geo-fencing
                to restrict vehicles from operating in prohibited areas or issue
                alerts
                upon unauthorized entry to such areas;
                and




•
            a
                graphical, icon-based view of vehicle safety/security/operational
                status
                on a facility map, filterable by a variety of conditions, both
                historically and in real time.




A
      specialized application of our solution in the industrial fleet management
      and
      security market is vehicle security, particularly at airports, seaports and
      other areas of critical infrastructure. The Transportation Security Act of
      2001
      mandates security for aircraft servicing equipment, including aircraft tow
      tractors, baggage tugs, cargo loaders, catering vehicles and fuel trucks. As
      of
      December 31, 2006, we had received more than $4.0 million in grants from the
      U.S. Department of Homeland Security for developing and deploying a version
      of
      our Wireless Asset Net system to address this mandate.




3




***Rental
      Fleet Management***




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




**Products
      and Services**




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




***Principal
      Products***




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




•
            contains
                an integrated, computer, programmed with a product specific
                application, and an advanced wireless transceiver with a
                communication range of up to one-half
                mile;




•
            controls
                equipment access with a variety of electronic interface
                options;




•
            is
                compatible with many existing facility access security
                systems;




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




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




•
            performs
                monitoring and control functions at all times, independent of RF
                or
                network connectivity; and




•
            incorporates
                a multi-voltage power supply designed to control electrical
                anomalies.




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


4


Each
      of
      our gateways:




•
            incorporates
                an integrated, computer, programmed with a product specific
                application, and an advanced wireless transceiver with a communication
                range of up to one-half mile;




•
            accommodates
                an unlimited number of on-asset hardware
                devices;




•
            automatically
                uploads and downloads data to and from other system
                components;




•
            employs
                built-in self-diagnostic capabilities;
                and




•
            is
                configurable to achieve a wide range of asset management
                goals.




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




•
            is
                Windows compatible;




•
            automatically
                processes data between our gateways and system
                databases;




•
            actively
                polls gateways to retrieve data on
                demand;




•
            supports
                passive listening to allow remote systems to dial in for data
                download;




•
            automates
                event scheduling, including data downloads, database archiving and
                diagnostic notifications;




•
            interfaces
                with certain existing external systems, including maintenance and
                training
                systems;




•
            supports
                remote control/management of event
                processes;




•
            automatically
                performs diagnostics on system components;
                and




•
            automatically
                e-mails event alerts and customizable
                reports.




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




The
      Wireless Asset Net console:




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




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




5







•
            searches,
                sorts and analyzes assets by drive time, idle time, location, status,
                group, maintenance condition and other
                parameters;




•
            displays
                and prints predefined and ad hoc reports;
                and




•
            allows
                remote access by management, customers and vendors through the
                Internet.




***Additional
      Products***




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




•
            tracks
                vehicle operator compliance with battery charging
                requirements;




•
            enforces
                critical equalization charging
                schedules;




•
            monitors
                data necessary for battery warranty compliance;
                and




•
            simplifies
                battery life management.




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




•
            accommodate
                virtually any power input, from 6 volts DC to 480 volts
                AC;




•
            monitor
                up to four motors on a single machine;
                and




•
            collect
                data for maintenance management and asset utilization
                analysis.




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




•
            automatic
                quality control checks;




•
            real-time
                alerts on out-of-specification machine
                parameters;




•
            automatic
                machine shut-down based on user-defined criteria;
                and




•
            electronic
                maintenance checklists.




*Line
      Asset Communicator* .
      Our
      Line Asset Communicator is a wireless messaging device that triggers automatic,
      real-time task requests via radio frequency. Our Line Asset Communicator is
      designed to automatically forward requests to the material handling resource
      that:




•
            has
                been designated as capable of performing the work
                requested;




•
            is
                available for work at the moment of request; and




6







•
            is
                physically closest to the site where the work must be
                performed.




The
      Line
      Asset Communicator is a key component of our OptiKan system, an optimized,
      wireless, electronic "kanban" system. "Kanban" refers to a method of signaling
      for parts replenishment on an assembly line, popularized by Japanese automobile
      manufacturers to achieve "just in time" production efficiencies. Our OptiKan
      system is designed to (i) eliminate dependence on line-of-sight parts
      replenishment calls, which can optimize material handling efficiency by reducing
      vehicle travel and eliminating unnecessary down time and (ii) provide a more
      dynamic, intelligent allocation of tasks to the material handling workforce
      that
      feeds the assembly line, which can both increase the timeliness and accuracy
      of
      parts replenishment and significantly reduce indirect labor costs.






***Services***




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




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




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




To
      help
      our customers derive the most benefit from our system, we supply a broad range
      of support documentation and provide initial post-launch data consulting. Our
      support documentation includes hardware user guides, software manuals, vehicle
      installation overviews, troubleshooting guides and issue escalation procedures.
      Our initial data consulting is intended to help the customer determine which
      reports and charts are most meaningful to different system users and which
      specific data may represent cost-saving or productivity-enhancing
      opportunities.




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




**Sales
      and Marketing**




Our
      sales
      and marketing objective is to achieve broad market penetration, with an emphasis
      both on expanding business opportunities with existing customers and on securing
      new customers. As of March 1, 2007, we had 12 employees devoted to sales and
      marketing and currently intend to expand our direct sales force to develop
      additional sales and marketing initiatives, including penetration of
      international markets.




7







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




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




•
            Ford
                initially implemented our system at one plant in 1999, which led
                to a
                blanket purchase order to deploy our system across its North American
                operations. As of December 31, 2006, we had implemented our system
                on an
                aggregate of approximately 5,000 vehicles at 38 Ford
                facilities.




•
            Walgreens
                initially deployed our system at a single distribution center in
                2003 and,
                as of December 31, 2006, had deployed our system at eight distribution
                centers covering an aggregate of approximately 800
                vehicles.




•
            The
                U.S. Postal Service used the implementation of our system at one
                of its
                facilities to form the basis of a solicitation for competitive bids
                for a
                powered vehicle management system. Based on our proposal for that
                program,
                the U.S. Postal Service awarded us a national contract in 2004 to
                deploy
                our system at up to 460 U.S. Postal Service facilities nationwide.
                As of
                December 31, 2006, the U.S. Postal Service had placed orders for
                deployment of our system in 65 of its
                facilities.




•
            Beginning
                in 2003, Target utilized our system on a limited number of vehicles
                at one
                of its facilities. After testing our product, Target placed orders
                with us
                to implement our system on more than 500 vehicles in Target’s distribution
                facilities across the United
                States.




•
            Wal-Mart
                initially deployed our system at a single distribution center in
                2005.
                After testing our system, Wal-Mart deployed our system in seven additional
                facilities.




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





**Customers**




We
      market
      and sell our wireless solutions to a wide range of customers in the commercial
      and government sectors. Our customers operate in diverse markets, such as
      automotive manufacturing, heavy industry, retail and wholesale distribution,
      aerospace and defense, homeland security and vehicle rental. Customers that
      have
      implemented our system include:




8





3M
                  Company
              Meijer,
                  Inc.Advanced
                  Technology Institute
              Nissan
                  North America, Inc.AeroVironment,
                  Inc.
              Northrop
                  Grumman CorporationAmerican
                  Axle & Manufacturing, Inc.
              Premier
                  Manufacturing Support Services, Inc.Archer
                  Daniels Midland Company
              Rite
                  Aid CorporationAvis
                  Rent A Car System, Inc.
              Target
                  CorporationCanadian
                  Tire Corporation, Limited
              Toyota
                  Motor Manufacturing Kentucky, Inc.DaimlerChrysler
                  Corp.
              U.S.
                  Department of Homeland SecurityDeere
                  & Company
              U.S.
                  NavyFord
                  Motor Company
              U.S.
                  Postal ServiceGeneral
                  Dynamics Corporation
              Walgreen
                  Co.Golub
                  Corporation
              Wal-Mart
                  Stores, Inc.Longview
                  Fibre Company
              Weyerhauser
                  CompanyWinCo
                  Foods, Inc.




During
      the year ended December 31, 2006, the U.S. Postal Service and Wal-Mart Stores,
      Inc. accounted for 61% and 14% of our revenues, respectively. During the year
      ended December 31, 2005, the U.S. Postal Service and Ford accounted for 45%
      and
      18% of our revenues, respectively. No other customer accounted for greater
      than
      10% of our net revenues during these periods.




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




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




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




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




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




•
            In
                2004, the U.S. Postal Service solicited bids for deployment of an
                enterprise-wide Powered Industrial Vehicle Management System (“PIVMS”),
                and subsequently awarded us a national contract to deploy our Wireless
                Asset Net technology as its PIVMS at up to 460 U.S. Postal Service
                facilities across the United States. As of December 31, 2006, we
                had
                implemented the PIVMS in 65 U.S. Postal Service
                facilities.




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




9


**Competition**




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




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




In
      each
      of our markets, we encounter different competitors due to the competitive
      dynamics of each segment. In the industrial fleet management and security
      market, the wireless control, tracking and management of enterprise assets
      is
      relatively new. Although we are not aware of any current competitors that
      provide the precise capabilities of our systems, we are aware of competitors
      that offer subsets of our system capabilities or alternate approaches to the
      needs our products address. Those companies include both emerging companies
      with
      limited operating histories, such as Media Recovery and Access Control Group,
      and companies with longer operating histories, greater name recognition and/or
      significantly greater financial, technical and marketing resources than ours,
      such as Savi Technology, which was acquired by Lockheed Martin Company in June
      2006, Symbol Technologies, which was acquired by Motorola, Inc. in January
      2007,
      Intermec, Inc. and WhereNet Corp., which was acquired by Zebra Technologies
      Corporation in January 2007.




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




**Research
      and Development**




As
      of
      March 1, 2007, including our executive vice president of engineering, our
      research and development group was comprised of 17 full-time employees. These
      employees have expertise in areas such as software and hardware design, wireless
      communications and mechanical and electrical engineering.




10






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




Our
      current research and development efforts are focused on:




•
            continuing
                to add to the functionality and reduce the costs of our
                system;




•
            expanding
                our system to meet the needs of potential markets and to provide
                new
                solutions to our customers; and




•
            improving
                our core products by utilizing continuing advances in technology.




We
      spent
      $2.6 million (includes $723,000 of stock based compensation), $1.6 million
      and
      $1.2 million for research and development during years ended December 31, 2006,
      2005 and 2004, respectively.




**Intellectual
      Property**




***Patents***




We
      attempt to protect our technology and products through the pursuit of patent
      protection in the United States and certain foreign jurisdictions. We have
      built
      a portfolio of patents and patent applications relating to aspects of our
      technology and products. We have four U.S. patents and eight pending U.S. patent
      applications. With the timely payment of all maintenance fees, our U.S. patent
      that covers our Wireless Asset Net system (U.S. Patent Number 5,682,142) expires
      on October 28, 2014, our U.S. patent that covers our rental car fleet management
      system (U.S. Patent Number 6,898,493) expires on April 6, 2020, our U.S. patent
      that covers our Wireless Asset Net system (U.S. Patent Number 7,165,040) expires
      on April 28, 2023), and our U.S. patent that covers our Wireless Asset Net
      system (U.S. Patent Number 7,171,381) expires on December 20, 2019.




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




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




11







U.S.
      Patent Number 7,165,040 and U.S. Patent Number 7,171,381, entitled “System and
      Method for Managing Remotely and Distantly Located Assets” and “System
      Architecture and Communications for an Asset Management System,” respectively,
      are directed toward protection for wireless,
      bi-directional communications between intelligent asset monitoring devices
      and
      central data processing nodes. The
      patented systems enable monitoring and control of remote assets in environments
      where wireless communication networks are overburdened or not reliable. We
      have
      foreign patents in China, South Korea, Australia and Mexico covering our
      Wireless Asset Net system. We also have patent applications for our Wireless
      Asset Net system pending in Japan and Canada . Because of the differences in
      patent laws and laws concerning proprietary rights, the extent of protection
      provided by U.S. patents or proprietary rights owned by us may differ from
      that
      of their foreign counterparts.




***Trademarks***




We
      have,
      or have applied for, trademark protection for I.D. Systems, Inc.®,
      Intelli-Listening®,  MACTM, Vehicle Asset Communicator®, Battery ChaMPTM,
      ChaMPTM and Wireless Asset Net®.




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




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




•
            reengineer
                our products successfully to avoid
                infringement;




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




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




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




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




12


**Manufacturing**




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




Our
      manufacturers are responsible for obtaining the necessary components and
      supplies to manufacture our products. While components and supplies are
      generally available from a variety of sources, manufacturers generally depend
      on
      a limited number of suppliers. In the past, unexpected demand for communication
      products caused worldwide shortages of certain electronic parts and allocation
      of such parts by suppliers that had an adverse impact on the ability of
      manufacturers to deliver products as well as on the cost of producing such
      products.




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




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




**Government
      Regulations**




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




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




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




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




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




13


**Employees**




As
      of
      March 1, 2007, we had 89 full-time employees, of which 36 are engaged in
      customer service, 17 in product development (which includes engineering), 9
      in
      operations, 12 in sales and marketing, and 15 in finance and administration.
      None of our employees are represented by union or collective bargaining
      agreements. We believe that our relationships with our employees are
      good.




**Available
      Information**




Our
      website is “www.id-systems.com.” We make available on this website free of
      charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
      reports on Form 8-K and amendments to those reports pursuant to Section 13(a)
      or
      15(d) of the Exchange Act as soon as reasonably practicable after we
      electronically file such material with, or furnish such information to, the
      Securities and Exchange Commission (“SEC”). We also make available on this
      website, free of charge, our Code of Ethics for Senior Financial Officers,
      which
      applies to our principal executive officer, principal financial officer and
      principal accounting officer.




**Item
      1A.**  **Risk
      Factors**




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




Although
      we generated net income of $851,000 and $398,000 for the years ended December
      31, 2005 and 2004, respectively, we incurred net losses of approximately $1.6
      million and $1.2 million for the years ended December 31, 2006 and 2003,
      respectively, and have incurred additional net losses since inception. At
      December 31, 2006, we had an accumulated deficit of approximately $12.2 million.
      Although during 2006, our revenues increased, our expenses also increased,
      primarily as a result of our adoption of SFAS No. 123(R) and the increase in
      payroll and related expenses due to the hiring of additional personnel. Our
      ability to increase our revenues from the sale of our products will depend
      on
      our ability to successfully implement our growth strategy and the continued
      expansion of our markets. If our revenues do not continue to grow as they have
      in the past, or if our operating expenses continue to increase, we may not
      be
      able to become profitable as we were in 2005 and 2004 and the market price
      of
      our common stock could decline significantly.




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




During
      the year ended December 31, 2006, the U.S. Postal Service and Wal-Mart Stores,
      Inc. accounted for 61% and 14% of our revenues, respectively. During the year
      ended December 31, 2005, the U.S. Postal Service and Ford accounted for 45%
      and
      18% of our revenues, respectively. Some of these and other customers operate
      in
      markets that have suffered business downturns in the past few years or may
      so
      suffer in the future. The loss of or any material reduction in the amount of
      our
      products that these customers purchase, or any material adverse change in the
      financial condition of such customers, could materially and adversely affect
      our
      financial condition and results of operations. If we are unable to replace
      such
      revenue from existing or new customers, the market price of our common stock
      could decline significantly.




14


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




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




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




Our
      market is characterized by rapid technological change and frequent new product
      announcements. Significant technological changes could render our existing
      technology obsolete. We are active in the research and development of new
      products and technologies and in enhancing our current products. However,
      research and development in our industry is complex and filled with uncertainty.
      For example, it is common for research and development projects to encounter
      delays due to unforeseen problems, resulting in low initial volume production,
      fewer product features than originally considered desirable and higher
      production costs than initially budgeted, any of which may result in lost market
      opportunities. In addition, these new products may not adequately meet the
      requirements of the marketplace and may not achieve any significant degree
      of
      market acceptance. If our efforts do not lead to the successful development,
      marketing and release of new products that respond to technological developments
      or changing customer needs and preferences, our revenues and market share could
      be materially and adversely affected. We may expend a significant amount of
      resources in unsuccessful research and development efforts. In addition, new
      products or enhancements by our competitors may cause customers to defer or
      forego purchases of our products. Any of the foregoing could materially and
      adversely affect our financial condition and results of operations and reduce
      our ability to grow our market share.




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




We
      have
      grown our business rapidly over the past few years. Between the fiscal years
      ended December 31, 2001 and 2006, our revenues increased at a compounded annual
      growth rate of 93%. We plan to significantly increase our operating expenses
      to
      expand our sales and marketing capabilities, broaden our customer support
      capabilities and fund greater levels of research and development. Our rapid
      growth has placed, and is expected to continue to place, a significant strain
      on
      our managerial, technical, operational and financial resources. To manage our
      expected growth, we will have to:




•
            retain
                existing personnel;




•
            hire,
                train, manage and retain additional qualified personnel, including
                sales
                and marketing and research and development
                personnel;




•
            implement
                additional operational controls, reporting and financial systems
                and
                procedures; and




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




15







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




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




The
      timing of the deployment of our solutions may vary widely and will depend on
      the
      specific deployment plan of each customer, the complexity of the customer’s
      organization and the difficulty of such deployment. Customers with substantial
      or complex organizations may deploy our solutions in large increments on a
      periodic basis. Accordingly, we may receive purchase orders for significant
      dollar amounts on an irregular and unpredictable basis. Because of our limited
      operating history and the nature of our business, we cannot predict the timing
      or size of these sales and deployment cycles. Long sales cycles, as well as
      our
      expectation that customers will tend to place large orders sporadically with
      short lead times, may cause our revenue and results of operations to vary
      significantly and unexpectedly from quarter to quarter. These variations could
      materially and adversely affect the market price of our common
      stock.




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




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




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




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




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




16







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




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




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




•
            pay
                substantial damages to the party making such
                claim;




•
            stop
                selling, making, having made or using products or services that
                incorporate the challenged intellectual
                property;




•
            obtain
                from the holder of the infringed intellectual property right a license
                to
                sell, make or use the relevant technology, which license may not
                be
                available on commercially reasonable terms, or at all;
                or




•
            redesign
                those products or services that incorporate such intellectual
                property.




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




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




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




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




17







In
      order
      to meet the requirements under our contracts, we rely on subcontractors to
      manufacture and deliver our products to our customers. For example, during
      the
      year ended December 31, 2006, we relied on Flextronics International Ltd. for
      the purchase of approximately 38% of our components and finished goods. Any
      quality or performance failures by our subcontractors or changes in their
      financial or business condition could disrupt our ability to supply quality
      products to our customers in a timely manner. If we are unable to fulfill orders
      from our customers in a timely manner, we could experience business
      interruption, increased costs, damage to our reputation and loss of our
      customers. In addition, we may be subject to claims from our customers for
      failing to meet our contractual obligations. Although we have several sources
      for production, the inability to provide our products to our customers in a
      timely manner could result in the loss of customers and our revenues could
      be
      materially reduced. In addition, there is great competition for the most
      qualified and competent subcontractors. If we are unable to hire qualified
      subcontractors, the quality of our services and products could decline.
      Furthermore, third-party manufacturers in the electronic component industry
      are
      consolidating. The consolidation of third-party manufacturers may give remaining
      manufacturers greater leverage to increase the prices that they charge, thereby
      increasing our manufacturing costs. If we are unable to pass the increased
      costs
      onto our customers, our profitability could be materially and adversely
      affected.




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




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




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




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




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




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




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




18


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




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




•
            advances
                in technology;




•
            new
                product introductions;




•
            evolving
                industry standards;




•
            product
                improvements;




•
            rapidly
                changing customer needs;




•
            intellectual
                property invention and protection;




•
            marketing
                and distribution capabilities;




•
            competition
                from highly capitalized companies;




•
            entrance
                of new competitors;




•
            ability
                of customers to invest in information technology;
                and




•
            price
                competition.




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




Although
      we are not aware of any current competitors that provide the precise
      capabilities of our systems, we are aware of competitors that offer subsets
      of
      our system capabilities or alternate approaches to the needs our products
      address. Those companies include both emerging companies with limited operating
      histories, such as Media Recovery, Inc. and Access Control Group L.L.C., and
      companies with longer operating histories, greater name recognition and/or
      significantly greater financial, technical and marketing resources than ours,
      such as Savi Technology, Inc., which was acquired by Lockhead Martin
      Company in June 2006, Symbol Technologies, Inc., which was acquired by
      Motorola, Inc. in January 2007, Intermec, Inc. and WhereNet Corp, which was
      acquired by Zebra Technologies Corporation in January 2007.




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




19







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




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




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




Technical
      products like ours often contain undetected errors or failures when first
      introduced. Despite our efforts to eliminate these flaws, there still may be
      flaws in our products, even after the commencement of commercial shipments.
      Because our products are used in business-critical applications, we could be
      subject to product liability claims if our systems fail to perform as intended.
      Even unsuccessful claims against us could result in costly litigation and the
      diversion of management’s time and resources and could damage our reputation and
      impair the marketability of our systems. Although we maintain insurance, we
      cannot assure you that:




•
            our
                insurance will provide adequate coverage against potential liabilities
                if
                our products cause harm or fail to perform as promised;
                or




•
            adequate
                product liability insurance will continue to be available to us in
                the
                future on commercially reasonable terms or at
                all.




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




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




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




20


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




We
      have
      not generated significant revenues outside of North America. As part of our
      growth strategy, we are seeking ways to expand our operations outside of North
      America by establishing offices overseas and developing relationships with
      global distributors to market and sell our systems internationally. For example,
      in October, 2006, we hired a salesperson in Düsseldorf, Germany to market and
      sell our systems in Europe. There are a number of risks inherent in doing
      business in such markets, including:




•
            unexpected
                legal or regulatory changes;




•
            unfavorable
                political or economic factors;




•
            less
                developed infrastructure;




•
            difficulties
                in recruiting and retaining personnel, and managing international
                operations;




•
            fluctuations
                in foreign currency exchange rates;




•
            lack
                of sufficient protection for intellectual property rights;
                and




•
            potentially
                adverse tax consequences.




Until
      recently, we had no operations outside of North America, and we have limited
      experience establishing or operating businesses outside of North America. If
      we
      do not adequately anticipate and respond to the risks inherent in international
      operations, our operating results and the market price of our common stock
      could
      be materially and adversely affected. In addition, although we intend to expand
      our business outside of North America, there are risks associated with
      conducting an international operation, including the risks listed above, and
      such expansion may not be successful or have a positive effect on our financial
      condition and results of operations.




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




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




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




•  incur
      debt;




•  assume
      liabilities;




•  incur
      expenses related to the impairment of goodwill; or




•  incur
      large and immediate write-offs.




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




21







•  problems
      combining the acquired operations, technologies or products;




•  unanticipated
      costs;




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




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




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




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




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




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




As
      of
      March 1, 2007, our executive officers and directors beneficially owned, in
      the
      aggregate, 8.4% of our outstanding common stock, not including 1,893,899 shares
      of common stock that our executive officers and directors may acquire upon
      the
      exercise of outstanding options or if they otherwise acquire additional shares
      of common stock in the future. As a result, our officers and directors may
      have
      the ability to influence the outcome of all corporate actions requiring
      stockholder approval, irrespective of how our other stockholders may vote,
      including the following actions:




•
            the
                election of directors;




•
            adoption
                of stock option plans;




•
            the
                amendment of our organizational documents;
                and




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




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




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




•
            variations
                in the sales of our products to our significant
                customers;




•
            variations
                in the mix of products and services provided by
                us;




•
            the
                timing and completion of initial programs and larger or enterprise-wide
                purchases of our products by our
                customers;




22







•
            the
                length and variability of the sales cycle for our
                products;




•
            the
                timing and size of sales;




•
            changes
                in market and economic conditions, including fluctuations in demand
                for
                our products; and




•
            announcements
                of new products by our competitors.




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




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




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




We
      have
      11,339,000 shares of common stock outstanding as of March 1, 2007, of which
      10,383,000 shares are freely transferable without restriction and 956,000 shares
      are eligible for future sale, subject to the applicable volume, manner of sale,
      holding period and other limitations of Rule 144. In addition, as of March
      1,
      2007, options to purchase 2,792,000 shares of our common stock were issued
      and
      outstanding, of which 1,709,000 were vested. The remaining options will vest
      ratably over a five-year period measured from the date of grant. The
      weighted-average exercise price of the vested stock options is $5.81, which
      is
      substantially lower than the current market price of our common stock. We also
      may issue additional shares of stock in connection with our business, including
      in connection with acquisitions, and may grant additional stock options to
      our
      employees, officers, directors and consultants under our stock option plans
      or
      warrants to third parties. If a significant portion of these shares were sold
      in
      the public market, the market value of our common stock could be adversely
      affected.




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




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




•
            permit
                our board of directors to issue, without further action by our
                stockholders, up to 5,000,000 shares of preferred stock, with any
                rights,
                preferences and privileges as they may designate, including the right
                to
                approve an acquisition or other change in
                control;




•
            provide
                that special meetings of stockholders may be called only by (i) our
                board
                of directors pursuant to a resolution adopted by a majority of the
                entire
                board of directors, either upon motion of a director or upon written
                request by the holders of at least 50% of the voting power of all
                the
                shares of our capital stock entitled to vote in the election of directors,
                voting as a single class, or (ii) our Chairman of the Board or President;
                and




23







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




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




**Cautionary
      Note Regarding Forward-Looking Statements.**




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




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




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




•
            future
                economic and business conditions;




•
            the
                loss of any of our key customers or reduction in the purchase of
                our
                products by any such customers;




•
            the
                failure of the market for our products to continue to
                develop;




•
            our
                inability to protect our intellectual
                property;




•
            our
                inability to manage our growth;




•
            the
                effects of competition from a wide variety of local, regional, national
                and other providers of wireless
                solutions;




•
            changes
                in laws and regulations, including tax and securities laws and regulations
                and interstate and regulations promulgated by the
                FCC;




•
            changes
                in accounting policies, rules and
                practices;




•
            changes
                in technology or products, which may be more difficult or costly,
                or less
                effective than anticipated; and




•
            the
                other factors listed under this Item 1A - “Risk
                Factors.”




24







All
      forward-looking statements are expressly qualified in their entirety by this
      cautionary notice. You are cautioned not to place undue reliance on any
      forward-looking statements, which speak only as of the date of this Annual
      Report on Form 10-K. We have no obligation, and expressly disclaim any
      obligation, to update, revise or correct any of the forward-looking statements,
      whether as a result of new information, future events or otherwise. We have
      expressed our expectations, beliefs and projections in good faith and we believe
      they have a reasonable basis. However, we cannot assure you that our
      expectations, beliefs or projections will result or be achieved or
      accomplished.




**Item
      1B.**  **Unresolved
      Staff Comments**




None.




**Item
      2.**  **Properties**




Our
      executive and administrative offices are located in Hackensack, New Jersey.
      In
      November 1999, we entered into a lease for this facility, covering approximately
      22,500 square feet, that expires on March 31, 2010. The rent is currently
      $34,825 per month. During 2003, we entered into an agreement to sublease to
      a
      third party 6,270 square feet through the end of the lease. The sublease
      provides for monthly payments of $11,619, subject to adjustments for increases
      in real estate taxes and certain operating expenses. During January 2007, the
      Company released the subleasee from the sublease and will reassume the space
      in
      mid 2007.




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




**Item
      3.**  **Legal
      Proceedings**




As
      of
      March 1, 2007, we were not involved in any material litigation.




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




None.




25


**PART
      II.**




**Item
                5.**
            **Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities**




(a) Market
      Information .
      Our
      common stock is quoted on the Nasdaq National Market under the symbol “IDSY.”
The following table sets forth, for the periods indicated, the high and low
      sales price for our common stock as reported on such quotation
      system.




**Quarter
                  Ending**
              
              **High**
              
              **Low****2005**March
                  31, 2005
              
              $
              18.50
              
              $
              9.25June
                  30, 2005
              
              
              15.97
              
              
              10.00September
                  30, 2005
              
              
              20.05
              
              
              15.15December
                  31, 2005
              
              
              23.96
              
              
              16.09**2006**March
                  31, 2006
              
              $
              25.03
              
              $
              19.40June
                  30, 2006
              
              
              25.84
              
              
              16.21September
                  30, 2006
              
              
              23.84
              
              
              15.14December
                  31, 2006
              
              
              23.59
              
              
              18.00


Set
      forth
      below is a line-graph presentation comparing the cumulative shareholder return
      on our common stock on an indexed basis against the cumulative total returns
      of
      the Nasdaq Market Value Index and the Hemscott Industry Communication Equipment
      Group Index (consisting of 79 publicly traded communication equipment companies)
      (“Hemscott Group Index”) for the period from January 1, 2001 through December
      31, 2006.













Measurement
                Period - Fiscal Year Ending December 31,Company/Index/Market
            
            2001
            
            2002
            
            2003
            
            2004
            
            2005
            
            2006I.D.
                Systems, Inc
            
            
            100.0
            
            
            41.36
            
            
            66.01
            
            
            176.20
            
            
            225.21
            
            
            177.71Hemscott
                Group Index
            
            
            100.0
            
            
            52.32
            
            
            79.50
            
            
            96.60
            
            
            108.91
            
            
            116.47NASDAQ
                Market Index
            
            
            100.0
            
            
            69.75
            
            
            104.88
            
            
            113.70
            
            
            116.19
            
            
            128.12


26









(b) Holders .
      As of
      March 1, 2007, there were 22 registered holders of our common stock.




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




(d) Sales
      of Unregistered Securities .




None.




(e) Share
      Repurchases .




None.




27


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




*The
      following table sets forth selected financial data for each of the five years
      ended December 31, 2006 derived from our audited financial statements. You
      should read the information in the table below together with the section of
      this
      Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations,” our financial statements and
      related notes and the other financial data included elsewhere in this Annual
      Report on Form 10-K.*




**Year
                Ended December 31,****Statement
                of Operations Data:**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**Revenues
            
            $
            5,544,000
            
            $
            7,959,000
            
            $
            13,741,000
            
            $
            19,004,000
            
            $
            24,740,000Cost
                of revenues
            
            
            2,430,000
            
            
            4,075,000
            
            
            6,509,000
            
            
            9,708,000
            
            
            13,701,000Gross
                profit
            
            
            3,114,000
            
            
            3,884,000
            
            
            7,232,000
            
            
            9,296,000
            
            
            11,039,000Operating
                expenses:Selling,
                general and administrative
            
            
            3,835,000
            
            
            4,456,000
            
            
            5,879,000
            
            
            7,140,000
            
            
            12,943,000Research
                and development
            
            
            938,000
            
            
            891,000
            
            
            1,234,000
            
            
            1,625,000
            
            
            2,639,000Income
                (loss) from operations
            
            
            (1,659,000
            )
            
            (1,463,000
            )
            
            119,000
            
            
            531,000
            
            
            (4,543,000
            )Interest
                income
            
            
            279,000
            
            
            269,000
            
            
            195,000
            
            
            222,000
            
            
            2,801,000Interest
                expense
            
            
            (4,000
            )
            
            (59,000
            )
            
            (63,000
            )
            
            (53,000
            )
            
            (29,000
            )Other
                income
            
            
            
            
            
            54,000
            
            
            147,000
            
            
            151,000
            
            
            155,000Net
                income (loss)
            
            $
            (1,384,000
            )
            $
            (1,199,000
            )
            $
            398,000
            
            $
            851,000
            
            $
            (1,616,000
            )Net
                income (loss) per share - basic
            
            $
            (0.21
            )
            $
            (0.17
            )
            $
            0.05
            
            $
            0.11
            
            $
            (0.15
            )Net
                income (loss) per share - diluted
            
            $
            (0.21
            )
            $
            (0.17
            )
            $
            0.05
            
            $
            0.09
            
            $
            (0.15
            )Weighted
                average common shares outstanding - basic
            
            
            6,711,000
            
            
            6,905,000
            
            
            7,455,000
            
            
            7,771,000
            
            
            10,501,000Weighted
                average common shares outstanding - diluted
            
            
            6,711,000
            
            
            6,905,000
            
            
            8,783,000
            
            
            9,332,000
            
            
            10,501,000







**Balance
                Sheet Data (at end of period):**Cash
                and cash equivalents
            
            
            3,758,000
            
            
            3,179,000
            
            
            8,440,000
            
            
            2,138,000
            
            
            9,644,000Marketable
                securities and short term investments
            
            
            3,031,000
            
            
            3,339,000
            
            
            3,195,000
            
            
            5,463,000
            
            
            60,716,000Total
                assets
            
            
            12,947,000
            
            
            13,470,000
            
            
            17,159,000
            
            
            19,840,000
            
            
            84,905,000Long-term
                debt
            
            
            -
            
            
            836,000
            
            
            648,000
            
            
            449,000
            
            
            240,000Total
                shareholders' equity (deficit)
            
            
            11,413,000
            
            
            10,979,000
            
            
            13,572,000
            
            
            15,166,000
            
            
            81,284,000







28




**Item
      7.**   **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation**




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




**Overview**




We
      develop, market and sell wireless solutions for managing and securing high-value
      enterprise assets. These assets include industrial vehicles, such as forklifts
      and airport ground support equipment, and rental vehicles. Our patented Wireless
      Asset Net system, which utilizes RFID technology, addresses the needs of
      organizations to control, track, monitor and analyze their assets. Our solutions
      enable our customers to achieve tangible economic benefits by making timely,
      informed decisions that increase the security, productivity and efficiency
      of
      their operations.




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




•
            Ford
                initially implemented our system at one plant in 1999, which led
                to a
                blanket purchase order to deploy our system across its North American
                operations. As of December 31, 2006, we had implemented our system
                on an
                aggregate of approximately 5,000 vehicles at 38 Ford
                facilities.




•
            Walgreens
                initially deployed our system at a single distribution center in
                2003 and,
                as of December 31, 2006, had deployed our system at eight distribution
                centers covering an aggregate of approximately 800
                vehicles.




•
            The
                U.S. Postal Service used the implementation of our system at one
                of its
                facilities in Buffalo, New York in 2003 to form the basis of a
                solicitation for competitive bids for a powered vehicle management
                system.
                Based on our proposal for that program, the U.S. Postal Service awarded
                us
                a national contract in 2004 to deploy our system at up to 460 U.S.
                Postal
                Service facilities nationwide. As of December 31, 2006, the U.S.
                Postal
                Service had placed orders for deployment of our system in 65 of its
                facilities.




•
            Beginning
                in 2003, Target utilized our system on a limited number of vehicles
                at one
                of its facilities. After testing our product, Target placed orders
                with us
                to implement our system on more than 500 vehicles in Target’s distribution
                facilities across the United
                States.




29







•
            Wal-Mart
                initially deployed our system at a single distribution center in
                2005.
                After testing our system, Wal-Mart deployed our system in seven additional
                facilities.




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




Although
      we generated net income of $851,000 and $398,000 for the years ended December
      31, 2005 and 2004, respectively, we incurred net losses of approximately $1.6
      million and $1.2 million for the years ended December 31, 2006 and 2003,
      respectively, and have incurred additional net losses since inception. At
      December 31, 2006, we had an accumulated deficit of approximately $12.2 million.
      Although during 2006, our revenue increased, our expenses also increased,
      primarily as a result of the adoption of SFAS No. 123(R) and the increase in
      payroll and related expenses due to the hiring of additional
      personnel.




During
      the year ended December 31, 2006, we generated revenues of $24.7 million, the
      U.S. Postal Service and Wal-Mart Stores, Inc. accounted for 61% and 14% of
      our
      revenues, respectively. During the year ended December 31, 2005, we generated
      revenues of $19.0 million, and the U.S. Postal Service and Ford accounted for
      45% and 18% of our revenues, respectively.




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




•
            increase
                sales of products and services to our existing
                customers;




•
            convert
                our initial programs into larger or enterprise-wide purchases by
                our
                customers;




•
            increase
                market acceptance and penetration of our products;
                and




•
            develop
                and commercialize new products and
                technologies.




**Critical
      Accounting Policies And Estimates**




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




30







***Revenue
      Recognition***




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




In
      most
      of our contracts, we invoice customers once certain milestones are met. As
      the
      systems are delivered, services are performed and all of the criteria for
      revenue recognition are satisfied, we recognize revenue for such systems. The
      difference between revenue recognized for financial reporting purposes and
      amounts invoiced is recorded as unbilled receivables or deferred revenue. Should
      a contract contain customer acceptance terms, we do not recognize any revenue
      on
      that contract until such terms have been met as described in the
      agreement.




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




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




***Stock-Based
      Compensation***




Prior
      to
      our fiscal year ended December 31, 2006, we accounted for stock-based employee
      compensation under Accounting Principles Board, or APB, Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations, and had
      adopted the disclosure-only provisions of SFAS No. 123, “Accounting for
      Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based
      Compensation — Transition and Disclosure.” In December 2004, the Financial
      Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based
      Payment,” which replaced SFAS 123 and superseded APB Opinion No. 25. Under the
      provisions of SFAS 123R, companies are generally required to measure the cost
      of
      employee services received in exchange for an award of equity instruments based
      on the grant-date fair value of the award. That cost is recognized over the
      period during which an employee is required to provide service in exchange
      for
      the award, usually the vesting period. SFAS 123R requires that compensation
      expense be recognized for the unvested portions of existing options granted
      prior to its effective date and the cost of options granted to employees after
      the effective date based on the fair value of the stock options at grant date.
      On January 1, 2006, we adopted SFAS 123R, and have applied the modified
      prospective method such that periods prior to adoption have not been restated.
      Pursuant to SFAS No. 123(R), stock based compensation expense amounted to
      $2,975,000 for the fiscal year ended December 31, 2006. The total fair value
      of
      shares vested during the years ended December 31, 2004 and 2005 was $740,000
      and
      $807,000, respectively.




31







**Results
      of Operations**




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




**Year
                Ended December 31,**2004
            
            2005
            
            **2006**Revenue:Product
            
            
            77.8
            %
            
            78.4
            %
            
            **65.5**
            **%**Services
            
            
            22.2
            
            
            21.6
            
            
            **34.5**100.0
            
            
            100.0
            
            
            **100.0**Cost
                of Revenues:Product
                cost of revenue
            
            
            46.3
            
            
            52.4
            
            
            **50.8**Service
                cost of revenue
            
            
            51.1
            
            
            46.2
            
            
            **64.1**Total
                Gross Profit
            
            
            52.6
            
            
            48.9
            
            
            **44.6**Selling,
                general and administrative expenses
            
            
            42.8
            
            
            37.6
            
            
            **52.3**Research
                and development expenses
            
            
            9.0
            
            
            8.6
            
            
            **10.7**Income
                (loss) from operations
            
            
            0.8
            
            
            2.8
            
            
            **(18.4**
            **)**Interest
                income
            
            
            1.4
            
            
            1.2
            
            
            **11.3**Interest
                expense
            
            
            (0.4
            )
            
            (0.3
            )
            
            **(0.0**
            **)**Other
                income
            
            
            1.1
            
            
            0.8
            
            
            **0.6****Net
                income (loss)**
            
            
            2.9
            %
            
            4.5
            %
            
            **(6.5**
            **)%**





32


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




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




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




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




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




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




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




***Selling,
      General and Administrative Expenses*** .
      Selling, general and administrative expenses increased $5.8 million, or 81.3%,
      to $12.9 million in 2006 compared to $7.1 million in 2005. This increase was
      attributable primarily to (i) the adoption of SFAS No. 123(R) in which we
      expensed $2.2 million of the value of stock based employee compensation and
      (ii)
      the increase in payroll and related expenses due to the hiring of additional
      personnel to support our continued growth. As a percentage of revenues, selling,
      general and administrative, expenses increased to 52.3% in 2006 from 37.6%
      in
      2005. We are currently expanding our direct sales force and intend to develop
      additional sales and marketing initiatives. As a result of such expansion,
      we
      expect our selling, general and administrative expenses to increase during
      2007.




***Research
      and Development Expenses.*** Research
      and development expenses increased $1.0 million, or 62.4%, to $2.6 million
      in
      2006 from $1.6 million in 2005. This increase was attributable primarily to
      (i)
      the adoption of SFAS No. 123(R) in which we expensed $723,000 of the value
      of
      stock based employee compensation and (ii) the increase in payroll and payroll
      related expenses. As a percentage of revenues, research and development expenses
      increased to 10.7% in 2006 from 8.6% in 2005. We intend to expand our research
      and development activities in order to continue to add to the functionality
      and
      reduce the costs of our system, to expand our system to meet the needs of new
      markets and provide new solutions to our customers; and to improve our core
      products by utilizing continuing advances in technology. As a result of such
      activities, we expect our research and development expenses to increase during
      2007.




33







***Interest
      Income.*** Interest
      income increased $2.6 million, or 1,161.7%, to $2.8 million in 2006 from
      $222,000 in 2005. This increase was attributable primarily to the increase
      in
      cash and cash equivalents and investments resulting from the proceeds received
      in connection with the public offering completed by us in March
      2006.




***Interest
      Expense.*** Interest
      expense decreased $24,000, or 45.3%, to $29,000 in 2006 from $53,000 in 2005.
      The decrease was attributable to a reduction in the principal amount of our
      outstanding debt in 2006.




***Other
      Income.*** Other
      income, which increased slightly to $155,000 in 2006 from $151,000 in 2005,
      reflects rental income earned from a sublease arrangement. During January 2007,
      we released the sublease from the sublease and will reassume the space in mid
      2007.




***Net
      Income (Loss).*** Net
      loss
      was $1.6 million or $(0.15) per basic and diluted share in the year ended
      December 31, 2006 as compared to net income of $851,000 or $0.11 per basic
      and
      $0.09 per diluted share for the year ended December 31, 2005. The increase
      in
      net loss was due primarily to the reasons described above.




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




***REVENUES.*** Revenues
      increased by $5.3 million, or 38.3%, to $19.0 in 2005 from $13.7 million in
      2004.




Revenues
      from product increased by $4.2 million, or 39.3%, to $14.9 million in 2005
      from
      $10.7 million in the same period in 2004. The increase in product revenues
      was
      attributable primarily to increased sales of our wireless system for tracking
      and managing industrial vehicles to our customers, including the U.S. Postal
      Service and Walgreens.




Revenues
      from service increased $1.1 million, or 34.7%, to $4.1 million in 2005 from
      $3.0
      million in the same period in 2004. The increase in service revenues was
      attributable primarily to the increase in implementation services to the US
      Postal Service.




***COST
      OF REVENUES*** .
      Cost of
      revenues increased by $3.2 million, or 49.1%, to $9.7 million in 2005 from
      $6.5
      million in 2004. Gross profit was $9.3 million in 2005 compared to $7.2 million
      in 2004. As a percentage of revenues, gross profit decreased to 48.9% in 2005
      from 52.6% in 2004.




Cost
      of
      product increased by $2.9 million, or 57.8%, to $7.8 million in 2005 from $5.0
      million in the same period in 2004. Gross profit from product revenue was $7.1
      million in 2005 compared to $5.7 million in 2004. As a percentage of product
      revenues, gross profit decreased to 47.6% in 2005 from 53.7% in 2004. The
      decrease is attributable to an increase to the inventory reserve of $105,000
      in
      2005, in addition, included in costs of revenues for 2005 and 2004 was $480,000
      and $400,000, respectively, of amortized capitalized costs associated with
      the
      application of the cost recovery method of revenue recognition. In accordance
      with the cost recovery method, these capitalized contract costs were reduced
      dollar for dollar by the amount of revenue recognized.




Cost
      of
      service increased by $335,000, or 21.5%, to $1.9 million in 2005 from $1.6
      million in the same period in 2004. Gross profit from service revenue was $2.2
      million in 2005 compared to $1.5 million in 2004. As a percentage of service
      revenues, gross profit increased to 53.8% in 2005 from 48.9% in 2004.




34







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




***Research
      and Development Expenses.*** Research
      and development expenses increased $391,000, or 31.7%, to $1.6 million in 2005
      from $1.2 million in 2004. This increase was attributable to increased payroll
      and related expenses due to the hiring of additional personnel and $80,000
      of
      research and development expenses in 2004 that were capitalized under the cost
      recovery method and included in deferred contract costs rather than expensed.
      As
      a percentage of revenues, research and development expenses decreased to 8.6%
      in
      2005 from 9.0% in 2004.




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




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




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




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




**Liquidity
      and Capital Resources**




Historically,
      our capital requirements have been funded from cash flow generated from our
      business and net proceeds from the issuance of our securities, including the
      issuance of our common stock upon the exercise of options and warrants. As
      of
      December 31, 2006, we had cash, cash equivalents and marketable securities
      of
      $70.4 million and working capital of $80.0 million compared to $7.6 million
      and
      $13.9 million, respectively, as of December 31, 2005.




***Operating
      Activities***




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


35








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





***Investing
      Activities***




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




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




***Financing
      Activities***




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




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




***Capital
      Requirements***




We
      believe that with the proceeds received from our public offering that was
      completed by us in March 2006, the cash we have on hand and operating cash
      flows
      we expect to generate, we will have sufficient funds available to cover our
      capital requirements for at least the next 12 months.




Our
      capital requirements depend on a variety of factors, including, but not limited
      to, the length of the sales cycle, the rate of increase or decrease in our
      existing business base, the success, timing, and amount of investment required
      to bring new products to market, revenue growth or decline and potential
      acquisitions. Failure to generate positive cash flow from operations will have
      a
      material adverse effect on our business, financial condition and results of
      operations. We may determine in the future that we require additional funds
      to
      meet our long-term strategic objectives, including to complete potential
      acquisitions. Any additional equity financing may be dilutive to stockholders,
      and debt financing, if available, may involve significant restrictive covenants,
      and we cannot assure you that such financing will be extended on terms
      acceptable to us or at all.




36


**Line
      of Credit and Term Loan**




We
      have a
      working capital line of credit, with maximum borrowings of $500,000. Interest
      is
      set at the 30 day LIBOR Market Index Rate plus 1.75% is payable monthly. At
      December 31, 2005 and 2006, we had no outstanding balance under this line of
      credit.




In
      January 2003, we closed on a five-year term loan for $1,000,000 with a financial
      institution. Interest at the 30-day LIBOR plus 1.75% and principal are payable
      monthly. To hedge the loan’s floating interest expense 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
      our assets and we are in compliance with the covenants under the term loan.
      The
      fair value of the interest rate swap is not material our financial condition
      or
      results of operations.




Maturities
      of long-term debt are as follows:




As
      of
      December 31, 2006, maturities of long-term debt were as follows:




2007
              
              $
              221,0002008
              
              
              19,000$
              240,000






**Contractual
      Obligations and Commitments**




The
      following table summarizes our significant contractual obligations and
      commitments as of December 31, 2006:






**Payment
                due by Period****Total**
            
            
            **Less
                than one year**
            
            
            **1
                to 3 years**
            
            
            **3
                to 5 years**
            
            
            **After
                5 years**Long-Term
                Debt Obligations
            
            $
            240,000
            
            $
            221,000
            
            $
            19,000
            
            $
            --
            
            $
            --Operating
                Leases
            
            
            1,358,000
            
            
            418,000
            
            
            836,000
            
            
            104,000
            
            
            --Total
                Contractual Cash Obligations
            
            $
            1,598,000
            
            $
            639,000
            
            $
            855,000
            
            $
            104,000
            
            $
            --





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




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




37


**Inflation**




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




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements that have or are reasonably likely
      to
      have a current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that is material to investors.




**Recently
      Issued Accounting Pronouncements**




In
      February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      155, *"Accounting
      for Certain Hybrid Financial Instruments"* .
      SFAS
      No. 155 amends SFAS No. 133 and SFAS No. 140, and addresses issues raised in
      SFAS No. 133 Implementation Issue No. D1, *"Application
      of Statement 133 to Beneficial Interests in Securitized Financial
      Assets”.* SFAS No.
      155 is effective for all financial instruments acquired or issued after the
      beginning of an entity's first fiscal year that begins after September 15,
      2006.
      We do not believe we will be materially affected by the adoption of SFAS No.
      155.




In
      June
      2006, the FASB issued interpretation No. 48, *"Accounting
      for Uncertainty in Income Taxes—An interpretation of FASB Statement No.
      109"* ,
      regarding accounting for, and disclosure of, uncertain tax positions. FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with SFAS No. 109, *"Accounting
      for Income Taxes."* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. FIN 48 is effective for fiscal years beginning
      after
      December 15, 2006. We are currently evaluating the impact FIN 48 will have
      on
      our results of operations and financial position.




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




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin (“SAB”) No. 108, "Considering the Effects on Prior Year Misstatements
      when Quantifying Misstatements in Current Year Financial Statements". 
 SAB No. 108 requires registrants to quantify errors using both the income
      statement method (i.e. iron curtain method) and the rollover method and requires
      adjustment if either method indicates a material error. If a correction in
      the
      current year relating to prior year errors is material to the current year,
      then
      the prior year financial information needs to be corrected. A correction to
      the
      prior year results that are not material to those years would not require a
      "restatement process" where prior
      financials would be amended. Our adoption of SAB 108 did not have a material
      impact on our financial statements.




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





38





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




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




39




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




**INDEX
        TO FINANCIAL STATEMENTS**
 
 **Page**Financial
                    Statements as of December 31, 2004, 2005 and 2006Report
                    of Independent Registered Public Accounting Firm
                41Balance
                    Sheets at December 31, 2005 and 2006
                42Statements
                    of Operations for the YearsEnded
                    December 31, 2004, 2005 and 2006
                43Statements
                    of Changes in Stockholders' Equity for the YearsEnded
                    December 31, 2004, 2005 and 2006
                44Statements
                    of Cash Flows for the YearsEnded
                    December 31, 2004, 2005 and 2006
                45Notes
                    to the Financial Statements
                46
   40
   **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  Board
        of
        Directors and Stockholders of
 I.D.
        Systems, Inc.
  We
        have
        audited the accompanying balance sheets of I.D. Systems, Inc. as of
        December 31, 2005 and 2006 and the related statements of operations,
        changes in stockholders’ equity and cash flows for the years ended
        December 31, 2004, 2005 and 2006. Our audits also included the financial
        statement schedule II - Valuation and Qualifying Accounts. These financial
        statements and schedule are the responsibility of the Company’s management. Our
        responsibility is to exp ress
        an
        opinion on these financial statements and schedule based on our
        audits.
  We
        conducted our audits in accordance with the standards of the Public Accounting
        Oversight Board (United States). Those standards require that we plan and
        perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the financial statements enumerate d
        above
        present fairly, in all material respects, the financial position of I.D.
        Systems, Inc. as of December 31, 2005 and 2006 and the results of its
        operations and its cash flows for the years ended December 31, 2004, 2005
        and 2006, in conformity with ac counting
        principles generally accepted in the United States. Also, in our opinion,
        the
        financial statement schedule referred to above, when considered in relation
        to
        the financial statements, taken as a whole, presents fairly, in all material
        respects, the information stated therein.
  As
        discussed in Note B to the financial statements,
        effective January 1, 2006, the Company adopted the provisions of Statement
        of
        Financial Accounting Standards No. 123 (R), "Share-Based Payment" applying
        the
        modified - prospective method.
   We
        also
        have audited, in accordance with the standards of the Public C ompany
        Accounting Oversight Board (United States), the effectiveness of I.D. Systems,
        Inc.’s internal control over financial reporting as of December 31, 2006,
        based on criteria established in the Internal Control - Integrated Framework
        issued by the Committee of Sponsoring Organizations of the Treadway Commission,
        and our report dated March 14, 2007 expressed an unqualified opinion on
        management’s assessment of, and the effective operation of, internal control
        over financial reporting.
   /s/
        Eisner LLP
  New
        York,
        New York
 March
        14,
        2007
  41
 **I.D.
        SYSTEMS, INC.**
 **Balance
        Sheets**
    **As
                  of December
                  31,****ASSETS**
              
              **2005**
              
              **2006**Current
                  assets:Cash
                  and cash equivalents
              
              $
              2,138,000
              
              $
              9,644,000Marketable
                  securities
              
              
              5,463,000
              
              
              60,716,000Accounts
                  receivable, net
              
              
              6,068,000
              
              
              5,101,000Unbilled
                  receivables
              
              
              1,293,000
              
              
              1,042,000Inventory
              
              
              2,952,000
              
              
              6,430,000Investment
                  in sales type leases
              
              
              34,000
              
              
              --Interest
                  receivable
              
              
              --
              
              
              179,000Officer
                  loan
              
              
              11,000
              
              
              8,000Prepaid
                  expenses and other current assets
              
              
              140,000
              
              
              271,000Total
                  current assets
              
              
              18,099,000
              
              
              83,391,000Fixed
                  assets, net
              
              
              1,159,000
              
              
              1,394,000Investment
                  in sales type leases
              
              
              433,000
              
              
              --Officer
                  loan
              
              
              8,000
              
              
              --Deferred
                  contract costs
              
              
              53,000
              
              
              33,000Other
                  assets
              
              
              88,000
              
              
              87,000$
              19,840,000
              
              $
              84,905,000**LIABILITIES**Current
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              3,881,000
              
              $
              2,950,000Current
                  portion of long term debt
              
              
              209,000
              
              
              221,000Deferred
                  revenue
              
              
              155,000
              
              
              221,000Total
                  current liabilities
              
              
              4,245,000
              
              
              3,392,000Long
                  term debt
              
              
              240,000
              
              
              19,000Deferred
                  revenue
              
              
              90,000
              
              
              133,000Deferred
                  rent
              
              
              99,000
              
              
              77,0004,674,000
              
              
              3,621,000Commitments
                  and Contingencies (Note J)**STOCKHOLDERS'
                  EQUITY**Preferred
                  stock; authorized 5,000,000 shares, $0.01 par value; none
                  issuedCommon
                  stock; authorized 50,000,000 shares, $0.01 par value; issued and
                  outstanding 7,851,000 and 11,337,000 shares at December 31, 2005
                  and 2006,
                  respectively
              
              
              79,000
              
              
              113,000Additional
                  paid-in capital
              
              
              25,735,000
              
              
              93,423,000Accumulated
                  deficit
              
              
              (10,535,000
              )
              
              (12,151,000
              )Comprehensive
                  income
              
              
              --
              
              
              12,00015,279,000
              
              
              81,397,000Treasury
                  stock; 40,000 shares at cost
              
              
              (113,000
              )
              
              (113,000
              )Total
                  stockholders’ equity
              
              
              15,166,000
              
              
              81,284,000Total
                  liabilities and stockholders’ equity
              
              $
              19,840,000
              
              $
              84,905,000
  
  
  SEE
        ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
  42
   **I.D.
        SYSTEMS, INC.**
 **Statements
        of Operations**
  Year
                  Ended December 31,2004
              
              2005
              
              2006Revenue:Product
              
              $
              10,697,000
              
              $
              14,905,000
              
              $
              16,205,000Service
              
              
              3,044,000
              
              
              4,099,000
              
              
              8,535,00013,741,000
              
              
              19,004,000
              
              
              24,740,000Cost
                  of Revenue:Cost
                  of product
              
              
              4,952,000
              
              
              7,816,000
              
              
              8,229,000Cost
                  of service
              
              
              1,557,000
              
              
              1,892,000
              
              
              5,472,0006,509,000
              
              
              9,708,000
              
              
              13,701,000Gross
                  Profit
              
              
              7,232,000
              
              
              9,296,000
              
              
              11,039,000Operating
                  expenses:Selling,
                  general and administrative expenses
              
              
              5,879,000
              
              
              7,140,000
              
              
              12,943,000Research
                  and development expenses
              
              
              1,234,000
              
              
              1,625,000
              
              
              2,639,0007,113,000
              
              
              8,765,000
              
              
              15,582,000Income
                  (loss) from operations
              
              
              119,000
              
              
              531,000
              
              
              (4,543,000
              )Interest
                  income
              
              
              195,000
              
              
              222,000
              
              
              2,801,000Interest
                  expense
              
              
              (63,000
              )
              
              (53,000
              )
              
              (29,000
              )Other
                  income
              
              
              147,000
              
              
              151,000
              
              
              155,000Net
                  income (loss)
              
              $
              398,000
              
              $
              851,000
              
              $
              (1,616,000
              )Net
                  income (loss) per share - basic
              
              $
              0.05
              
              $
              0.11
              
              $
              (0.15
              )Net
                  income (loss) per share - diluted
              
              $
              0.05
              
              $
              0.09
              
              $
              (0.15
              )Weighted
                  average common shares outstanding - basic
              
              
              7,455,000
              
              
              7,771,000
              
              
              10,501,000Weighted
                  average common shares outstanding - diluted
              
              
              8,783,000
              
              
              9,332,000
              
              
              10,501,000
  
  SEE
        ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
  43
   **I.D.
        SYSTEMS, INC.**
 **Statements
        of Changes in Stockholders' Equity**
  **Accumulated****Common
                  Stock**
              
              **Additional**
              
              
              
              **Other****Number
                  of**
              
              
              
              **Paid-in**
              
              **Accumulated**
              
              **Comprehensive**
              
              **Treasury**
              
              **Stockholders'****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Income**
              
              **Stock**
              
              **Equity****Balance
                  at January 1, 2004**
              
              
              7,097,000
              
              $
              71,000
              
              $
              22,804.000
              
              $
              (11,784,000
              )
              
              --
              
              $
              (113,000
              )
              $
              10,978,000Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              398,000
              
              
              
              
              
              
              
              
              398,000Comprehensive
                  income (loss) - unrealized gain (loss) on investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              --
              
              
              
              
              
              --Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              398,000
              
              
              --
              
              
              
              
              
              398,000Shares
                  issued pursuant to exerciseof
                  stock options
              
              
              444,000
              
              
              4,000
              
              
              1,167,000
              
              
              
              
              
              
              
              
              
              
              
              1,171,000Shares
                  issued pursuant to exerciseof
                  warrants
              
              
              149,000
              
              
              2,000
              
              
              1,023,000
              
              
              
              
              
              
              
              
              
              
              
              1,025,000**Balance
                  at December 31, 2004**
              
              
              7,690,000
              
              $
              77,000
              
              $
              24,994,000
              
              $
              (11,386,000
              )
              
              --
              
              $
              (113,000
              )
              $
              13,572,000Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              851,000
              
              
              
              
              
              
              
              
              851,000Comprehensive
                  income (loss) - unrealized gain(loss) on investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              851,000
              
              
              -
              
              
              
              
              
              851,000Shares
                  issued pursuant to exercise of stock options
              
              
              161,000
              
              
              2,000
              
              
              741,000
              
              
              
              
              
              
              
              
              
              
              
              743,000**Balance
                  at December 31, 2005**
              
              
              7,851,000
              
              $
              79,000
              
              $
              25,735,000
              
              $
              (10,535,000
              )
              
              --
              
              $
              (113,000
              )
              $
              15,166,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (1,616,000
              )
              
              
              
              
              
              
              
              (1,616,000
              )Comprehensive
                  income - unrealized gain on investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,000
              
              
              
              
              
              12,000Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              (1,616,000
              )
              
              12,000
              
              
              
              
              
              (1,604,000
              )Shares
                  issued pursuant to exerciseof
                  stock options
              
              
              200,000
              
              
              2,000
              
              
              784,000
              
              
              
              
              
              
              
              
              
              
              
              786,000Shares
                  issued pursuant to a publicoffering
              
              
              2,750,000
              
              
              28,000
              
              
              55,500,000
              
              
              
              
              
              
              
              
              
              
              
              55,528,000Shares
                  issued pursuant to exerciseof
                  overallotment options related to public offering
              
              
              413,000
              
              
              4,000
              
              
              8,429,000
              
              
              
              
              
              
              
              
              
              
              
              8,433,000Issuance
                  of restricted stock
              
              
              91,000
              
              
              
              
              
              478,000
              
              
              
              
              
              
              
              
              
              
              
              478,000Issuance
                  of performance shares
              
              
              32,000
              
              
              
              
              
              602,000
              
              
              
              
              
              
              
              
              
              
              
              602,000Stock
                  based compensation - options
              
              
              
              
              
              
              
              
              1,895,000
              
              
              
              
              
              
              
              
              
              
              
              1,895,000**Balance
                  at December 31, 2006**
              
              
              11,337,000
              
              $
              113,000
              
              $
              93,423,000
              
              $
              (12,151,000
              )
              $
              12,000
              
              $
              (113,000
              )
              $
              81,284,000
  
 SEE
        ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
  44
   **I.D.
        SYSTEMS, INC.**
 **Statements
        of Cash Flows**
 **Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006****Cash
                  flows from operating activities:**Net
                  income (loss)
              
              $
              398,000
              
              $
              851,000
              
              $
              (1,616,000
              )Adjustments
                  to reconcile net income (loss) to cash provided by (used in) operating
                  activities:Inventory
                  reserve
              
              
              --
              
              
              105,000
              
              
              100,000Accrued
                  interest income
              
              
              119,000
              
              
              42,000
              
              
              (165,000
              )Stock
                  based compensation
              
              
              --
              
              
              --
              
              
              2,975,000Depreciation
                  and amortization
              
              
              255,000
              
              
              362,000
              
              
              468,000Deferred
                  rent expense
              
              
              23,000
              
              
              (13,000
              )
              
              (22,000
              )Deferred
                  revenue
              
              
              (88,000
              )
              
              (41,000
              )
              
              109,000Provision
                  for uncollectible accounts
              
              
              (12,000
              )
              
              20,000
              
              
              211,000Deferred
                  contract costs
              
              
              199,000
              
              
              423,000
              
              
              20,000Unrealized
                  gain on investments
              
              
              --
              
              
              --
              
              
              12,000Changes
                  in:Accounts
                  receivable
              
              
              784,000
              
              
              (4,656,000
              )
              
              756,000Unbilled
                  receivables
              
              
              (402,000
              )
              
              (891,000
              )
              
              251,000Inventory
              
              
              (1,063,000
              )
              
              (1,318,000
              )
              
              (3,578,000
              )Prepaid
                  expenses and other assets
              
              
              (87,000
              )
              
              85,000
              
              
              (130,000
              )Investment
                  in sales type leases
              
              
              37,000
              
              
              (394,000
              )
              
              467,000Accounts
                  payable and accrued expenses
              
              
              1,485,000
              
              
              1,340,000
              
              
              (931,000
              )Net
                  cash (used in) provided by operating activities
              
              
              1,648,000
              
              
              (4,085,000
              )
              
              (1,073,000
              )**Cash
                  flows from investing activities:**Purchase
                  of fixed assets
              
              
              (419,000
              )
              
              (512,000
              )
              
              (703,000
              )Purchase
                  of investments
              
              
              (1,235,000
              )
              
              (5,963,000
              )
              
              (68,481,000
              )Maturities
                  of investments
              
              
              3,385,000
              
              
              3,703,000
              
              
              13,214,000Collection
                  of officer loan
              
              
              11,000
              
              
              11,000
              
              
              11,000Net
                  cash provided by (used in) investing activities
              
              
              1,742,000
              
              
              (2,761,000
              )
              
              (55,959,000
              )**Cash
                  flows from financing activities:**Repayment
                  of term loan
              
              
              (188,000
              )
              
              (199,000
              )
              
              (209,000
              )Repayment
                  of line of credit
              
              
              (137,000
              )
              
              --
              
              
              --Proceeds
                  from exercise of stock options
              
              
              1,171,000
              
              
              743,000
              
              
              786,000Net
                  proceeds from public offering
              
              
              --
              
              
              --
              
              
              63,961,000Proceeds
                  from exercise of warrants
              
              
              1,025,000
              
              
              --
              
              
              --Net
                  cash provided by financing activities
              
              
              1,871,000
              
              
              544,000
              
              
              64,538,000**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              5,261,000
              
              
              (6,302,000
              )
              
              7,506,000Cash
                  and cash equivalents-beginning of period
              
              
              3,179,000
              
              
              8,440,000
              
              
              2,138,000**Cash
                  and cash equivalents****-****end of period**
              
              $
              8,440,000
              
              $
              2,138,000
              
              $
              9,644,000**Supplemental
                  disclosure of cash flow information:**Cash
                  paid for:Interest
              
              $
              63,000
              
              $
              53,000
              
              $
              29,000
 
  SEE
        ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
  
  45
   **I.D.
        SYSTEMS, INC.**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2005 and 2006**
  **NOTE
        A - THE COMPANY**
  I.D.
        Systems, Inc. (the "Company") designs, develops and produces innovative wireless
        monitoring and tracking products that utilize its patented radio-frequency-based
        system. The Company's products provide features enabling users to improve
        operating efficiencies and reduce costs by monitoring the use of corporate
        assets. The Company outsources its hardware manufacturing operations to contract
        manufacturers. The Company was incorporated in Delaware in 1993 and commenced
        operations in January 1994.
  **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.
        We continually evaluate estimates used in the preparation of the financial
        statements for reasonableness. The significant areas of estimation include
        collectability of accounts receivable, sales returns, recoverability of
        inventory, realization of deferred tax assets, useful lives, impairment of
        tangible and intangible assets, and present value calculations in sales type
        leases.
  **[2]** **Cash
        and cash equivalents:**
  The
        Company considers all highly liquid debt instruments with an original maturity
        of three months or less when purchased to be cash equivalents.
  **[3]** **Marketable
        securities:**
  The
        Company has marketable debt and equity securities, which are classified as
        either available for sale securities or held to maturity securities, depending
        on management’s investment intentions relating to these securities. Available
        for sale securities are marked to market based on quoted market values of
        the
        securities, with the unrealized gain and (losses), reported as comprehensive
        income or (loss). Investments categorized as held to maturity securities
        are
        carried at amortized cost because the Company has both the intent and the
        ability to hold these investments until they mature
  **[4]** **Inventory:**
  Inventory,
        which consists of components for the Company's products and finished goods
        to be
        shipped to customers under existing orders, is stated at the lower of cost
        or
        market using the first-in first-out method. At December 31, 2005 and 2006
        the
        Company’s inventory consisted of components of approximately $327,000 and
        $465,000 and finished goods of approximately $2,625,000 and $5,965,000,
        respectively.
  **[5]**
              **Unbilled
                  receivables and deferred
                  revenue:**
  Under
        certain customer contracts the Company invoices progress billings once certain
        milestones are met. The milestone terms vary by customer and can include
        upon
        receipt of purchase order, delivery, installation and launch. As the systems
        are
        delivered, and services are performed, and all of the criteria for revenue
        recognition are satisfied, the Company recognizes revenue. The difference
        between revenue recognized for financial reporting purposes, and amounts
        invoiced is recorded as unbilled receivables or deferred revenue. As of December
        31, 2005 and 2006, unbilled receivables were $1,293,000 and $1,042,000,
        respectively and deferred revenue was $245,000 and $354,000, respectively.
  46
   
  **[6]** **Fixed
        assets and depreciation:**
  Fixed
        assets are recorded at cost and depreciated using the straight-line method
        over
        the estimated useful lives of the assets which range from three to ten years.
        Leasehold improvements are amortized using the straight-line method over
        the
        terms of the respective leases, or their estimated useful lives, whichever
        is
        shorter.
  **[7]** **Long-lived
        assets:**
  The
        Company evaluates impairment losses on its long-lived assets in accordance
        with
        Statement of Financial Accounting Standards (“SFAS”) No. 144, *“Accounting
        for the Impairment or Disposal of Long-Lived Assets,”* .
        In the
        evaluation, the Company compares the carrying values of such assets to the
        estimated undiscounted future cash flows expected from the use of the assets
        and
        their eventual disposition. When the estimated undiscounted future cash flows
        are less than the carrying amount an impairment loss is recognized equal
        to the
        difference between the assets fair value and their carrying value. For the
        years
        ended December 31, 2004, 2005 and 2006, the Company has not incurred an
        impairment charge.
  **[8]** **Research
        and development:**
  Research
        and development costs are charged to expense as incurred.
  **[9]** **Patent
        costs:**
  Costs
        incurred in connection with acquiring patent rights are charged to expense
        as
        incurred.
  **[10]        Re** **venue
        recognition:**
  The
        Company's revenue is derived from contracts with multiple element arrangements,
        which include the Company's system, training and technical support. Revenue
        is
        recognized as each element is earned based on the selling price of each element
        and when there are no undelivered elements that are essential to the
        functionality of the delivered elements. The Company's system is typically
        implemented by the customer or a third party and, as a result, revenue is
        recognized when title and risk of loss passes to the customer, which usually
        is
        upon delivery of the system, persuasive evidence of an arrangement exists,
        sales
        price is fixed and determinable, collectibility is reasonably assured and
        contractual obligations have been satisfied. Training and technical support
        revenue are generally recognized at time of performance.
  The
        Company also enters into post-contract maintenance and support agreements.
        Revenue is recognized over the service period and the cost of providing these
        services is expensed as incurred.
  The
        Company also derives revenue under leasing arrangements. Such arrangements
        provide for monthly payments covering the system sale, maintenance and interest.
        These arrangements meet the criteria to be accounted for as sales-type leases.
        Accordingly, the system sale is recognized upon delivery of the system, provided
        all other revenue recognition criteria are met as described above. Upon the
        recognition of revenue, an asset is established for the "investment in
        sales-type leases". Maintenance revenue and interest income are recognized
        monthly over the lease term.
  **[11]       
        Be** **nefit
        plan:**
  The
        Company maintains a retirement plan under Section 401(k) of the Internal
        Revenue
        Code, which covers all eligible employees. The Company did not make any
        contributions to the plan during the years ended December 31, 2004, 2005
        and
        2006.
  47
   
  **[12]** **Rent
        expense:**
  Expense
        related to the Company's facility lease is recorded on a straight-line basis
        over the lease term. The difference between rent expense incurred and the
        amounts required to be paid in accordance with the lease term is recorded
        as
        deferred rent and is amortized over the lease term.
  **[13]** **Stock-based
        compensation:**
  Commencing
        January 1, 2006, the Company adopted Statement of Financial Accounting Standard
        No. 123R, *“Share
        Based Payment” (“SFAS 123R”)* ,
        which
        requires all share-based payments, including grants of stock options, to
        be
        recognized in the statement of operations as an operating expense, based
        on
        their fair values on grant date.
  Prior
        to
        adopting SFAS 123R, the Company accounted for stock-based employee compensation
        under Accounting Principles Board Opinion No. 25, *“Accounting
        for Stock Issued to Employees”* and
        related interpretations. No stock-based compensation cost was recognized
        in the
        statement of operations for the years ended December 31 2004 and 2005, as
        all
        options granted under the Plans had an exercise price equal to the market
        value
        of the underlying common stock on date of grant. The Company has applied
        the
        modified prospective transition method in adopting SFAS 123R. Accordingly,
        periods prior to adoption have not been restated. As a result of adoption,
        stock
        based compensation expense of $2,975,000 was recorded for the year ended
        December 31, 2006, resulting in a corresponding increase in loss from operations
        and net loss and a reduction of $0.28 per basic and $ 0.26 per diluted share
        for
        the year ended December 31, 2006.
  SFAS
        123R
        requires companies to estimate the fair value of share based payment awards
        on
        the grant date using an option pricing model. The value of the portion of
        the
        award that is ultimately expected to vest is recognized as expense over the
        requisite service period in the Company’s statement of operations. SFAS 123
        requires forfeitures to be estimated at the time of grant in order to estimate
        the amount of share based awards that will ultimately vest. The estimate
        is
        based on the Company’s historical rates of forfeitures. Share based compensation
        expense recognized by the Company in 2006 includes (i) compensation expense
        for
        share based awards granted prior to, but not yet vested as of December 31,
        2005,
        based on the grant date fair value estimated in accordance with the pro forma
        provisions of SFAS 123 and (ii) compensation expense for the share based
        payment
        awards granted subsequent to December 31, 2005, based on the grant date fair
        value estimated in accordance with the provisions of SFAS 123R. This is based
        on
        awards ultimately expected to vest and hence it has been reduced for estimated
        forfeitures. In the Company’s pro forma information required under SFAS 123 for
        the periods prior to 2006, the Company accounted for forfeitures as they
        occurred. SFAS 123R also requires estimated forfeitures to be revised, if
        necessary, in subsequent periods if actual forfeitures differ from those
        estimates.
  The
        following table illustrates the effect on reported net income and earnings
        per
        share if the fair value based method had been applied to the prior
        periods.
 
 **December
                  31,****2004**
              
              **2005**Reported
                  net income
              
              $
              398,000
              
              $
              851,000Stock-based
                  employee compensation expense included in reported net income,
                  net of
                  related tax effects
              
              
              0
              
              
              0Stock-based
                  employee compensation determined under the fair value based method,
                  net of
                  related tax effects
              
              
              (1,187,000
              )
              
              (1,612,000
              )Pro
                  forma net loss
              
              $
              (789,000
              )
              $
              (761,000
              )Net
                  income (loss) per share basicAs
                  reported
              
              $
              0.05
              
              $
              0.11Pro
                  forma
              
              $
              (0.11
              )
              $
              (0.10
              )Net
                  income (loss) per share dilutedAs
                  reported
              
              $
              0.05
              
              $
              0.09Pro
                  forma
              
              $
              (0.11
              )
              $
              (0.10
              )
  
   48
   The
        fair
        value of each option grant on the date of grant is estimated using the
        Black-Scholes option-pricing model reflecting the following weighted average
        assumptions:
  **December
                  31,****2004**
              
              **2005**
              
              **2006**Expected
                  volatility
              
              
              52
              %
              
              51
              %
              
              60
              %Expected
                  life of options
              
              
              5
                  years
              
              
              5
                  years
              
              
              5
                  yearsRisk
                  free interest rate
              
              
              3
              %
              
              4
              %
              
              5
              %Dividend
                  yield
              
              
              0
              %
              
              0
              %
              
              0
              %
  **[14]** **Income
        taxes:**
  The
        Company uses the asset and liability method of accounting for deferred income
        taxes. Deferred income taxes are measured by applying enacted statutory rates
        to
        net operating loss carryforwards and to the differences between the financial
        reporting and tax bases of assets and liabilities. Deferred tax assets are
        reduced, if necessary, by a valuation allowance if it is more likely than
        not
        that some portion or all of the deferred tax assets will not be
        realized.
  **[15]** **Net
        income (loss) per share:**
  **December
                  31,****2004**
              
              **2005**
              
              **2006****Basic
                  income (loss) per share**Net
                  income (loss)
              
              $
              398,000
              
              $
              851,000
              
              $
              (1,616,000
              )Weighted
                  average shares outstanding
              
              
              7,455,000
              
              
              7,771,000
              
              
              10,501,000Basic
                  income (loss) per share
              
              $
              0.05
              
              $
              0.11
              
              $
              (0.15
              )**Diluted
                  income (loss) per share**Net
                  income (loss)
              
              $
              398,000
              
              $
              851,000
              
              $
              (1,616,000
              )Weighted
                  average shares outstanding
              
              
              7,455,000
              
              
              7,771,000
              
              
              10,501,000Dilutive
                  effect of stock options
              
              
              1,328,000
              
              
              1,561,000
              
              
              --Weighted
                  average shares outstanding, diluted
              
              
              8,783,000
              
              
              9,332,000
              
              
              10,501,000Diluted
                  income (loss) per share
              
              $
              0.05
              
              $
              0.09
              
              $
              (0.15
              )
  Basic
        income (loss) per share is calculated by dividing net income (loss) by the
        weighted average number of common shares outstanding during the period. Diluted
        income (loss) per share reflects the potential dilution assuming common shares
        were issued upon the exercise of outstanding options and the proceeds thereof
        were used to purchase outstanding common shares. Options to purchase 69,000
        and
        136,000 shares of common stock were outstanding during the years ended December
        31, 2004 and 2005, respectively, but were not included in the computation
        of
        diluted earnings per share because the options’ exercise prices were greater
        than the average market price of the common shares and, therefore, the effect
        would be anti-dilutive. For the year ended December 31, 2006, the basic and
        diluted weighted average shares outstanding are the same since the effect
        from
        the potential exercise of outstanding stock options of 2,784,000, would have
        been anti-dilutive.
 49
  
  **[16]** **Financial
        instruments:**
  The
        carrying amounts of cash equivalents, accounts receivable, marketable
        securities, and other liabilities approximate their fair values due to the
        short
        period to maturity of these instruments. The carrying amounts of investment
        in
        sales-type leases and installment receivable - noncurrent portion approximate
        their fair value due to the market rate of interest charged to
        customers.
  **[17]** **Advertising
        and Marketing Expense:**
  Advertising
        and marketing costs are expensed as incurred. Advertising and marketing expense
        for the years ended December 31, 2004, 2005 and 2006 amounted to $99,000,
        $143,000 and $217,000 respectively.
  **[18]** **Reclassifications:**
  Certain
        prior year amounts have reclassified to conform with the current year
        presentation.
  **[19]** **Recently
        Issued Accounting Pronouncements:**
  In
        February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
        No.
        155, *"Accounting
        for Certain Hybrid Financial Instruments"* .
        SFAS
        No. 155 amends SFAS No. 133 and SFAS No. 140, and addresses issues raised
        in
        SFAS No. 133 Implementation Issue No. D1, *"Application
        of Statement 133 to Beneficial Interests in Securitized Financial
        Assets”.* SFAS No.
        155 is effective for all financial instruments acquired or issued after the
        beginning of an entity's first fiscal year that begins after September 15,
        2006.
        The Company does not believe it will be materially affected by the adoption
        of
        SFAS No. 155.
  In
        June
        2006, the FASB issued interpretation No. 48, *"Accounting
        for Uncertainty in Income Taxes—An interpretation of FASB Statement No.
        109"* ,
        regarding accounting for, and disclosure of, uncertain tax positions. FIN
        48
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise's financial statements in accordance with SFAS No. 109, *"Accounting
        for Income Taxes."* FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. FIN 48 also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure, and transition. FIN 48 is effective for fiscal years beginning
        after
        December 15, 2006. The Company is currently evaluating the impact FIN 48
        will
        have on its results of operations and financial position.
  In
        September 2006, the FASB issued SFAS No. 157, *"Fair
        Value Measurements"* ,
        to
        define fair value, establish a framework for measuring fair value in accordance
        with generally accepted accounting principles, and expand disclosures about
        fair
        value measurements. SFAS No. 157 will be effective for fiscal years beginning
        after November 15, 2007, the beginning of the Company's 2008 fiscal year.
        The
        Company is assessing the impact the adoption of SFAS No. 157 will have on
        the
        Company's financial position and results of operations.
  In
        February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
        Assets and Financial Liabilities” including an amendment of SFAS No. 115. SFAS
        No. 159 provides companies with an option to report selected financial assets
        and financial liabilities at fair value. Unrealized gains and losses on items
        for which the fair value option has been elected are reported in earnings.
        SFAS
        No. 159 is effective for fiscal years beginning after November 15, 2007.
        The Company is currently assessing the impact of SFAS No. 159 on its financial
        position and results of operations.
  50
  In
        September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin (“SAB”) No. 108, "Considering the Effects on Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements".   SAB No. 108 requires registrants to quantify errors
        using both the income statement method (i.e. iron curtain method) and the
        rollover method and requires adjustment if either method indicates a material
        error. If a correction in the current year relating to prior year errors
        is
        material to the current year, then the prior year financial information needs
        to
        be corrected. A correction to the prior year results that are not material
        to
        those years would not require a "restatement process" where prior financials
        would be amended. The Company’s adoption of SAB 108 did not have a material
        impact on its financial statements.
  **NOTE
        C - MARKETABLE SECURITIES**
 
 The
        Company has marketable debt and equity securities, which are classified as
        either available for sale or held to maturity, depending on management’s
        investment intentions relating to these securities. Available for sale
        securities are marked to market based on quoted market values of the securities,
        with the unrealized gain and (losses), reported as comprehensive income or
        (loss). Investments categorized as held to maturity are carried at amortized
        cost because the Company has both the intent and the ability to hold these
        investments until they mature. The Company primarily invests in high credit
        quality Auction Rate Certificates issued by counties, cities, states, other
        municipal entities, not-for-profits and corporations. These Auction Rate
        Certificates reset every 28 days giving the Company the ability to readily
        convert these instruments in to cash to fund current operations, or satisfy
        other cash requirements as needed. Accordingly, we have classified all
        marketable securities as current assets in the accompanying balance
        sheets.
 
 The
        cost,
        gross unrealized gains (losses) and fair value of available for sale and
        held to
        maturity securities by major security type at December 31, 2005 and 2006
        were as
        follows:
 
 Unrealized
              
              Unrealized
              
              FairDecember
                  31, 2005
              
              Cost
              
              Gain
              
              Loss
              
              ValueAvailable
                  for sale securities:State
                  bonds
              
              $
              4,350,000
              
              
              -
              
              
              -
              
              $
              4,350,000Mutual
                  funds
              
              
              745,000
              
              
              -
              
              
              -
              
              
              745,000Certificates
                  of deposit
              
              
              368,000
              
              
              
              
              
              
              
              
              368,000Total
                  available for sale securities
              
              
              5,463,000
              
              
              -
              
              
              -
              
              
              5,463,000Total
                  marketable securities
              
              $
              5,463,000
              
              
              -
              
              
              -
              
              $
              5,463,000
 51
 
 
 Unrealized
              
              Unrealized
              
              FairDecember
                  31, 2006
              
              Cost
              
              Gain
              
              Loss
              
              ValueAvailable
                  for sale securities:Government
                  agency bonds
              
              $
              6,662,000
              
              $
              11,000
              
              
              -
              
              $
              6,673,000State
                  bonds
              
              
              36,550,000
              
              
              -
              
              
              -
              
              
              36,550,000Corporate
                  bonds
              
              
              261,000
              
              
              1,000
              
              
              -
              
              
              262,000Mutual
                  funds
              
              
              3,257,000
              
              
              -
              
              
              -
              
              
              3,257,000Total
                  available for sale securities
              
              
              46,730,000
              
              
              12,000
              
              
              -
              
              
              46,742,000Held
                  to maturity securities:Certificates
                  of deposit
              
              
              190,000
              
              
              -
              
              
              -
              
              
              190,000Government
                  agency bonds
              
              
              9,255,000
              
              
              -
              
              
              -
              
              
              9,255,000Corporate
                  bonds
              
              
              4,529,000
              
              
              -
              
              
              -
              
              
              4,529,000Total
                  held to maturity securities
              
              
              13,974,000
              
              
              -
              
              
              -
              
              
              13,974,000Total
                  marketable securities
              
              $
              60,704,000
              
              $
              12,000
              
              
              -
              
              $
              60,716,000
 
  **NOTE
        D - FIXED ASSETS**
  Fixed
        assets are stated at cost, less accumulated depreciation and amortization,
        and
        at December 31, 2005 and 2006, are summarized as follows:
   52
   
  
 **As
                  of December 31,****2005**
              
              **2006**Equipment
              
              $
              648,000
              
              $
              1,059,000Computer
                  software
              
              
              453,000
              
              
              475,000Computer
                  hardware
              
              
              383,000
              
              
              531,000Furniture
                  and fixtures
              
              
              206,000
              
              
              206,000Leasehold
                  improvements
              
              
              447,000
              
              
              447,0002,137,000
              
              
              2,718,000Accumulated
                  depreciation and amortization
              
              
              (978,000
              )
              
              (1,324,000
              )$
              1,159,000
              
              $
              1,394,000
  Depreciation
        expense was $203,000, $310,000 and $416,000 for the years ended December
        31,
        2004, 2005 and 2006, respectively.
  **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, 2005 and 2006, $19,000 and $8,000 is due to the Company,
        respectively. 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 is set at the 30 day LIBOR Market Index Rate plus 1.75%
        is
        payable monthly. At December 31, 2005 and 2006 the Company has no outstanding
        balance 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 Company’s financial condition or results of
        operations.
  Maturities
        of long-term debt are as follows:
  **Year
                  Ending****December
                  31,**2007
              
              $
              221,0002008
              
              
              19,000$
              240,000
  53
  NOTE
        H - STOCKHOLDERS' EQUITY
  **[1]** **Common
        stock:**
  On
        March
        15, 2006, the Company completed the sale of 2,750,000 shares of its common
        stock
        in a public offering. In connection therewith, the Company received net proceeds
        of approximately $55,528,000.
  On
        March
        28, 2006, the Company completed the sale of 412,500 shares of its common
        stock
        pursuant to the full exercise by the underwriters of their over-allotment
        option
        granted in connection with the Company's public offering of its common stock.
        In
        connection therewith, the Company received net proceeds of approximately
        $8,433,000.
  At
        the
        Company’s Annual Meeting of Stockholders, held on June 9, 2006, the stockholders
        of the Company approved an amendment to the Company’s Amended and Restated
        Certificate of Incorporation to increase the aggregate number of authorized
        shares of the Company’s common stock from 15,000,000 shares to 50,000,000
        shares.
  **[2]** **Preferred
        stock:**
  The
        Company is authorized to issue 5,000,000 shares of $0.01 par value preferred
        stock. The Company's Board of Directors has the authority to issue shares
        of
        preferred stock and to determine the price and terms of those
        shares.
  **[3]** **Stock
        options:**
  The
        Company 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, pursuant
        to
        which the Company may grant options and stock awards to purchase up to 2,813,000
        shares of common stock and the 1999 Director Option Plan, pursuant to which
        the
        Company may grant options to purchase up to 600,000 shares of common stock.
        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, 2004,
        2005
        and 2006 and changes during the years then ended, is presented
        below:
  **2004**
              
              **2005**
              
              **2006****Weighted**
              
              
              
              **Weighted**
              
              
              
              **Weighted****Average**
              
              
              
              **Average**
              
              
              
              **Average****Shares**
              
              **Exercise
                  Price**
              
              **Shares**
              
              **Exercise**
                **Price**
              
              **Shares**
              
              **Exercise**
                **Price**Outstanding
                  at beginning of year
              
              
              2,129,000
              
              $
              3.74
              
              
              2,291,000
              
              $
              5.04
              
              
              2,730,000
              
              $
              6.94Granted
              
              
              713,000
              
              
              7.85
              
              
              677,000
              
              
              13.10
              
              
              388,000
              
              
              21.30Exercised
              
              
              (444,000
              )
              
              2.63
              
              
              (161,000
              )
              
              4.61
              
              
              (200,000
              )
              
              3.92Forfeited
              
              
              (107,000
              )
              
              7.96
              
              
              (77,000
              )
              
              9.30
              
              
              (134,000
              )
              
              10.94Outstanding
                  at end of year
              
              
              2,291,000
              
              $
              5.04
              
              
              2,730,000
              
              $
              6.94
              
              
              2,784,000
              
              $
              8.97Exercisable
                  at end of year
              
              
              1,100,000
              
              $
              3.61
              
              
              1,320,000
              
              $
              4.27
              
              
              1,535,000
              
              $
              5.49
   54
  The
        following table summarizes information about stock options at December 31,
        2004:
 
 **Options
                  Outstanding**
              
              **Options
                  Exercisable****Weighted****Average**
              
              **Weighted**
              
              
              
              **Weighted****Remaining**
              
              **Average**
              
              
              
              **Average****Exercise**
              
              **Number**
              
              **Contractual**
              
              **Exercise**
              
              **Number**
              
              **Exercise****Prices**
              
              **Outstanding**
              
              **Life**
              
              **Price**
              
              **Outstanding**
              
              **Price**1.20
              
              
              542,000
              
              
              3
                  years
              
              $
              1.20
              
              
              542,000
              
              $
              1.202.31
                  - 3.81
              
              
              151,000
              
              
              6
                  years
              
              
              2.93
              
              
              80,000
              
              
              3.024.07
                  - 7.05
              
              
              1,198,000
              
              
              8
                  years
              
              
              5.71
              
              
              258,000
              
              
              5.327.56
                  - 18.90
              
              
              400,000
              
              
              6
                  years
              
              
              9.02
              
              
              220,000
              
              
              7.772,291,000
              
              
              5
                  years
              
              
              5.04
              
              
              1,100,000
              
              
              3.61
   The
        following table summarizes information about stock options at December 31,
        2005:
 
 **Options
                  Outstanding**
              
              **Options
                  Exercisable****Weighted****Average**
              
              **Weighted**
              
              
              
              **Weighted****Remaining**
              
              **Average**
              
              
              
              **Average****Exercise**
              
              **Number**
              
              **Contractual**
              
              **Exercise**
              
              **Number**
              
              **Exercise****Prices**
              
              **Outstanding**
              
              **Life**
              
              **Price**
              
              **Outstanding**
              
              **Price**1.20
              
              
              525,000
              
              
              2
                  years
              
              $
              1.20
              
              
              525,000
              
              $
              1.202.31
                  - 3.81
              
              
              103,000
              
              
              5
                  years
              
              
              2.86
              
              
              80,000
              
              
              2.974.07
                  - 7.05
              
              
              1,070,000
              
              
              7
                  years
              
              
              5.70
              
              
              412,000
              
              
              5.467.56
                  - 20.37
              
              
              1,032,000
              
              
              8
                  years
              
              
              11.56
              
              
              303,000
              
              
              8.332,730,000
              
              
              6
                  years
              
              
              6.94
              
              
              1,320,000
              
              
              4.27
  55
  **I.D.
        SYSTEMS, INC.**
 **NOTES
        TO FINANCIAL STATEMENTS**
  The
        following table summarizes information about stock options at December 31,
        2006:
   **Options
                  Outstanding**
              
              
              
              **Options
                  Exerciseable****Exercise**
                **Prices**
              
              **Number**
                **Outstanding**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Life**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Aggregate**
                **Intrinsic**
                **Value**
              
              **Number**
                **Outstanding**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Aggregate**
                **Intrinsic**
                **Value**1.20
                  - 3.81
              
              
              500,000
              
              
              2
                  years
              
              $
              1.48
              
              
              
              
              
              500,000
              
              $
              1.484.07
                  - 10.0
              
              
              1,257,000
              
              
              6
                  years
              
              
              6.11
              
              
              
              
              
              869,000
              
              
              6.1710.25
                  - 19.94
              
              
              727,000
              
              
              8
                  years
              
              
              13.59
              
              
              
              
              
              157,000
              
              
              13.5520.06
                  - 25.38
              
              
              300,000
              
              
              9
                  years
              
              
              22.24
              
              
              
              
              
              9,000
              
              
              23.882,784,000
              
              
              6
                  years
              
              $
              8.97
              
              $
              27,418,000
              
              
              1,535,000
              
              $
              5.49
              
              $
              20,458,000
   The
        weighted average fair value of options granted during the years ended December
        31, 2004, 2005 and 2006 were $3.74, $7.02 and $11.88, respectively. The total
        intrinsic value of options exercised during the years ended December 31,
        2004,
        2005 and 2006 was $3,034,000, $1,327,000 and $3,601,000, respectively.
  A
        summary
        of the status of the Company's non-ovested stock options as of December 31,
        2006
        and changes during the year then ended, is presented below:
  **Weighted****Average****Non-vested**
                **Shares**
              
              **Grant
                  Date**
                **Fair
                  Value**Non-vested
                  at January 1, 2006
              
              
              1,410,000
              
              $
              4.92Granted
              
              
              388,000
              
              
              11.89Vested
              
              
              (415,000
              )
              
              4.59Forfeited
              
              
              (134,000
              )
              
              5.67Non-vested
                  at December 31, 2006
              
              
              1,249,000
              
              $
              7.11
  As
        of
        December 31, 2006, there was $6,515,000 of total unrecognized compensation
        costs
        related to non-vested options granted under the plans. That cost is expected
        to
        be recognized over a weighted average period of 5.22 years
   **[4]** **Restricted
        stock awards and performance shares:**
  As
        of
        December 31, 2006, there were 91,000 shares of restricted stock awards that
        were
        granted to key employees pursuant to the 1999 Stock Option Plan during 2006.
        The
        restricted stock awards are subject to a two year restriction period commencing
        on the date of grant. These restricted stock awards are subject to forfeiture
        if
        the employee is not employed by the Company. For
        the
        year ended December 31, 2006, the Company recorded a $478,000 stock based
        compensation expense in connection with the restricted stock awards. As of
        December 31, 2006, there was $1,251,000 of total unrecognized compensation
        cost
        related to non-vested shares. The cost is expected to be recognized over
        the
        next two years.
   56
   In
        June
        2006, the Compensation Committee granted 85,000 performance shares to key
        employees pursuant to the 1999 Stock Option Plan. The issuance of the shares
        of
        the Company’s common stock underlying the performance shares is subject to the
        achievement of revenue and gross margin levels during a two-year performance
        period. If the performance criterion is not met during that two year period,
        then the performance shares will not vest and will automatically be returned
        to
        the Plan. If the performance trigger is met, then the shares will be issued
        to
        the employees. For the year ended December 31, 2006, performance criteria
        was
        met for 31,875 shares which were subsequently issued in 2007 and 10,625
        performance shares were returned to the plan. For the year ended December
        31,
        2006, the Company recorded $602,000 of stock based compensation expense in
        connection with the performance shares.
  **NOTE
        I - INCOME TAXES**
  At
        December 31, 2006, the Company has an aggregate net operating loss carryforward
        of approximately $18,207,000 for United States federal income tax purposes
        and certain state and local income tax purposes of which $3,398,000
        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.  The Company has not included this amount in
        deferred tax assets.  Substantially all of the net operating loss
        carryforwards expire from 2020 through 2025 for federal purposes and from
        2007
        through 2012 for state purposes.  The net operating loss carryforwards
        maybe limited to use in any particular year based on Internal Revenue Code
        sections related to change of ownership restrictions.  In addition, future
        stock issuances may subject the Company to annual limitiations on the
        utilization of its net operating loss carryforwards under the same Internal
        Revenue Code provision.
 
 The
        Company has a deferred tax asset of approximately $6,442,000 and $6,904,000
        at
        December 31, 2005 and 2006, respectively.  The increase in the deferred tax
        asset is primarily attributed to $2,975,000  of stock based compensation
        expensed during 2006 in accordance with SFAS 123R.  There were no other
        significant temporary differences between financial and tax reporting.
 
 The
          Company has elected to use the incremental approach for financial statement
          purposes. Under which the Company will elect to utilize net operating loss
          carry
          forwards before utilizing excess benefit from exercise of options during
          the
          current year.  The Company has provided a valuation allowance against the
          full amount of its deferred tax asset, since the likelihood of realization
          cannot be determined.  The valuation allowance increased during 2004, 2005
          and 2006 by $1,045,000 and $129,000 and $462,000,
          respectively.
  The
        difference between income taxes at the statutory federal income tax rate
        and
        income taxes reported in the statements of operations is attributable to
        the
        following:
  
 **Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Income
                  tax expense (benefit) at the federal statutory rate
              
              $
              135,000
              
              $
              289,000
              
              $
              (549,000
              )State
                  and local income taxes, net of effect on federal taxes
              
              
              (129,000
              )
              
              (20,000
              )
              
              (81,000
              )Increase
                  in valuation allowance
              
              
              1,045,000
              
              
              129,000
              
              
              462,000Fixed
                  assets accumulated book/tax difference - prior year
              
              
              -
              
              
              -
              
              
              117,000Stock
                  options
              
              
              (1,031,000
              )
              
              (451,000
              )
              
              -Other
              
              
              (20,000
              )
              
              53,000
              
              
              51,000$
              0
              
              $
              0
              
              $
              0
 57
  **NOTE
          J - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS**
  **[1]** **Operating
          leases:**
  The
        Company is obligated under an operating lease for its facility. The Company's
        operating lease provides for minimum annual rental payments as
        follows:
  **Year
                  Ending****December
                  31,**2007
              
              $
              418,0002008
              
              
              418,0002009
              
              
              418,0002010
              
              
              104,000$
              1,358,000
  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, $398,000 and $396,000
        for
        the years ended December 31, 2004, 2005 and 2006, 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,
        $151,000 and $155,000 for the years ended December 31, 2004, 2005 and 2006,
        respectively reflects rent received by the Company under the sublease. During
        January 2007, the Company released the subleasee from the sublease and will
        reassume the space in mid 2007.
  **[2]** **Concentration
        of customers:**
  Two
        customers accounted for 61% and 14%, respectively, of the Company’s revenue
        during the year ended December 31, 2006. One of these customers accounted
        for
        47% of the Company’s accounts receivable and unbilled receivables at December
        31, 2006.
  Two
        customers accounted for 45% and 18%, respectively, of the Company’s revenue
        during the year ended December 31, 2005. One of these customers accounted
        for
        72% of the Company’s accounts receivable and unbilled receivables at December
        31, 2005.
  Three
        customers accounted for 49%, 15%, and 12%, respectively, of the Company’s
        revenue during the year ended December 31, 2004.
  **[3]** **Concentration
        of vendors:**
  One
        vendor accounted for 38% of the Company’s purchases during the year ended
        December 31, 2006. The same vendor accounted for 11% of the Company’s accounts
        payable as of December 31, 2006.
  One
        vendor accounted for 47% of the Company’s purchases during the year ended
        December 31, 2005. The same vendor accounted for 51% of the Company’s accounts
        payable as of December 31, 2005.
  **[4]** **Officers
        bonus:**
  The
        Board
        has awarded bonuses of approximately $295,000 and $135,000 to certain officers
        for the years ended December 31, 2005 and 2006, respectively.The bonuses
        are
        based on certain operating criteria, and is in addition to their base
        salaries.
  58
   **NOTE
        K - QUARTERLY SELECTED FINANCIAL DATA (UNAUDITED)**
  The
        following tables contain selected quarterly financial data for each quarter
        for
        the years ended December 31, 2005 and 2006. We believe the following information
        reflects all normal recurring adjustments necessary for a fair presentation
        of
        the information for the periods presented. The operating results for any
        period
        are not necessarily indicative of results for any future periods.
  **Year
                  Ended December 31, 2005****1st
                  Quarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter**Revenue:Product
              
              $
              2,360,000
              
              $
              3,871,000
              
              $
              4,363,000
              
              $
              4,311,000Service
              
              
              673,000
              
              
              327,000
              
              
              1,379,000
              
              
              1,720,0003,033,000
              
              
              4,198,000
              
              
              5,742,000
              
              
              6,031,000Cost
                  of revenue:Cost
                  of product
              
              
              1,195,000
              
              
              1,836,000
              
              
              2,588,000
              
              
              2,197,000Cost
                  of service
              
              
              311,000
              
              
              245,000
              
              
              566,000
              
              
              770,0001,506,000
              
              
              2,081,000
              
              
              3,154,000
              
              
              2,967,000Gross
                  Profit
              
              
              1,527,000
              
              
              2,117,000
              
              
              2,588,000
              
              
              3,064,000Selling,
                  general and administrative expense
              
              
              1,853,000
              
              
              1,451,000
              
              
              1,624,000
              
              
              2,212,000Research
                  and development expense
              
              
              395,000
              
              
              342,000
              
              
              398,000
              
              
              490,000Other
                  income and (expense)
              
              
              86,000
              
              
              88,000
              
              
              75,000
              
              
              71,000Net
                  income (loss)
              
              $
              (635,000
              )
              $
              412,000
              
              $
              641,000
              
              $
              433,000Income
                  (loss) per share - basic
              
              $
              (0.08
              )
              $
              0.05
              
              $
              0.08
              
              $
              0.06Income
                  (loss) per share - diluted
              
              $
              (0.08
              )
              $
              0.05
              
              $
              0.07
              
              $
              0.05
  
  59
 
 **Year
                  Ended December 31, 2006****1st
                  Quarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter**Revenue:Product
              
              $
              4,132,000
              
              $
              4,582,000
              
              $
              5,751,000
              
              $
              1,740,000Service
              
              
              2,258,000
              
              
              1,781,000
              
              
              2,323,000
              
              
              2,173,0006,390,000
              
              
              6,363,000
              
              
              8,074,000
              
              
              3,913,000Cost
                  of revenue:Cost
                  of product
              
              
              2,010,000
              
              
              2,241,000
              
              
              2,995,000
              
              
              984,000Cost
                  of service
              
              
              1,193,000
              
              
              1,232,000
              
              
              1,504,000
              
              
              1,542,0003,203,000
              
              
              3,473,000
              
              
              4,499,000
              
              
              2,526,000Gross
                  Profit
              
              
              3,187,000
              
              
              2,890,000
              
              
              3,575,000
              
              
              1,387,000Selling,
                  general and administrative expense
              
              
              2,748,000
              
              
              2,910,000
              
              
              3,162,000
              
              
              4,123,000Research
                  and development expense
              
              
              493,000
              
              
              560,000
              
              
              673,000
              
              
              913,000Other
                  income and (expense)
              
              
              179,000
              
              
              761,000
              
              
              892,000
              
              
              1,095,000Net
                  income (loss)
              
              $
              125,000
              
              $
              181,000
              
              $
              632,000
              
              $
              (2,554,000
              )Income
                  (loss) per share - basic
              
              $
              0.01
              
              $
              0.02
              
              $
              0.06
              
              $
              (0.23
              )Income
                  (loss) per share - diluted
              
              $
              0.01
              
              $
              0.01
              
              $
              0.05
              
              $
              (0.23
              )
 
  60


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




None.




**Item
      9A.**  **Controls
      and Procedures**




Evaluation
      of Disclosure Controls and Procedures




During
      the fourth quarter of our fiscal year ended December 31, 2006, our management,
      including the principal executive officer and principal financial officer,
      evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e)
      and 15d-15(e) under the Exchange Act) related to the recording, processing,
      summarization, and reporting of information in our reports that we file with
      the
      SEC. These disclosure controls and procedures have been designed to ensure
      that
      material information relating to us is made known to our management, including
      these officers, by other of our employees, and that this information is
      recorded, processed, summarized, evaluated and reported, as applicable, within
      the time periods specified in the SEC’s rules and forms. Due to the inherent
      limitations of control systems, not all misstatements may be detected. These
      inherent limitations include the realities that judgments in decision-making
      can
      be faulty and that breakdowns can occur because of simple error or mistake.
      Additionally, controls can be circumvented by the individual acts of some
      persons, by collusion of two or more people, or by management override of the
      control. Our controls and procedures can only provide reasonable, not absolute,
      assurance that the above objectives have been met.




Based
      on
      their evaluation as of December 31, 2006, our principal executive officer and
      principal financial officer have concluded that our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act)
      are effective to reasonably ensure that the information required to be disclosed
      by us in the reports that we file or submit under the Exchange Act, is recorded,
      processed, summarized and reported within the time periods specified in the
      SEC’s rules and forms.




Management’s
      Report on Internal Control Over Financial Reporting




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rules
      13a-15(f) and 15d-15(f). Under the supervision and with the participation of
      our
      management, including our principal executive officer and principal financial
      officer, we conducted an evaluation of the effectiveness of our internal control
      over financial reporting based on the framework in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. Based on our evaluation under this framework, our management
      concluded that our internal control over financial reporting was effective
      as of
      December 31, 2006.




Eisner
      LLP, the independent registered accounting firm that audited our consolidated
      financial statements included in this Annual Report on Form 10-K, has audited
      management’s assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2006. The report, which expresses
      unqualified opinions on management’s assessment and on the effectiveness of our
      internal control over financial reporting as of December 31, 2006, is included
      below.




61


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of


I.D.
      Systems, Inc.




We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that I.D. Systems, Inc.
      (the “Company”) maintained effective internal control over financial reporting
      as of December 31, 2006, based on criteria established in Internal Control
      -
      Integrated Framework issued by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (“COSO”). The Company’s management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting.
      Our responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting based on our audit.




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




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




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




In
      our
      opinion, management’s assessment that I.D. Systems, Inc. maintained effective
      internal control over financial reporting as of December 31, 2006, is fairly
      stated, in all material respects, based on criteria established in Internal
      Control - Integrated Framework issued by the COSO. Also, in our opinion, the
      Company maintained, in all material respects, effective internal control over
      financial reporting as of December 31, 2006, based on criteria established
      in
      Internal Control - Integrated Framework issued by COSO.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the balance sheets of I.D. Systems, Inc. as
      of
      December 31, 2005 and 2006, and the related statements of operations, changes
      in
      stockholders’ equity, and cash flows for the years ended December 31, 2004, 2005
      and 2006, and our report dated March 14, 2007 expressed an unqualified opinion
      on those financial statements. Our report on the December 31, 2006 financial
      statements included an explanatory paragraph regarding the Company’s change in
      accounting principle for its method of accounting for stock-based compensation.




/s/
      Eisner LLP




New
      York,
      New York


March
      14,
      2007




62




Changes
      in Internal Control Over Financial Reporting




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




**Item
      9B.**  **Other
      Information**




None.




63


**PART
      III.**




**Item
      10.**  **Directors,
      Executive Officers and Corporate Governance**




The
      registrant incorporates by reference herein information to be set forth in
      its
      definitive proxy statement for its 2007 annual meeting of stockholders that
      is
      responsive to the information required with respect to this Item 10; provided , however ,
      that
      such information shall not be incorporated herein:




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





**Item
      11.**  **Executive
      Compensation**




The
      registrant incorporates by reference herein information to be set forth in
      its
      definitive proxy statement for its 2007 annual meeting of stockholders that
      is
      responsive to the information required with respect to this Item 11; provided , however ,
      that
      such information shall not be incorporated herein:




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


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




The
      registrant incorporates by reference herein information to be set forth in
      its
      definitive proxy statement for its 2007 annual meeting of stockholders that
      is
      responsive to the information required with respect to this Item 12; provided , however ,
      that
      such information shall not be incorporated herein:




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






64







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






The
      registrant incorporates by reference herein information to be set forth in
      its
      definitive proxy statement for its 2007 annual meeting of stockholders that
      is
      responsive to the information required with respect to this Item 13; provided , however ,
      that
      such information shall not be incorporated herein:




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







**Item
      14.**  **Principal
      Accountant Fees and Services**






The
      registrant incorporates by reference herein information to be set forth in
      its
      definitive proxy statement for its 2007 annual meeting of stockholders that
      is
      responsive to the information required with respect to this Item 14; provided , however ,
      that
      such information shall not be incorporated herein:




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







65


**PART
      IV.**




**Item
      15.**  **Exhibits,
      Financial Statement Schedules**




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




1. Financial
      Statements .
      The
      following financial statements of I.D. Systems, Inc. are included in Item 8
      of
      Part II of this Annual Report on Form 10-K:




Report
      of
      Independent Registered Public Accounting Firm




Balance
      Sheets as of December 31, 2005 and 2006




Statements
      of Operations for the Years Ended December 31, 2004, 2005 and 2006




Statements
      of Changes in Stockholders’ Equity for the Years Ended December 31, 2004, 2005
      and 2006




Statements
      of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006




Notes
      to
      the Financial Statements




2.  Financial
      Statement Schedules .




Schedule
      II - Valuation and Qualifying Accounts




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




3. Exhibits .
      The
      following exhibits are filed with this Annual Report on Form 10-K or are
      incorporated herein by reference, as indicated.




3.1
            Amended
                and Restated Certificate of Incorporation of I.D. Systems, Inc.
                (incorporated herein by reference to the I.D. Systems, Inc.’s Form SB-2
                filed with the SEC on June 30,
                1999).




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




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




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




66







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




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




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




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




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




23.1
            Consent
                of Eisner LLP.




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




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




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




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




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




(c)  Financial
      Statement Schedules and Other Financial Statements .




Schedule
      II - Valuation and Qualifying Accounts




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




67


**SIGNATURES**




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




Date:
      March 16, 2007






I.D. SYSTEMS, INC.By:/s/ Jeffrey M. JagidJeffrey M. JagidChief Executive Officer(Principal Executive
              Officer)By:/s/ Ned MavrommatisNed MavrommatisChief Financial Officer(Principal Financial and Accounting
              Officer)





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





**Signature**
              **Title**
              **Date**/s/
                  Jeffrey M. JagidJeffrey
                  M. Jagid
              Chief
                  Executive Officer and Director
              March
                  16, 2007(Principal
                  Executive Officer)/s/
                  Kenneth S. EhrmanKenneth
                  S. Ehrman
              President,
                  Chief Operating Office and Director
              March
                  16, 2007/s/
                  Ned MavrommatisNed
                  Mavrommatis
              Chief
                  Financial Officer (Principal Financial
              March
                  16, 2007and
                  Accounting Officer)/s/
                  Lawrence BursteinLawrence
                  Burstein
              Director
              March
                  16, 2007/s/
                  Michael Monaco
              Director
              March
                  16, 2007Michael
                  Monaco/s/
                  Beatrice Yormark
              Director
              March
                  16, 2007Beatrice
                  Yormark


68


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


**SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS**




**Charged
                  to****Balance
                  at**
              
              **(Write-off)**
              
              **Balance
                  at****Beginning**
              
              **to
                  Costs and**
              
              **End
                  of****Description**
              
              **Period**
              
              **Expenses******
              
              **Period**Year
                  ended December 31, 2006Inventory
                  reserve
              
              $
              305
              
              $
              (180
              )
              $
              125Year
                  ended December 31, 2005Inventory
                  reserve
              
              $
              200
              
              $
              105
              
              $
              305Year
                  ended December 31, 2004Inventory
                  reserve
              
              $
              200
              
              $
              __
              
              $
              200**Charged
                  to****Balance
                  at**
              
              
              **(Write-off**)****
              
              
              **Balance
                  at****Beginning**
              
              
              **to
                  Costs and**
              
              
              **End
                  of****Description**
              
              
              **Period**
              
              
              **Expenses**
              
              
              **Period**Year
                  ended December 31, 2006allowance
                  for doubtful accounts
              
              $
              28
              
              $
              211
              
              $
              239Year
                  ended December 31, 2005allowance
                  for doubtful accounts
              
              $
              8
              
              $
              20
              
              $
              28Year
                  ended December 31, 2004allowance
                  for doubtful accounts
              
              $
              20
              
              $
              (12
              )
              $
              8





69