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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   Form 10-K

(Mark One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

                  For the fiscal year ended December 31, 2001

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934

           For the transition period from                        to


                         Commission File No. 001-14217

                      INDUSTRIAL DATA SYSTEMS CORPORATION
                (Name of Small Business Issuer in its Charter)

               Nevada                                  88-0322261
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
   incorporation or organization)

  600 Century Plaza Drive, Suite 140,                77073-6033
            Houston, Texas                           (Zip code)
    (Address of principal executive
               offices)
                   Issuer's telephone number (281) 821-3200

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

<TABLE>
<CAPTION>
                 Title of                         Name of each exchange
                each class                         on which registered
                ----------                        ---------------------
<S>             <C>                              <C>                                           <C>
                  Common                         American Stock Exchange
</TABLE>

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

                                Not applicable

   Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months or for such
shortened period that the issuer was required to file such reports, and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[_]

   Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the 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. [X]

   The issuer's revenues for fiscal year ended December 31, 2001 were
$22,053,738.

   The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 18, 2002 was $7,223,722. The issuer has no authorized
non-voting stock.

   The number of shares outstanding of each of the registrant's classes of
stock on March 18, 2002 is as follows:
   $0.001 Par Value Preferred Stock....................2,500,000 shares
   $0.001 Par Value Common Stock......................22,861,199 shares

                      DOCUMENTS INCORPORATED BY REFERENCE
   Responses to Items 10, 11, 12, and 13 of Part III of this report are
incorporated herein by reference to certain information contained in the
Company's definitive proxy statement for its 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 2002.

   Transitional Small Business Disclosure Format: Yes [_] No [X]

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                      INDUSTRIAL DATA SYSTEMS CORPORATION
                                 2001 FORM 10-K

                               TABLE OF CONTENTS

                                     PART I

<TABLE>
 <C>      <S>                                                               <C>
 Item 1.  Business.......................................................     2
 Item 2.  Properties.....................................................    10
 Item 3.  Legal Proceedings..............................................    11
 Item 4.  Submission of Matters to a Vote of Security Holders............    11

                                    PART II

 Item 5.  Market for Registrant's Common Equity and Related Stockholder
          Matters........................................................    13
 Item 6.  Selected Financial Data........................................    14
 Item 7.  Management's Discussion and Analysis of Financial Condition and
          Results of Operation...........................................    15
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....    22
 Item 8.  Financial Statements and Supplementary Data....................    23
 Item 9.  Changes in and Disagreements With Accountants on Accounting and
          Financial Disclosure...........................................    46

                                    PART III

 Item 10. Directors and Executive Officers of the Registrant.............    46
 Item 11. Executive Compensation.........................................    46
 Item 12. Security Ownership of Certain Beneficial Owners and
          Management.....................................................    46
 Item 13. Certain Relationships and Related Transactions.................    46

                                    PART IV

 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
          K..............................................................    47
 Signatures...............................................................   52
</TABLE>

                                       i
<PAGE>

                                    PART I

            CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

   Certain of the statements made in this Report including matters discussed
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as oral statements made by the Company and
its officers, directors or employees, may constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Such forward-looking statements are
based on Management's beliefs, current expectations, estimates and projections
about the industries which the Company and its subsidiaries serve, the economy
and about the Company in general. The words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate" and similar expressions are intended to
identify such forward-looking statements; however, this Report also contains
other forward-looking statements in addition to historical information.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, such forward-looking statements are not guarantees
of future performance and are subject to risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company to differ materially from historical results or from any results
expressed or implied by such forward-looking statements. The Company cautions
readers that the following important factors, among others, could cause the
Company's actual results to differ materially from the forward-looking
statements contained in this Report: (i) the effect of changes in laws and
regulations, with which the Company must comply, and the associated costs of
compliance with such laws and regulations either currently or in the future as
applicable; (ii) the effect of changes in accounting policies and practices,
as may be adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or of changes in the Company's organization,
compensation and benefit plans; (iii) the effect on the Company's competitive
position within its market area of the increasing consolidation within its
services industries, including the increased competition from larger regional
and out-of-state engineering services organizations; (iv) the effect of
increases and decreases in oil prices, (v) the inability to get parts from
vendors (vi) the inability to renew its line of credit; and (vii) the effect
of changes in the business cycle and downturns in local, regional and national
economies. The Company cautions that the foregoing list of important factors
is not exclusive. We are under no duty to update any of the forward-looking
statements after the date of this Report to conform such statements to actual
results.

   The following summary is qualified in its entirety by, and should be read
in connection with the more detailed information contained herein and in the
Company's Consolidated Financial Statements, and the Notes thereto, included
elsewhere in this Annual Report on Form 10-K. References to the "Company" or
to "IDSC" refer to Industrial Data Systems Corporation. References to "IDS"
refer to the Company's wholly owned subsidiary, Industrial Data Systems, Inc.
References to "IED" refer to the Company's wholly owned subsidiary, IDS
Engineering, Inc. References to "Thermal" refer to the Company's wholly owned
subsidiary, Thermaire, Inc. dba Thermal Corp. References to "CPM" refer to the
Company's wholly owned subsidiary, Constant Power Manufacturing, Inc.
References to "PEI" refer to Petrocon Engineering, Inc., a subsidiary owned
indirectly through IDS Engineering Management LC, of which all of the
membership interests are owned by the Company. References to "PSI" refer to
Petrocon's wholly owned subsidiary, Petrocon Systems, Inc. References to "PCR"
refer to Petrocon's wholly owned subsidiary, Petrocon Construction Resources,
Inc. References to "TE&C" refer to Petrocon's wholly owned subsidiary,
Triangle Engineers and Constructors, Inc. References to "RPM" refer to
Petrocon's wholly owned subsidiary, RPM Engineering, Inc.

                                       1
<PAGE>

Item 1. Business

General

   Industrial Data Systems Corporation (IDSC or the Company) was incorporated
in the State of Nevada in June 1994. The Company's common stock trades on the
American Stock Exchange under the symbol "IDS." The Company has never filed
for protection under the bankruptcy protection act, nor has the Company or any
of its assets been in receivership or any other similar proceedings.

   IDSC entered into a letter of intent on April 3, 2001 to acquire, through
merger with a wholly owned subsidiary, Petrocon Engineering, Inc., a Texas-
based engineering support services company, in exchange for 9,800,000 shares
of IDS, valued at $0.71 per share. The purchase price totaled approximately
$23,806,000. The transaction was financed by issuance of common stock valued
at $6,637,000, net of registration costs, issuance of preferred stock with a
liquidation value of $2,500,000 and assumption of debt totaling approximately
$13,737,000. The transaction was consummated on December 21, 2001 and was
accounted for as a purchase with an effective date of December 31, 2001.
Accordingly, the results of operations of Petrocon are not included in the
consolidated results of operations for the year ended December 31, 2001, but
will be included in the consolidated results of operations of IDSC
prospectively from the date of acquisition. See additional details in the
Selected Financial Data, Management Discussion and Analysis of Financial
Condition and Results of Operation, and the Financial Statements sections of
this Report on Form 10-K.

   Prior to the merger, the Company had three wholly owned operating
subsidiaries, IDS Engineering, Inc., Constant Power Manufacturing, and
Thermaire, Inc., dba Thermal, comprising the Company's three segments in 2001.
The engineering services segment is IDSC's predominant business segment,
providing 64.5% of the Company's revenue and 71.8% of its gross profits in
2001. IDS Engineering, Inc. (IED), which makes up the engineering segment, was
incorporated in October 1997 in Texas and operates in Texas and Oklahoma. The
engineering services segment generates revenues by providing engineering
consulting services to the pipeline and process divisions of major integrated
oil and gas companies. These services include the development, management and
turnkey execution of engineering projects, including procurement,
construction, and management (EPC) activities.

   The engineered systems segment is responsible for approximately 16.2% of
the total revenue contributing to the gross profits 8.8%. Constant Power
Manufacturing, Inc. (CPM), in the engineered systems segment, is a Texas
corporation formed in June 1989, and was purchased in 1998. CPM fabricates
industrial grade uninterruptible electrical power systems and battery
chargers.

   The manufacturing segment consists of another wholly owned subsidiary,
Thermaire, Inc. dba Thermal Corp. (Thermal) that provided approximately 19.3%
of the Company's revenue and 19.4% of the gross profits for 2001. The Company
acquired Thermal in 1997, which manufactures air handling equipment for
commercial heating, ventilation, and cooling systems. Thermal is a Texas
corporation formed in 1992.

   Petrocon, a Texas corporation was formed in 1988 and provides engineering
services and engineered systems to a broad range of industrial, commercial and
institutional clients throughout the United States and internationally.
Petrocon is the parent of five wholly owned operating subsidiaries: RPM
Engineering, Inc., incorporated in the state of Louisiana in 1980 and acquired
by Petrocon in October 1996; Petrocon Construction Resources, Inc., a Texas
corporation formed in 1994; Petrocon Systems, Inc., a Texas corporation formed
in 1991; Triangle Engineers and Constructors, Inc., incorporated in Texas in
1980 and acquired by Petrocon in 1996; and Petrocon Engineering of Louisiana,
Inc., a Louisiana corporation formed in 1998. Petrocon's multi-disciplined
expertise enables it to offer its clients broad design and engineering
solutions, extending from project inception through completion, including
start-up and operation, within multiple industries and across diverse
geographic markets. In 2001, Petrocon generated consolidated revenues of
approximately $70,000,000.

                                       2
<PAGE>

Products and Services

 Engineering Services

   The engineering services segment has traditionally offered engineering
consulting services primarily to the pipeline and process industries for the
development, management and turnkey execution of engineering projects. As a
result of the Petrocon merger, the Company will be able to offer its expertise
to a broader range of industrial clients. The predominant type of contract is
the blanket services contract which typically provides IDSC's clients with
engineering, procurement and project management services on a time and
materials basis. Capital projects are also executed for its clients on a full
service, turnkey basis. The engineering staff has the capability of developing
a project from the initial planning stages through the detailed design and
construction management. In 2001, the Company was successful in procuring more
contracts on a fixed price basis than in prior years. The services provided
include conceptual studies, project definition, cost estimating, engineering
design, and material procurement, in addition to project and construction
management. These services are performed for major energy-related firms on
facilities that include cross-country pipelines, pipeline pump stations, gas
compressor facilities, chemical plants, crude oil refineries and electric
power generation facilities. The engineering services segment offers its
clients a wide range of services from a single source provider. Both
modifications to existing facilities and new construction projects have been
handled by the engineering services segment.

 Engineered Systems

   For the year 2001, IDSC's engineered systems segment is comprised solely of
CPM, a thirteen year old company established in the industrial and commercial
power backup and conditioned power systems marketplace. Both standard and
custom-designed products and systems are fabricated and sold in a wide array
of power ranges which include: battery chargers, battery monitoring systems,
DC power supplies, DC/AC inverters, uninterruptible power systems (UPS), power
distribution systems and solar photo-voltaic systems.

   CPM provides field service support for installation and maintenance of
these products. Most of the products are made pursuant to specifications
required for a particular order. A new product line of switch-mode battery
chargers was introduced in mid-1999. These chargers have been readily accepted
where physical size constraints and heat are design factors. During 2001, CPM
began to provide explosive proof enclosures for hazardous area requirements.
Refineries, petrochemical plants, utilities, offshore platforms and other
commercial, industrial and governmental facilities utilize the products sold
by CPM. CPM sells to industrial and commercial accounts across the United
States.

   The Advanced Controls division of IED was established in 2000 for the
purpose of providing specialized expertise to clients for the design and
implementation of their automation and control system requirements. This
division was combined with the engineered systems segment following the merger
with Petrocon. Petrocon Systems, Inc., (PSI), a wholly owned subsidiary of
Petrocon Engineering, Inc., designs, assembles, programs, installs, integrates
and services control and instrumentation systems for specific applications,
principally in various energy and related processing related industries. These
engineering personnel offer comprehensive, turnkey services for automation and
control of various industrial processes including but not limited to
compressor stations, material handling, data acquisition, position measuring,
environmental and safety monitoring and factory automation. Feasibility
studies, engineering, design, estimating, configuration and programming,
construction, commissioning, startup, troubleshooting, and operation of
controls systems are provided by personnel experienced in field operations and
maintenance.

   CPM has continued the manufacturing and service of IDS' specialized
industrial microcomputer systems to existing IDS customers. This division of
CPM also provides systems integration and resells industrial microcomputers
and peripheral products. The microcomputer and peripheral products are
designed to be utilized in industrial applications, which include
manufacturing, process control, discrete manufacturing, data acquisition,
telecommunications and man-machine interfaces. These systems are typically
designed with enclosures that withstand tough environmental conditions or with
enclosures that have a special form factor which are based on the customer's
specific parameters.

                                       3
<PAGE>

 Manufacturing

   The manufacturing segment, comprised solely of Thermal, has manufactured
quality air handling equipment since 1945. Thermal also reserves production
capacity to accomplish premium, expedited deliveries of two or four weeks,
when necessary. Thermal is well known for its design and manufacturing
expertise and flexibility, which is often required to meet the special needs
for custom installations.

   Thermal's product lines consist of a variety of cooling, heating and
ventilating equipment. The wide range of sizes and models in each product line
coupled with Thermal's manufacturing adaptability provides flexibility in air
handling equipment choice. Thermal's quality air handling products include
central plant air conditioners, multi-zone air conditioners, high-pressure air
conditioners, and air-cooled condensers. Thermal also manufactures fan coil
units, cooling and heating coils, and roof top air handlers. Popular custom
unit features include special modular construction, custom cabinet dimensions,
special insulation type and thickness, gas and electric heaters, humidifiers,
all types of fans, non-standard arrangements, motor and unit controls, unique
customer requirements, exotic materials of construction and severe service
applications, etc.

   Thermal distributes its products exclusively through its United States and
international network of non-stocking sales representatives.

Product Development

 Engineering Services

   Engineering services continues to provide consulting services primarily to
the energy industry as its core business. There are approximately twenty-one
blanket service contracts in place in which clients are furnished with service
on a time and materials basis and eight fixed fee contracts for turnkey
services. With the merger of Petrocon, an additional 168 blanket service
agreements are in place for time and material service and 41 fixed fee
contracts for turnkey services. The Company's Tulsa, Oklahoma office, which
opened in February 1999, has facilitated the expansion of its market area.
During 2000 and 2001, the engineering segment continued to grow geographically
throughout the United States and into international markets.

   IED completed development of its standard meter skid package in 1999 and
began to market this package, which is designed with modular, interchangeable
components that help to reduce project cost and execution times. The initial
revenue for this product was generated in the second half of the year 2001.

   As part of its implementation plan to increase its range of engineering
capabilities and to market its services to downstream industries such as the
refining, petrochemical and process industries, IDSC acquired Petrocon
Engineering, Inc., headquartered in Beaumont, Texas effective as of December
21, 2001. (See further discussion in "Business Strategy")

 Engineered Systems

   In the engineered systems segment in 2000, CPM introduced its USGS
Intellicharger(TM) product line of microprocessor controlled battery chargers
that bring to the marketplace state-of-the-art flexibility and features for
the end user. The Intellicharger is now included in the majority of battery
charger units sold by CPM. The Company has seen substantial cost savings in
the manufacturing process during the initial six months of production by
reducing labor. This reduction in cost has provided CPM the opportunity to
enter new markets that have historically been unavailable due to price
competition. The Company does not intend to complete the battery-monitoring
product, BMR-280, since most of its functionality is included in the
Intellicharger.

   With the merger, PSI a subsidiary of Petrocon, will join CPM in the systems
segment. PSI designs, assembles, programs, installs, integrates and services
control and instrumentation systems for specific applications, principally in
various energy and processing related industries. PSI's control and
instrumentation systems are custom designed and include both conventional
pneumatic and hydraulic control systems and

                                       4
<PAGE>

sophisticated electronic, microprocessor-based controls employing programmable
logic. Typical applications for PSI's control and instrumentation systems
include oil and gas production safety systems, refinery, petrochemical and
chemical plant controls, analyzer packaging, fire and gas detection systems,
pipeline compressor station controls, data acquisition systems, control
systems for oil and gas wells, engine and gas turbine driven compressors,
pumps boilers and heaters, and processing equipment. All facets of control and
instrumentation system design, engineering, assembly and testing are performed
in-house by PSI, and PSI's full service field installation and technical staff
performs complete electrical and instrumentation installation projects, start-
up and commissioning services, modifications to existing systems, on-site
training and routine maintenance procedures for client operating personnel.
PSI's control systems unit does not produce products for inventory and
purchases components for its systems on an as-needed basis.

 Manufacturing

   In the manufacturing segment during 2000, Thermal installed the necessary
equipment for the manufacturing of industry compliant, 5/89 plate-fin coils.
The addition of this plate-fin coil production line has improved its
competitive position in the marketplace by reducing product costs and
production time. A majority of Thermal's coil requirements are now produced
in-house. In 2001, the Company made additional capital commitments for the
replacement of a variety of older equipment used on its production line.

Competition

   Engineering services is in a highly competitive environment and competes
with many other organizations that are substantially larger and have greater
financial and other resources. The engineering services segment competes with
a large number of other firms of all sizes, ranging from the industry's
largest firms, which operate on a worldwide basis, to much smaller regional
and local firms. Typical competitors include: S&B Engineering, Jacobs
Engineering Group, CDI Engineering Group, Matrix Engineering, GDS Engineering
and Mustang Engineering.

   Competition in the engineering services segment is primarily centered on
performance and the ability to provide the engineering, planning, and project
execution skills required to complete projects in a timely and cost efficient
manner, as well as price. Larger projects, especially international work,
appears to be trending toward pricing alternatives designed to shift to the
service provider, or requiring the service provider to at least share in, the
risks of cost overruns and inefficiencies in the delivery of services. These
alternatives include fixed-price, guaranteed maximum price, incentive fee,
competitive bidding, and other "value based" pricing arrangements.

   In its engineered systems segment, the emphasis that both clients and the
Company place on pricing tends to vary with cyclical conditions in the oil and
gas, petroleum and processing industries, with pricing becoming a more
important factor during industry downturns.

   CPM's market is characterized by a small number of larger companies that
dominate the bulk of the market, and a large number of similarly sized
companies that compete for a limited share of the market. In the opinion of
management, the competitive position of CPM has been greatly enhanced by the
introduction of its microprocessor controlled battery charger product line,
trademarked Intellicharger. The Intellicharger product contains battery-
charging technology that Management believes is unique in the industry and has
many advantages over existing battery charging methods. The new Intellicharger
product has allowed CPM to enter markets that are more standardized in nature
and volume oriented. Companies competing in the power systems arena include
Custom Power, Inc., LaMarche Mfg., Inc., Goodall, Inc., and Powerware, Inc.

   PSI's control systems and modular facilities compete with similar systems
built by other companies, both larger and smaller, some of which compete
primarily on the basis of pricing. PSI's competitors include the following:
PasTech, TAS, TAG, Contact Engineering, and Aspen Tech.

   Like engineering services and engineered systems, the manufacturing segment
in which Thermal operates is highly competitive. Management believes that the
principal competitive factors in its market include delivery

                                       5
<PAGE>

time, flexibility and product design, breadth of product features, product
quality, customer service, and price. Thermal competes with other air handling
equipment manufacturers on the basis of quality, quick delivery and capability
to provide custom applications. Management believes that Thermal is cost
competitive with many well-established manufacturers, such as Temtrol,
Governaire, Mammoth and Pace, and others. Thermal has distinguished itself by
being responsive to customer requests for custom products and is able to
expedite delivery of units faster than many other commercial manufacturers due
to the flexibility of its engineering and manufacturing facility capabilities.

Business Strategy

   Engineering services' strategy is to increase revenues by developing and
marketing the capability of performing full service turnkey or EPC
(Engineering, Procurement and Construction) projects. IED has traditionally
only been responsible for the engineering portion of its projects, which is
normally between five to fifteen percent of the project's total installed
cost. In the past, IED has invoiced for its services largely on a time and
materials basis with billing rates that are specified in client generated
blanket services contracts. During the year 2001, the Company saw a
significant increase in the number of projects billed on a fixed price basis.
In this regard, IED added staff with expertise in project proposals and
bidding, and worked to diversify its client base.

   In 2001, the Company emphasized the services provided through its Advanced
Controls division of IED. The Company believes that the Advanced Controls
division allows its engineering services segment to leverage its existing
sales and marketing effort. Additional revenues have occurred from projects
that the Company would not otherwise have been involved in and larger revenue
percentage of projects on which the Company is already performing the
engineering and design function. The controls function of any engineering
project is very critical and often determines project success or failure. The
Advanced Controls capability facilitates the execution of the Company's plan
to handle a larger portion of projects on a fixed price turnkey basis.
Performing the controls function in-house will make the project interface
easier, and should result in overall improved project performance by the
Company. This division will be combined with the engineered systems segment in
2002.

   Management does not believe that CPM made significant progress in the
signing of new sales representatives or in its marketing strategy in 2001.
Management anticipated adding in-house personnel in 2001 whose primary
responsibility was to increase quotation capabilities and work to expand the
sales and marketing effort of CPM. Although the Company was successful in this
effort in 2001 it did not occur soon enough to result in increased operating
results. CPM has strategically placed advertising for its batteries, battery
chargers, and UPS systems in a well-known product catalogue. The Company plans
to continue these advertisements through the year 2002.

   Thermal continues to focus on establishing and supporting a qualified sales
representative network within the U.S., and exploiting its niche for custom
products. The addition of a plate-fin coil manufacturing line has helped
reduce product costs and production time, and has also generated additional
revenues from increased sales of replacement coils.

   The Company's plan to pursue potential acquisitions of complementary
businesses was realized on December 21, 2001 through its merger with Petrocon.
The initial business strategy of the combined company will focus primarily on
cross-marketing its engineering capabilities and, following a reduction in its
debt burden, completing mergers and acquisitions in its engineering business.
Since there is little overlap in the engineering customer bases of the two
companies, there is considerable potential to enhance the internal growth of
the combined company through cross-marketing. An intense marketing effort
focused on those customers who are identified as most likely to buy the
additional services offered through the combined company will be the highest
priority. Selling points will include:

  .  More technical resources at our disposal to serve customers, with
     approximately 900 employees in the combined operations;

                                       6
<PAGE>

  .  Greater depth of capabilities that can service energy customers in the
     oil and gas industry from the well head through the finished
     petrochemical product;

  .  Enhanced geographical coverage with offices in the primary U.S. energy
     markets of Houston, Tulsa, Baton Rouge, Beaumont, and Lake Charles;

  .  Additional shop space and personnel available to handle larger, more
     diverse, instrumentation/systems packaging projects;

  .  Construction management and inspection services previously not available
     to IDSC; and

  .  The potential for enhancing the market coverage for Constant Power's UPS
     products through Petrocon Systems, Inc. and through over 440 personnel
     outsourced into plants in the Petrocon organization.

Sales and Marketing

   The Company's various subsidiaries derive revenues primarily from in-house
direct sales and from its network of sales representatives. Sales
representatives are teamed with in-house sales managers and are assigned to
territories within the United States. Management believes that this method of
selling leads to increased account penetration, proper management of its
products, and enhanced customer service, which creates and maintains the
foundation for long-term relationships with its customers. The Company's in-
house sales personnel are normally compensated utilizing incentive
commissions, which are based on either a percentage of revenues or gross
profitability which can be attributed to their efforts. Management believes
that its past and future growth depends in large measure on its ability to
attract and retain qualified sales representatives and sales management
personnel. Management is of the opinion that its in-house marketing and
selling of its products allows for more freedom and control, thus increasing
profitability.

   The Company's subsidiaries promote their products and services through
general and trade advertising, participation in trade shows, and through on-
line Internet communication via IDSC's corporate home page that provides links
to each of the subsidiaries' websites. The Company, through a service
provider, makes an effort to maintain and update each of its subsidiaries'
Internet web sites on an ongoing basis. It is the opinion of management that
the Internet is a powerful marketing tool, and with the increasing e-commerce
activity becoming evident, each subsidiary must be positioned to capitalize on
this trend.

   The Company's sales personnel focus on building long-term relationships
with customers and, through their product and industry expertise, providing
customers with product application, engineering and after-the-sale services.
Additionally, the sales personnel of IDSC subsidiaries seek to capitalize on
customer relationships that have been developed by each subsidiary through
cross-selling of the various products and services offered by each subsidiary.
Sales leads developed through this effort are then jointly pursued.

   Much of the Company's business is repeat business, and the source of new
customers has been largely through word-of-mouth referrals from existing
customers and industry members, such as manufacturer's representatives. The
merger with Petrocon expanded the Company's existing customer base and the
potential for business development activities.

   Petrocon has traditionally believed that marketing and business development
are company-wide responsibilities, and Petrocon's project and other managers
are encouraged to be actively involved in business development efforts through
the maintenance of professional and personal relationships and through the
identification and pursuit of new business opportunities. Company managers
closely monitor Petrocon's client list to ensure that existing clients are
contacted on a regular basis in order for the Company to remain before the
client and be aware of all current and proposed client projects.

   Additionally, eleven full-time professional marketers in-house are now
employed by the Company as a result of the merger. Business development agents
are retained in Mexico City, the Middle East, the United Kingdom and Norway,
and alliances with other engineering and construction firms worldwide
including Australia, Europe, Central and South America and Pacific Rim
locations.

                                       7
<PAGE>

Customers

   IDSC's engineering services customer base consists primarily of Fortune 500
companies in numerous industry segments within the United States. Effective
with the merger, the engineering services group added many clients
representing a broader range of industries and institutions, most of whom have
been repeat clients. With the Petrocon acquisition, the Company will not have
continuing dependence on any single client or any limited group of clients,
however, one or a few clients have in the past and may in the future
contribute a substantial portion of the revenues in any one year or over a
period of several consecutive years due to the size of major engineering
projects. This segment is not necessarily dependent upon sustaining the level
of revenues contributed by particular clients in any given year or period of
consecutive years. Historically, the Company has not generated significant
revenues from governmental clients. The Company has undertaken new projects
for prior clients and has provided ongoing services to clients following the
completion of their projects. Nonetheless, IDSC must continually obtain new
engineering projects, whether from existing or new clients, in order to
generate revenues in future years as existing projects are completed.

   In recent years, the continuing trend among engineering services clients
and their industry counterparts has been toward outsourcing and sole sourcing,
which has fostered the development of arrangements with clients which are less
oriented toward specific projects and more focused on ongoing, longer term
relationships. These arrangements, often referred to as partnering
relationships or alliances, and, in some cases, sole source contracts, vary in
their scope, duration and degree of commitment. Some provide a minimum number
of work man-hours over specified periods; some assure at least a designated
percentage of the client's requirements for engineering services at one or
more locations; and some establish the Company as the client's sole source of
engineering services at a specific location or locations. Other agreements
express only a client's non-binding preference or intent, or establish a
general contractual framework for what the parties expect will be an ongoing
relationship. Despite their variety, the collective effect of these partnering
relationships or alliances is to exert a stabilizing influence on the
Company's engineering service revenues. At present, there is some form of
partnering or alliance arrangement with approximately 13 major oil and
chemical companies.

   In the engineered systems segment, clients include end users, such as oil
and gas producers, compressor stations, refineries, chemical companies and
processing plants, that own or operate the facilities for which the systems
are designed. Other clients include equipment manufacturers, construction
contractors and other engineering firms that incorporate control systems into
facilities and products of their own design, construction and manufacture. As
in the engineering services segment, in any given year, a small number of
clients may account for a large percentage of the engineered systems revenues
for that year, depending on the number of major projects undertaken. Though
the engineered systems segment frequently receives work from repeat clients,
its client list may vary greatly from year to year.

   Historically, the Company's largest ten customers (which varied from period
to period) accounted in the aggregate for approximately 60% and 70% of the
Company's total revenue during 2000 and 2001, respectively.

   Currently, the Company's major customers include:

  IED:     Caspian Pipeline Consortium, EXXON Mobil Pipeline Co., Oneok Gas
           Transportation, LLC, Centennial Pipeline, LLC, TE Products
           Pipeline Co., Universal Compression, Inc., Marathon Pipeline Co.

  CPM:     Parsons Power Group

  Thermal: South Texas Equipment, Hollingsworth Equipment, Inc., Conditioning
           Components Company

   There are no long-term commitments by such customers to purchase products
or services from IDSC. Sales of products from the engineered systems segment
and the manufacturing segment are typically made from the customer's
specifications on a purchase order basis. The Company's potential revenues
are, therefore, dependent on continuing relationships with these customers.

                                       8
<PAGE>

Customer Service and Support

   The Company provides service and technical support to its customers in
varying degrees depending upon the product line and on customer contractual
arrangements. The Company's support staff provides initial telephone
troubleshooting services for end-user customers and distributors. These
services include isolating and verifying reported product failures,
authorizing product returns and tracking completion of repaired goods in
support of customer requirements. Technical support also provides on-site
engineering support in the event that a technical issue cannot be resolved
over the telephone. The Company provides limited warranty coverage for its
products for varying time periods depending on a variety of factors. On a
routine basis, the Company provides worldwide start-up and commissioning
services for projects in which it provides engineering services.

Dependence upon Suppliers

   The Company's businesses depend upon the ability to obtain an adequate
supply of products and parts at competitive prices and on reasonable terms.
The Company's suppliers are not obligated to have products on hand for timely
delivery to the Company nor can they guarantee product availability in
sufficient quantities to meet the Company's demands. There can be no assurance
that such products will be available as required by the Company at prices or
on terms acceptable to the Company. The Company procures a majority of its
components from distributors in order to obtain competitive pricing, maximize
product availability and maintain quality control.

   All of CPM's products are manufactured using components and materials that
are available from numerous domestic suppliers. CPM has approximately 10
principal suppliers of components and each of those could be replaced with
several competitors; therefore, CPM anticipates little or no difficulty in
obtaining components in sufficient quantities and in a timely manner to
support its manufacturing and assembly operations.

   Units produced by the engineered systems segment are not produced for
inventory and all component parts are purchased on an as needed basis that are
readily available from numerous domestic suppliers. The Company anticipates
little or no difficulty in obtaining components in sufficient quantities to
support its operations.

   The manufacturing segment currently stocks key components due to long lead
times. Specialty items are purchased as required for each job. Thermal has
increased its stocking levels, in order to avoid of the potential delays in
manufacturing that would be caused by its inability to procure critical
components.

   There can be no assurance that IDSC's subsidiaries will be able to continue
to obtain the necessary components from any of its single sources on terms
acceptable to the Company, if at all. There can be no assurance that such
relationships will continue or that, in the event of a termination of any
relationship, it would be able to obtain alternative sources of supply without
a material disruption in the Company's ability to provide products to its
customers. Any material disruption in the Company's supply of products would
have a material adverse effect on the Company's financial condition and
results of operations. No one manufacturer or vendor provides products that
account for 10% or more of the Company's revenues.

Patents, Trademarks, Licenses

   The Company's success depends in part upon its proprietary technology, and
it relies primarily on trade secrecy and confidentiality agreements to
establish and protect its rights in its proprietary technology. The Company
owns a U.S. patent on its hybrid low NOX technology and a trademark of Bernard
and Burk Industries. There can be no assurance that the Company's present
protective measures will be adequate to prevent unauthorized use or disclosure
of its technology or independent third party development of the same or
similar technology. Although the Company's competitive position could be
affected by its ability to protect its proprietary and trade secret
information, the Company believes other factors, such as the technical
expertise and knowledge of the Company's management and technical personnel,
and the timeliness and quality of support services provided by the Company, to
be more significant in maintaining the Company's competitive position.

                                       9
<PAGE>

   The Company has no franchises, concessions, royalty agreements, labor
contracts, or licenses (other than for off-the shelf software).

Government Regulations

   Certain of the Company's subsidiaries are subject to various foreign,
federal, state, and local laws and regulations relating to its business and
operations, and various health and safety regulations as established by the
Occupational Safety and Health Administration. The Company and members of its
professional staff are subject to a variety of state, local, and foreign
licensing, registration and other regulatory requirements governing the
practice of engineering. The Company's engineering professionals are licensed
or registered in several states and foreign jurisdictions. The Company is not
currently aware of any situation or condition that it believes is likely to
have a material adverse effect on its results of operations or financial
condition.

Research and Development

   Research and development costs for 1999, 2000 and 2001, were approximately
$79,000, $32,000 and $47,000, respectively. As of December 31, 2001, IDSC's
subsidiaries were involved in the following active research and development
activities: IED is expanding the capability of its standard meter skid
product; IED is currently designing a standardized specification package for
project related execution; CPM has evaluated the design of an uninterruptible
power supply product; and Thermal is currently seeking industry certification
for its in-house produced coils.

Employees

   As of December 31, 2001, after the merger with Petrocon, the Company
employed approximately 875 individuals within its eight operating
subsidiaries; approximately eleven were employed in sales, marketing and
customer services; approximately 600 were employed in engineering;
approximately 80 were employed in technical production positions;
approximately 50 were employed in administration, finance and management
information systems and approximately 134 support staff. The Company believes
that its ability to recruit and retain highly skilled and experienced
technical, sales and management personnel has been, and will continue to be,
critical to its ability to execute its business plan. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company believes that relations with its employees
are good.

Item 2. Properties

Facilities

   For its professional, technical, and administrative staff, IDSC leases nine
offices in the U.S. totaling approximately 167,000 square feet, and owns two
office buildings in Baton Rouge, Louisiana totaling 38,072 square feet and a
manufacturing facility in Houston totaling 37,725 square feet. This includes
the property acquired through the merger with Petrocon and property previously
leased or owned by IDSC. The leases have remaining terms ranging from monthly
to 10 years and are at what the Company considers to be commercially
reasonable rental rates. The Company's principal office locations are in
Houston and Beaumont, Texas; Baton Rouge and Lake Charles, Louisiana; and
Tulsa, Oklahoma. The Company believes its office and other facilities are well
maintained and adequate for existing and planned operations at each operating
location.

   IDSC's engineered systems segment is performing fabrication assembly at
three shop facilities totaling approximately 47,400 square feet in Beaumont
and Houston, Texas. A property in Beaumont, Texas is currently leased on a
month-to-month basis from a joint venture owned one-third by each: Petrocon,
Michael L. Burrow (the Company's CEO), and a shareholder of the Company that
owns less than 1% of the Company's stock. The Company believes that this lease
is at a commercially reasonable rental rate.

                                      10
<PAGE>

Item 3. Legal Proceedings

   From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business that are incidental to the Company's
business. As of the date of this document, the Company is party to several
legal proceedings that have been reserved for, are covered by insurance, or
that, if determined adversely to us individually or in the aggregate, would not
have a material adverse effect on the Company's results of operations or
financial position, when taken as a whole.

   In May 2000, Petrocon terminated the employment of two of its officers who
had guaranteed compensation and severance provisions under their employment
agreements. Petrocon Engineering, Inc. vs. Gary J. Coury and Rick Berry, was
filed in the 136th District Court of Jefferson County, Texas on March 17, 2000.
Petrocon disputed the validity and enforceability of these two employment
contracts and took legal action against the former officers alleging negligence
in their fiduciary responsibilities as officers of Petrocon. During the fourth
quarter 2001, concurrent with the merger, and as a result of mediation, a
settlement agreement was reached. The settlement stipulates that the Company
will pay $775 thousand. The Company has paid $325 thousand and will pay the
remaining balance of $450 thousand in 24 equal monthly installments of
approximately $12 thousand with the balance of $175 thousand paid in the 25th
month.

   Petrocon was also a party to a lawsuit filed in the 805h District Court of
Harris County, Texas in March 2001, wherein certain former employees asserted
breach of contract, wrongful termination, and failure to pay commissions on
sales. This claim was settled prior to the merger in the fourth quarter 2001.
The Company has agreed to pay $453 thousand of which the Company has accrued
$247 thousand in unpaid settlement costs related to this lawsuit as of December
31, 2001.

   Two other claims in the 60th District Court of Jefferson County, Texas and
the 14th District Court of Parish of Calcasieu, Louisiana, respectively, that
involve failure of contractual performance caused by faulty design have been
identified by the management of the Company and are covered by errors and
omissions insurance. The Company has accrued the costs subject to the insurance
deductible of $100 thousand each. Both of these cases are in the discovery
phase and pending.

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

   A Special Meeting of the shareholders of the Company was held on December
20, 2001 at the Company's headquarters in Houston, Texas for the purpose of
voting on the following matters:

     1. To approve an amendment to IDS' articles of incorporation creating a
  class of preferred stock with 5,000,000 shares authorized for issuance;

     2. To approve an amendment to the IDS 1998 Incentive Plan increasing the
  number of options which may be issued under the Plan from 1,200,000 to
  1,400,000;

     3. To approve and adopt the Agreement and Plan of Merger dated as of
  July 31, 2001, between IDS, IDS Engineering Management, LC, a Texas limited
  liability company and wholly owned subsidiary of IDS, PEI Acquisition,
  Inc., a Texas corporation and wholly owned subsidiary of IDS Engineering
  Management, LC, and Petrocon Engineering, Inc., a Texas corporation,
  relating to the merger of PEI Acquisition, Inc. into Petrocon, including
  without limitation the issuance of 9,800,000 shares of IDS common stock to
  Petrocon shareholders, 2,500,000 shares of IDS convertible preferred stock
  to Petrocon shareholders and lenders, and 100,500 shares of IDS common
  stock to IDS' financial advisor;

     4. Contingent upon consummation of the merger, to elect four additional
  directors to the board of directors of IDS to serve until the next annual
  meeting of stockholders or until their respective successors are elected
  and qualified. The nominees for director are Michael L. Burrow, P.E.,
  Jimmie N. Carpenter, P.E., Randall B. Hale, and David C. Roussel;

     5. To grant authority to extend the solicitation period if the meeting
  is postponed or adjourned; and

                                       11
<PAGE>

     6. To transact such other business as may properly come before the
  meeting or any adjournment thereof.

   Set forth below is a tabulation of the votes.

<TABLE>
<CAPTION>
                                 For              Against          Abstained
                          ------------------ ----------------- -----------------
                             No. of             No. of            No. of
      Proposal No.        shares voted   %   shares voted  %   shares voted  %
      ------------        ------------ ----- ------------ ---- ------------ ----
<S>                       <C>          <C>   <C>          <C>  <C>          <C>
1--Amendment of
 Articles...............   10,326,548  98.51         0     .00   156,339    1.49
2--Amendment of 1998
 Incentive Plan.........   10,326,548  98.51         0     .00   156,339    1.49
3--Agreement and Plan of
 Merger.................   10,358,738  98.82         0     .00   124,149    1.18
4--Election of            No less than 98.51 No more than 1.43 No more than 1.49
 Directors..............   10,238,831          204,944            39,112
5--Extension of
 Solicitation Period....   10,354,638  98.07   107,889    1.96    20,360     .51
Total shares voted......   10,482,887
Total shares not voted..    2,482,031
</TABLE>
--------
** Votes "FOR" Proposal 4--Agreement and Plan of Merger, with Alliance voted
   shares removed, totaled 858,738 or 87.36% of total shares voted.

   With the above-mentioned votes representing more than a majority of the
outstanding voting stock of the Company, all of the matters presented to the
shareholders for vote passed.

                                      12
<PAGE>

                                    PART II

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

   The Company's Common Stock, $.001 par value per share, has been quoted on
the American Stock Exchange since June 16, 1998, under the symbol "IDS".

<TABLE>
<CAPTION>
                                                                     High   Low
                                                                    ------ -----
   <S>                                                              <C>    <C>
   Year Ended December 31, 1999
   First Quarter...................................................  9.250 7.250
   Second Quarter.................................................. 10.750 1.750
   Third Quarter...................................................  2.688 1.000
   Fourth Quarter..................................................  1.188 0.750

   Year Ended December 31, 2000
   First Quarter...................................................  5.125 0.750
   Second Quarter..................................................  2.063 0.938
   Third Quarter...................................................  1.125 0.813
   Fourth Quarter..................................................  1.000 0.438

   Year Ended December 31, 2001
   First Quarter...................................................  0.920 0.500
   Second Quarter..................................................  1.290 0.520
   Third Quarter...................................................  1.150 0.770
   Fourth Quarter..................................................  0.920 0.650
</TABLE>

   The foregoing figures are based on information published by AMEX, do not
reflect retail markups or markdowns and may not represent actual trades.

   The Company's Series A Preferred Stock, $0.001 par value per share, is held
by one shareholder, Equus. In connection with the Company's merger with
Petrocon, 2,500,000 shares of such preferred stock were issued on December 21,
2001.

   As of December 31, 2001, the Common Stock was held by approximately 342
shareholders of record and approximately 1,600 non-objecting beneficial
shareholders.

Dividend Policy

   The Company has never declared or paid a cash dividend on the Common Stock.
The payment of dividends in the future will depend on the Company's earnings,
capital requirements, operating and financial position and general business
conditions. The Company intends to retain any future earnings for reinvestment
in its business and does not intend to pay cash dividends in the foreseeable
future other than the dividends payable to the preferred stockholder. In
addition, the Company's agreement with Fleet precludes IDSC from paying any
dividends on its Common Stock. The restrictions arise from the covenants on
the Fleet Credit Facility.

   Dividends on outstanding shares of Series A Preferred Stock are payable
annually on the last day of May beginning in 2002 at a rate of 8% of the
liquidation amount which is $1.00 per share plus accrued and unpaid dividends.
Dividends may be paid in cash or at the option of the Company, in shares of
stock of Series A Preferred Stock at a rate of 0.08 shares for each
outstanding share of Series A Preferred Stock. See "Management's Discussion
and Analysis of Condition and Results of Operation."

                                      13
<PAGE>

Item 6. Selected Financial Data

        Summary Selected Historical Consolidated Financial Data For IDS

   The following table sets forth selected financial information for IDSC for
the years ended December 31, 1997, 1998, 1999, 2000 and 2001. This financial
information was derived from the consolidated financial statements of IDSC.
This data should be read in conjunction with the consolidated financial
statements and the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
following selected financial information for IDSC for the years ended
December 31, 1997, 1998, and 1999 was derived from consolidated financial
statements and the related notes of IDS that are not included herein.

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                                  -------------------------------------------
                                   1997     1998     1999     2000     2001
                                  -------  -------  -------  -------  -------
                                      (In thousands, except per share
                                                 amounts)
<S>                               <C>      <C>      <C>      <C>      <C>
Statement of Operations:
Revenues:
  Engineering services........... $ 4,265  $ 4,407  $ 5,978  $10,740  $14,235
  Engineered systems.............      --       --       --    2,815    3,575
  Manufacturing..................   6,259    8,260    6,260    3,421    4,244
                                  -------  -------  -------  -------  -------
    Total revenues...............  10,524   12,667   12,238   16,976   22,054
                                  -------  -------  -------  -------  -------
Costs and expenses:
  Cost of engineering services...   3,219    3,143    4,378    8,175   10,433
  Cost of engineered systems.....      --       --       --    2,156    3,107
  Cost of manufacturing..........   4,699    6,308    5,012    2,696    3,219
  Selling, general and
   administrative................   2,012    2,278    2,616    3,428    3,583
                                  -------  -------  -------  -------  -------
    Total costs and expenses.....   9,930   11,729   12,006   16,455   20,342
                                  -------  -------  -------  -------  -------
Operating income.................     594      938      232      521    1,712
Gains (realized and unrealized)
 on marketable securities .......      26       18       51       --       64
Interest expense, net............     (28)     (29)     (21)     (40)     (70)
Other income, net................      (1)      --       49       23      (50)
                                  -------  -------  -------  -------  -------
Income before taxes..............     591      927      311      504    1,656
Provision for taxes..............     208      357      151      123      674
                                  -------  -------  -------  -------  -------
Income from continuing
 operations......................     383      570      160      381      982
Loss from discontinued
 operations, net of taxes........      --     (149)      (2)      --       --
Loss on disposal of discontinued
 operations......................      --       --     (481)      --       --
                                  -------  -------  -------  -------  -------
    Net income (loss)............ $   383  $   421  $  (323) $   381  $   982
                                  =======  =======  =======  =======  =======
Per Share Data:
Basic earnings (loss) per share:
  Continuing operations.......... $  0.03  $  0.04  $  0.01  $  0.03  $  0.07
  Discontinued operations........      --    (0.01)   (0.03)      --       --
  Net income (loss) per share....    0.03     0.03    (0.02)    0.03     0.07
Weighted average common shares
 outstanding.....................  12,757   12,947   13,056   12,965   13,236
Diluted earnings (loss) per
 share:
  Continuing operations.......... $  0.03  $  0.04  $  0.01  $  0.03  $  0.07
  Discontinued operations........      --    (0.01)   (0.03)      --       --
  Net income (loss) per share....    0.03     0.03    (0.02)    0.03     0.07
Weighted average common shares
 outstanding.....................  12,757   12,947   13,056   12,965   13,236
Cash Flow Data:
  Operating activities, net...... $  (818) $   773  $    94  $    27  $   744
  Investing activities, net......  (1,067)     209     (209)    (468)       5
  Financing activities, net......   1,368        8     (197)      19      253
  Discontinued operations, net of
   tax...........................      --     (221)    (250)      --       --
                                  -------  -------  -------  -------  -------
    Net change in cash and cash
     equivalents................. $  (517) $   769  $  (562) $  (422) $ 1,002
                                  =======  =======  =======  =======  =======
</TABLE>

                                      14
<PAGE>

<TABLE>
<S>                                    <C>     <C>     <C>     <C>     <C>
Balance Sheet Data (at the end of
 period, includes acquisition of
 Petrocon in 2001):
Working capital....................... $ 1,958 $ 3,047 $ 3,306 $ 3,187 $ 6,657
Property, plant, and equipment, net...   1,044   1,051   1,070   1,404   5,123
Total assets..........................   5,368   7,929   5,914   7,052  38,286
Long-term debt........................     421     422     385     386  13,489
Capital Leases........................      --      --      --     144     198
Shareholders' equity..................   3,439   4,409   3,975   4,159  14,346
</TABLE>

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

   The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements
including the Notes thereto, included elsewhere in this Annual Report on Form
10-K. Footnote 16 to the Financial Statements contains segment information.

Overview

   The major source of revenues for the Company is from the engineering
services segment, which furnishes engineering consulting services to the
pipeline divisions of major integrated oil and gas companies. In 2001, the
engineering segment accounted for 64.5% of total revenues for the year. This
segment has been successful in obtaining more turnkey projects providing
expanded services in the engineering, procurement and construction phases of
major projects. The manufacturing segment revenue was 19.3% of the total
revenues for the 2001 year. The engineered systems segment accounted for 16.2%
of the total revenues.

   The Company generated a consolidated gross profit in 2001 of $5.3 million
or 24.0%, which is greater than the 23.3% margin in 2000. In 2001,
consolidated gross margin increased by $1.3 million from 2000. This increase
was attributable to the increased revenues in 2001.

Forward-Looking Statements

   Certain information contained in this Form 10-K Annual Report, the
Company's Annual Report to Shareholders, as well as other written and oral
statements made or incorporated by reference from time to time by the Company
and its representatives in other reports, filings with the Securities and
Exchange Commission, press releases, conferences, or otherwise, may be deemed
to be forward-looking statements with the meaning of Section 21E of the
Securities Exchange Act of 1934. This information includes, with limitation,
statements concerning the Company's future financial position and results of
operations; planned capital expenditures; business strategy and other plans
for future operations; the future mix of revenues and business; commitments
and contingent liabilities; and future demand and industry conditions.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. When used in this report, the
words "anticipate," "believe," "estimate," "expect," "may," and similar
expressions, as they relate to the Company and its management, identify
forward-looking statements could differ materially from the results described
in the forward-looking statements due to the risks and uncertainties set forth
with this Annual Report on Form 10-K generally.

                                      15
<PAGE>

Results of Operations

   The following table sets forth, for the periods indicated, certain
financial data derived from the Company's consolidated statements of
operations and indicates percentage of total revenue for each item (in
thousands):

<TABLE>
<CAPTION>
                                        Years ended December 31,
                                ---------------------------------------------
                                    1999           2000            2001
                                -------------  --------------  --------------
                                Amount    %    Amount     %    Amount     %
                                ------  -----  -------  -----  -------  -----
<S>                             <C>     <C>    <C>      <C>    <C>      <C>
Revenue:
  Engineering services......... $5,978   48.8  $10,740   63.3  $14,235   64.5
  Engineered systems...........  3,109   25.5    2,815   16.5    3,575   16.2
  Manufacturing................  3,151   25.7    3,421   20.2    4,244   19.3
                                ------  -----  -------  -----  -------  -----
    Total revenue.............. 12,238  100.0   16,976  100.0   22,054  100.0

Gross profit:
  Engineering services.........  1,600   26.8    2,565   23.9    3,803   26.7
  Engineered systems...........    650   20.9      659   23.4      468   13.1
  Manufacturing................    599   19.0      725   21.2    1,025   24.1
                                ------  -----  -------  -----  -------  -----
    Total gross profit.........  2,849   23.3    3,949   23.3    5,296   24.0
Selling, general and
 administrative expenses.......  2,616   21.4    3,428   20.2    3,584   16.2
                                ------  -----  -------  -----  -------  -----
Operating profit...............    233    1.9      521    3.1    1,712    7.8
Other income (expense).........     78    0.6      (17)  (0.1)     (56)  (0.3)
                                ------  -----  -------  -----  -------  -----
Income before provision for
 income
 taxes.........................    311    2.5      504    3.0    1,656    7.5
Provision for income taxes.....    151    1.2      123    0.8      674    3.1
                                ------  -----  -------  -----  -------  -----
Income from continuing
 operations....................    160    1.3       --     --       --     --
Loss from discontinuing
 operations....................     (2)    --       --     --       --     --
Loss on disposal of
 discontinued
 operations, net of $146 tax in
 1999..........................   (481)  (3.9)      --     --       --     --
                                ------  -----  -------  -----  -------  -----
Net income (loss).............. $ (323)  (2.6) $   381    2.2  $   982    4.4
                                ======  =====  =======  =====  =======  =====
</TABLE>

 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

   Total Revenue. Total revenue increased by $5.1 million or 29.9% from $17.0
million in 2000 to $22.1 million in 2001. Revenue from the engineering
services segment, which comprised 63.3% and 64.5% of total revenue in 2000 and
2001, respectively, increased by $3.5 million or 32.5%. This increase was due
to the award of several large fixed fee turnkey contracts, primarily one from
Russia during 2001 and additional revenue generated by the Tulsa operation.

   The engineered systems segment contributed 16.2% of total revenues in 2001.
Revenues increased from $2.8 million to $3.6 million in 2000 and 2001,
respectively. The increase in sales experienced earlier in the year due to
improved market conditions in the oil and gas markets somewhat slowed during
the fourth quarter.

   Revenue from the manufacturing segment comprised 20.2% and 19.3% of total
revenue in 2000 and 2001, respectively, increased by $0.8 million or 24.1%.
This increase is primarily attributable to orders from municipal customers for
the replacement of equipment damaged by Tropical Storm Allison earlier in
2001.

   Gross Profit. Gross profit increased by $1.3 million or 34.1% from $3.9
million in 2000 to $5.3 million in 2001. The gross margin for the engineering
services segment increased by $1.2 million or 48.2% from 2000 to 2001. The
engineering services segment's 2001 gross profit as a percentage of revenue
increased from 23.9% in 2000 to 26.7%. This was attributable to increased
margins on higher risk fixed fee projects begun during the 2001 period and to
rate increases on blanket contracts. Engineering services contributed 71.8% of
the total gross profits in 2001.

                                      16
<PAGE>

   The engineered systems segment gross margin as a percentage of sales
decreased from 23.4% in 2000 to 13.1% in 2001. This decrease was attributable
to increases in direct labor costs, other production costs, and adjustments to
raw material and work-in-process inventory that effect material costs. In
addition, write-offs of obsolete inventory contributed to lower gross profits.
Management believes the adjustments and write-offs will have a one-time effect
and will not occur in future periods.

   The manufacturing segment's gross profit increased by $0.3 million from
$0.7 million to $1.0 million or 21.2% to 24.1% from 2000 to 2001,
respectively. This increase is attributable to the manufacturing segment
bidding jobs with higher margins and to a substantial number of orders at
premium margins with expedited shipping dates during the 2001 period.

   Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.2 million or 4.5% from $3.4 million in
2000 to $3.6 million in 2001. However, due to the increase in revenues, as a
percentage of total revenue, selling, general and administrative expenses
decreased from 20.2% in 2000 to 16.2% in 2001.

   Operating Profit. Operating profit increased by $1.2 million or 228% from
$0.5 million in 2000 to $1.7 million in 2001. Operating profit increased as a
percentage of total revenue from 3.1% in 2000 to 7.8% in 2001. This increase
was brought about by the overall higher revenues and to a lower percentage of
selling, general and administrative expenses.

   Other Income and (Expense). Other expense increased from $17 thousand to
$56 thousand from 2000 to 2001, respectively. This increase in expense from
(0.1)% of revenues to (0.3)% of revenues was the result of increased
borrowings on the line of credit and related interest expense.

   Net Income. Income before provision for income taxes increased $1.2 million
or 228% from $0.5 million to $1.7 million from 2000 to 2001. This increase is
due to the substantial increase in revenues, increased gross margins, and
lower selling, general and administrative expenses. Net income after taxes
increased by $0.6 million or 158% from $0.4 million to $982 million from 2000
to 2001.

 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

   In October 1999, the acquisition of IDS FAB, which took place in November
1998 was rescinded. As a result of this, the operating results of IDS FAB were
reclassified as discontinued operations for 1998 and 1999. During the Fourth
Quarter of 2000, the Company combined the power systems and the product
segments into the engineered systems segment. The following comparisons
reflect these reclassifications and combinations.

   Total Revenue. Total revenue increased by $4.7 million or 38.7% from $12.2
million in 1999 to $17.0 million in 2000. Revenue from the engineering
segment, which comprised 48.8% and 63.3% of total revenue in 1999 and 2000,
respectively, increased by $4.8 million or 79.7%. This increase was due to the
award of several substantial fixed fee projects and to revenues generated by
additional projects secured by its Tulsa operation. The engineered systems
segment contributed 25.5% of total revenues for the year ended December 31,
1999 and 16.5% of total revenues in 2000. Revenue from the manufacturing
segment comprised 25.7% and 20.2% of total revenue in 1999 and 2000,
respectively, increased by $0.3 million or 8.6%.

   Gross Profit. Gross profit increased by $1.1 million or 38.6% from $2.8
million in 1999 to $3.9 million in 2000. The gross margin for the engineering
segment increased by $1.0 million or 60.3% from 1999 to 2000. This increase
was attributable to the substantial increase in revenues in 2000. The
engineering segment's 2000 gross profit as a percentage of revenue decreased
from 26.8% in 1999 to 23.9%. This was attributable to higher material costs
related to sizeable fixed fee projects completed during the 2000 period. The
engineered systems segment gross margin as a percentage of sales increased
from 20.9% in 1999 to 23.4% in 2000. The Company believes this was a result of
the combination of the power systems and product segments and the benefits
derived from this combination, such as reduced labor costs and improved
efficiencies. The gross margin for the

                                      17
<PAGE>

manufacturing segment increased by $0.1 million or 21.2% from 1999 to 2000.
This increase was due to the increase in 2000 revenues and to higher margins
during the last two quarters of the year brought about by improvements in
quoting jobs.

   Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.8 million or 31.0% from $2.6 million
in 1999 to $3.4 million in 2000. However, as a percentage of total revenue,
selling, general and administrative expenses decreased from 21.4% in 1999 to
20.2% in 2000.

   Operating Profit. Operating profit increased by $0.3 million or 124.3% from
$0.2 million in 1999 to $0.5 million in 2000. Operating profit increased as a
percentage of total revenue from 1.9% in 1999 to 3.1% in 2000. This increase
was brought about by the overall higher revenues and to a lower percentage of
selling, general and administrative expenses.

   Income from Continuing Operations. Income from continuing operations
increased by $221 thousand or 138.4% from $160 thousand in 1999 to $381
thousand in 2000. This was attributable to the overall increase in revenues
accompanied by a decrease in selling, general and administrative costs as a
percentage of revenue and to a lower provision for income taxes.

   Discontinued Operations. Discontinued operations contributed a loss of $2
thousand in 1999. In 2000, there was no loss from discontinued operations
generated. The loss on disposal of discontinued operations, as a result of the
rescission of the IDS FAB acquisition generated a one-time loss of $481
thousand in 1999.

Liquidity and Capital Resources

   Historically, the Company has satisfied its cash requirements principally
through operations and, as needed, by borrowings under its line of credit. Any
future decrease in demand for the Company's services or products would reduce
the availability of funds through operations. (See "Customers") With the
merger, the Company assumed $13.7 million of Petrocon's debt. As of December
31, 2001, IDSC had working capital of $6.7 million. In addition, IDSC had
long-term debt outstanding of $13.5 million. The long-term debt includes the
line of credit due in 2003 of $8.9 million, other long-term debt of $4.6
million and long-term capital leases of $0.2 million. Under the terms and
conditions of its senior credit facility, IDSC had a borrowing capacity of
approximately $3.4 million after consideration of the borrowing base
limitations. There are no other standby letters of credit, guarantee,
repurchase obligations, or other commitments. Listed below is a maturity
schedule.

   Maturities of long-term debt and leases (in thousands) are as follows:

<TABLE>
<CAPTION>
                                                                         Capital
                                                                  Debt   Leases
                                                                 ------- -------
   <S>                                                           <C>     <C>
   2002......................................................... $ 1,357  $ 48
   2003.........................................................   9,631    53
   2004.........................................................     601    59
   2005.........................................................   1,900    33
   2006 and thereafter..........................................      --     5
                                                                 -------  ----
     Total long-term obligations................................ $13,489  $198
                                                                 =======  ====
</TABLE>

   IDSC has obligations under non-cancelable operating leases for certain
equipment and office space expiring in various years through 2011. Minimum
annual rental commitments at December 31, 2001 (in thousands) are:

<TABLE>
   <S>                                                                   <C>
   2002................................................................. $1,147
   2003.................................................................    711
   2004.................................................................    645
   2005.................................................................    464
   2006 and thereafter..................................................  1,877
                                                                         ------
     Total operating expenses........................................... $4,844
                                                                         ======
</TABLE>

                                      18
<PAGE>

   IDSC has entered into a revolving credit facility with Fleet Capital
Corporation as part of the merger transaction with Petrocon. This credit
facility replaced a revolving credit note with Frost Bank and is senior to all
other debt and includes a line of credit that is limited to $15 million,
subject to borrowing base restrictions. This agreement also includes
continuance of the existing term loan in the amount of $0.5 million. The line
of credit is collateralized by eligible trade accounts receivable and
substantially all of the other assets of the Company and its subsidiaries.
Eligible accounts are any account arising in the ordinary course of IDSC or
subsidiary company's business which are due and unpaid no more than 90 days
after the original invoice date. IDSC's financial covenants under the senior
credit facility are based on monthly senior debt to EBITDA, cumulative fixed
charge ratio and cost in excess of billings maximum amount. Negative covenants
in the agreement require IDSC to have Fleet's written consent before making
capital expenditures which in the aggregate exceed $600,000, making sales
during any calendar year on a bill-and-hold basis in excess of $5,000,000, and
becoming a lessee under any operating lease of property if the aggregate
rentals payable during any current or future period of twelve consecutive
months would exceed $3,500,000. The agreement also limits collateral
eligibility on accounts arising out of fixed cost contracts to total unpaid
amount to $2,352,941 and on performance accounts with respect to accrued time
on cost reimbursable contracts to $3,500,000. At December 31, 2001, $8.9
million was outstanding on the line of credit and $0.5 million was outstanding
on the term loan. Both the line of credit and the term loan mature on June 14,
2003. The interest rate on the line of credit is one-quarter of one percent
plus prime (5.0 percent at December 31, 2001), and the commitment fee on the
unused line of credit is 0.375 percent. The interest rate on the term loan is
one-half of one percent plus prime. Monthly principal payments on the term
loan plus interest commenced January 1, 2002 and continue until maturity. The
remaining borrowings available under the line of credit as of December 31,
2001 were $3.4 million after consideration of the borrowing base limitations.

   The IDSC credit facility with Fleet Capital Corporation contains covenants
which require the maintenance of certain ratios, including cumulative fixed
charge coverage and various other covenants. The status of the covenants is
reported to Fleet monthly beginning with December 31, 2001 at which time,
there was no violation of the covenants. The breach of specific covenants or
other events shall constitute an "Event of Default" under the terms of the
agreement. Upon or at anytime after the occurrence and during the continuance
of an Event of Default, all or any portion of the obligations under the
agreement shall, at the option of Fleet, become at once due and payable. Also,
while an Event of Default exists, the principal amount of all loans shall bear
interest at a rate per annum equal to two percent (2.0%) above the current
rate.

   Prior to the merger, Petrocon had a promissory note with Equus II
Incorporated (Equus) with a balance of $6.5 million and a Series B junior
subordinated promissory note with Equus with a balance of $3.2 million. As
part of the merger, the Equus notes were restructured, reorganized, and
reduced through the payment of $2.0 million in cash, the issuance of $2.5
million in preferred stock and a new note issued for $3.0 million. The
remaining balance of $2.2 million was forgiven. This note is subordinate to
the Fleet credit facility.

   On December 20, 2001, at a special meeting of the shareholders of IDSC
5,000,000 shares of preferred stock were authorized for issuance. In addition
the shareholders approved the issuance of 2,500,000 shares of IDSC convertible
preferred stock to Equus entitled to receive cumulative dividends at an annual
rate of 8.0% payable in cash or in kind. The rights, preferences and
limitations of the convertible preferred stock are as follows:

  .  holders of the convertible preferred stock are entitled to receive a
     liquidation preference of $1.00 per share, subject to adjustments
     relating to future issuances of common stock or recapitalizations, if
     the Company liquidates, dissolves or winds up before any distribution or
     if payment is made for the benefit of the holders of our common stock;

  .  at any time, IDSC is entitled to redeem all or part of (but not less
     than 25% of the shares of convertible preferred stock then outstanding)
     of the convertible preferred stock outstanding at a price equal to the
     then effective liquidation preference plus accrued and unpaid dividends;

                                      19
<PAGE>

  .  at any time after the seventh anniversary date of the issuance of the
     convertible preferred stock, the holders of not less than two-thirds of
     the then outstanding convertible preferred stock may demand mandatory
     redemption of all (but not less than all) of the convertible preferred
     stock then outstanding at a price equal to the then effective
     liquidation preference plus accrued but unpaid dividends;

  .  holders of the convertible preferred stock have the right to vote on
     changes to the Articles of Incorporation that adversely effect them,
     and, as long as 750,000 shares of Series A Preferred Stock are
     outstanding, they also have the right to approve issuances of any senior
     shares;

  .  holders of the convertible preferred stock have the right, at such
     holders' option, to convert all or a portion of their convertible
     preferred stock into shares of our common stock at the rate of one share
     of common stock for each 2.38 shares of preferred stock. If all shares
     are converted, this would result in the issuance of 1,050,420, or
     approximately 4.41%, of our outstanding common stock after giving effect
     to the merger; and

  .  the shares of convertible preferred stock are subject to mandatory
     conversion at the option of IDSC if the closing price of IDSC common
     stock for 20 consecutive AMEX trading days exceeds a price of $3.00,
     with such price to be adjusted to reflect future issuances of common
     stock or re-capitalizations.

   The Company does not engage in trading in commodity contracts. Nor does it
have any foreign currency exposure.

 Cash Flow

   Operating activities provided net cash totaling $27 thousand and $744
thousand during 2000 and 2001, respectively. The Company's significant cash
flow from operating activities has increased significantly due to the growth
in the engineering segment.

   Investing activities used cash totaling $468 thousand in 2000 as compared
to $5 thousand being generated in 2001. In 2001, the Company's investing
activities consisted of redemption of municipal bonds net of purchasing
capital assets.

   Financing activities provided cash totaling $19 thousand and $253 thousand
during 2000 and 2001, respectively. The Company has additional financing
amounts available on its line of credit. The line of credit has been used
principally to finance accounts receivable and inventory purchases.

   The merger with Petrocon was a $23.8 million non-cash purchase transaction
made through the issuance of common and preferred stock and assumption of
debt.

   The Company believes that it has available necessary cash for the next 12
months. Cash and the availability of cash, could be materially restricted if
circumstances prevent the timely internal processing of invoices into
receivable accounts, if such accounts are not collected within 90 days of the
original invoice date, or if project mix shifts from cost reimbursable to
fixed costs contracts during significant periods of growth.

   If losses occur, IDSC may not be able to meet the monthly fixed charge
ratio covenant. In that event, if IDSC is unable to obtain a waiver or
amendment of the covenant, IDSC may be unable to borrow under the credit
facility and may have to repay all loans then outstanding under the credit
facility.

 Asset Management

   The Company's cash flow from operations has been affected primarily by the
timing of its collection of trade accounts receivable. The Company typically
sells its products and services on short-term credit terms and seeks to
minimize its credit risk by performing credit checks and conducting its own
collection efforts. The Company had trade accounts receivable increase from
$3.6 million to $14.9 million as of December 31, 2000

                                      20
<PAGE>

and 2001, respectively, primarily due to the acquisition of Petrocon. The
number of days' sales outstanding in trade accounts receivable was 76 days at
December 31, 2000 and December 31, 2001. Bad debt expenses have been
insignificant (approximately .01%) for each of these periods.

Related Party Transactions

   Petrocon leases office space from PEI Investments, a joint venture in which
Petrocon has a one-third interest, Mike Burrow (the Company's CEO) has a one-
third interest, and a shareholder who owns less than 1% of the Company's
common stock has a one-third interest. Rentals paid under these leases were
$0.1 million for 1999, 2000 and 2001. These leases expired in 2001 and have a
present annual rental rate of $0.1 million. Petrocon expects to renegotiate
the leases during 2002. The Company believes that this lease is at a
commercially reasonable rental rate.

Risk Management

   In performing services for its clients, the Company could potentially be
liable for breach of contract, personal injury, property damage, or
negligence, including professional errors and omissions. IDSC often agrees to
indemnify its clients for losses and expenses incurred by them as a result of
the Company's negligence and, in certain cases, the concurrent negligence of
the clients. The Company's quality control and assurance program includes a
control function to establish standards and procedures for performance and for
documentation of project tasks, and an assurance function to audit the control
function and to monitor compliance with procedures and quality standards. IDSC
maintains liability insurance for bodily injury and third-party property
damage, professional errors and omissions, and workers compensation coverage
which it considers sufficient to insure against these risks, subject to self-
insured amounts.

Critical Accounting Policies

   Revenue Recognition--The Company's revenues are composed of product sales
and engineering service revenue. The Company recognizes service revenue as
soon as such services are performed and product sales upon shipment to the
customer. The majority of its services are provided through cost-plus
contracts.

   Profits and losses on fixed-fee contracts are recorded on the percentage-
of-completion method of accounting, measured by the percentage-of-contract
costs incurred to date to estimated total contract costs for each contract.
Contract costs include amounts paid to subcontractors. Anticipated losses on
uncompleted construction contracts are charged to operations as soon as such
losses can be estimated. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined.

   The asset, "costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability "billings in excess of costs and estimated profits on
uncompleted contracts" represents amounts billed in excess of revenues
recognized.

   Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires the Company's management to make estimates
and assumptions that affect the amounts reported in these financial statements
and accompanying results. Actual results could differ from these estimates.
Examples include the estimates of uncollectability of our accounts receivable.
Management specifically analyzes the accounts receivable balances, historical
bad debts, customer credit-worthiness, and changes in our customers' payment
trends when evaluating the provisions for bad debts.

   Litigation--The Company is subject to legal proceedings and claims that
have arisen in the ordinary course of its business. Based on legal analysis
and advise from its attorneys, allowances have been made for any litigation
that Management of the Company believes could have a material adverse effect
on its financial condition or results of operations.

                                      21
<PAGE>

   Principles of Consolidation--The consolidated financial statements include
the accounts of Industrial Data Systems Corporation and all wholly owned
subsidiaries. Industrial Data Systems Corporation has no affiliates whose
ownership is less than 100%. All intercompany transactions and accounts are
eliminated in the consolidation.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

   As of December 31, 2000 and 2001, the Company did not participate in any
derivative financial instruments or other financial and commodity instruments
for which fair value disclosure would be required under SFAS No. 107. The
Company's investments at December 31, 2000 are carried on the Company's books
at amortized cost, which approximates fair market value. There are no
investments at December 31, 2001. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.

   As of December 31, 2000 and 2001, the Company did not participate in any
derivative financial instruments or other financial and commodity instruments
for which fair value disclosure would be required under SFAS No. 133.

   The Company has no market risk exposure in the areas of interest rate risk
because there is no investment portfolio as of December 31, 2001. Currently
the Company does not engage in foreign currency hedging activities nor is the
Company exposed to currency exchange rate fluctuation.

                                      22
<PAGE>

Item 8. Financial Statements and Supplementary Data

   The audited consolidated financial statements for Industrial Data Systems
Corporation, as of December 31, 1999, 2000 and 2001 are attached hereto and
made part hereof.

                                     INDEX

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
INDEPENDENT AUDITOR'S REPORT...............................................  24

CONSOLIDATED BALANCE SHEETS
 December 31, 2000 and 2001................................................ 25

CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31, 1999, 2000 and 2001..............................  26

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 Years Ended December 31, 1999, 2000 and 2001..............................  27

CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31, 1999, 2000 and 2001..............................  28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................  29
</TABLE>

                                       23
<PAGE>

                         INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders
Industrial Data Systems Corporation

   We have audited the accompanying consolidated balance sheets of Industrial
Data Systems Corporation as of December 31, 2000 and 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ending December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Industrial Data Systems Corporation and Subsidiaries as of December 31,
2000 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ending December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.

/s/ Hein + Associates llp
-------------------------------------
Hein + Associates LLP

Houston, Texas
March 7, 2002

                                      24
<PAGE>

                      INDUSTRIAL DATA SYSTEMS CORPORATION
                                AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           December 31, 2000 and 2001

<TABLE>
<CAPTION>
                                                           2000        2001
                        ASSETS                          ----------  -----------
<S>                                                     <C>         <C>
Current Assets:
  Cash................................................. $  242,592  $ 1,244,907
  Municipal bonds, at cost.............................    400,000           --
  Trade receivables, net...............................  3,555,933   14,908,069
  Inventory............................................    865,341      691,048
  Cost and estimated earnings in excess of billings on
   uncompleted contracts...............................    330,000      730,507
  Prepaid expenses and other...........................    190,369      740,670
                                                        ----------  -----------
    Total current assets...............................  5,584,235   18,315,201
Property and Equipment, net............................  1,404,017    5,123,115
Goodwill...............................................     18,450   14,513,806
Other Assets...........................................     45,563      333,567
                                                        ----------  -----------
    Total assets....................................... $7,052,265  $38,285,689
                                                        ==========  ===========

<CAPTION>
         LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                     <C>         <C>
Current Liabilities:
  Accounts payable and accrued expenses................ $1,720,683  $ 9,076,520
  Current portion of long-term debt....................     21,238    1,357,228
  Notes payable........................................    433,729      398,974
  Billings and estimated earnings in excess of costs on
   uncompleted contracts...............................         --      777,712
  Current portion of long-term leases..................     24,118       48,058
  Deferred income taxes................................     37,000           --
  Income taxes payable.................................    160,013           --
                                                        ----------  -----------
    Total current liabilities..........................  2,396,781   11,658,492
Long-term debt, net of current portion.................    365,368   12,131,582
Long-term leases, net of current portion...............    120,212      149,665
Non-current deferred tax liability.....................     11,000           --
                                                        ----------  -----------
    Total liabilities..................................  2,893,361   23,939,739

Commitments And Contingencies (Notes 9 and 18)

Shareholders' Equity:
  Preferred stock; $0.001 par value; 5,000,000 shares
   authorized; 0 and 2,500,000 issued and outstanding,
   respectively........................................         --        2,500
  Common stock; $0.001 par value; 75,000,000 shares
   authorized; 12,964,918 and 22,861,199 shares issued
   and outstanding, respectively.......................     12,965       22,862
  Notes receivable from shareholders...................   (196,500)          --
  Paid-in capital......................................  2,640,154   11,832,971
  Retained earnings....................................  1,702,285    2,487,617
                                                        ----------  -----------
    Total shareholders' equity.........................  4,158,904   14,345,950
                                                        ----------  -----------
    Total liabilities and shareholders' equity......... $7,052,265  $38,285,689
                                                        ==========  ===========
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       25
<PAGE>

                      INDUSTRIAL DATA SYSTEMS CORPORATION
                                AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                        -------------------------------------
                                           1999         2000         2001
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
Operating Revenues
  Engineering services................. $ 5,978,180  $10,739,874  $14,235,042
  Engineered systems...................   3,108,973    2,814,965    3,574,591
  Manufacturing........................   3,151,296    3,421,184    4,244,105
                                        -----------  -----------  -----------
    Total revenue......................  12,238,449   16,976,023   22,053,738
Direct Costs
  Engineering services.................   4,378,459    8,174,972   10,432,512
  Engineered systems...................   2,465,195    2,156,094    3,107,085
  Manufacturing........................   2,546,355    2,695,688    3,219,432
                                        -----------  -----------  -----------
    Total direct costs.................   9,390,009   13,026,754   16,759,029
                                        -----------  -----------  -----------
Gross Profit...........................   2,848,440    3,949,269    5,294,709
Selling, General, and Administrative
 Expenses..............................   2,615,922    3,427,778    3,583,032
                                        -----------  -----------  -----------
Operating Income.......................     232,518      521,491    1,711,677
  Interest expense.....................     (21,104)     (39,928)     (69,910)
  Other income and expenses............      99,540       22,083       13,695
                                        -----------  -----------  -----------
Income from Continuing Operations
 Before Provisions for Income Taxes....     310,954      503,646    1,655,462
Provision for Income Taxes.............     151,212      122,768      673,630
                                        -----------  -----------  -----------
  Income from continuing operations....     159,742      380,878      981,832
Loss from Discontinued Operations, net
 of tax................................      (1,972)          --           --
Loss on Disposal of Discontinued
 Operations............................    (481,085)          --           --
                                        -----------  -----------  -----------
Net income (loss)...................... $  (323,315) $   380,878  $   981,832
                                        ===========  ===========  ===========
Basic and Diluted Earnings Per Common
 Share
  Continuing operations................ $      0.01  $      0.03  $      0.07
  Discontinued operations..............       (0.03)          --           --
  Net income (loss)....................       (0.02)        0.03         0.07
Weighted Average Common Shares
 Outstanding...........................  13,055,535   12,964,918   13,236,049
</TABLE>


       See accompanying notes to these consolidated financial statements.

                                       26
<PAGE>

                      INDUSTRIAL DATA SYSTEMS CORPORATION
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                  Years Ended December 31, 1999, 2000 and 2001

<TABLE>
<CAPTION>
                          Preferred Stock     Common Stock      Additional                  Note         Total
                          ---------------- -------------------    Paid-in     Retained   Receivable  Shareholders'
                           Shares   Amount   Shares    Amount     Capital     Earnings   Stockholder    Equity
                          --------- ------ ----------  -------  -----------  ----------  ----------- -------------
<S>                       <C>       <C>    <C>         <C>      <C>          <C>         <C>         <C>
Balances, January 1,
 1999...................         -- $   -- 13,073,718  $13,074  $ 2,766,163  $1,644,722   $ (15,323)  $ 4,408,636
 Treasury stock
  Acquisition:
  Received 50,000 shares
   in rescission
   agreement............         --     --         --       --           --          --     (43,750)      (43,750)
  Purchase 40,000
   shares...............         --     --         --       --           --          --     (67,045)      (67,045)
 Retirement.............                     (108,800)    (109)    (126,009)         --     126,118            --
 Net loss...............         --     --         --       --           --    (323,315)         --      (323,315)
                          --------- ------ ----------  -------  -----------  ----------   ---------   -----------
Balances, December 31,
 1999...................         --     -- 12,964,918   12,965    2,640,154   1,321,407          --     3,974,526
 Reclassification of
  note receivable from
  stockholder...........         --     --         --       --           --          --    (196,500)     (196,500)
 Net income.............         --     --         --       --           --     380,878          --       380,878
                          --------- ------ ----------  -------  -----------  ----------   ---------   -----------
Balances, December 31,
 2000...................         --     -- 12,964,918   12,965    2,640,154   1,702,285    (196,500)    4,158,904
 Acquisition: Issued
  stock for purchase of
  Petrocon Engineering,
  Inc., net of
  registration costs....         --     --  9,800,000    9,800    6,627,054          --          --     6,636,854
 Acquisition: Issued
  stock for investment
  advisor...............         --     --     96,281       97       68,263          --          --        68,360
 Acquisition: 8%
  Preferred stock issued
  for forgiveness of
  debt..................  2,500,000  2,500         --       --    2,497,500          --          --     2,500,000
 Forgiveness of note
  receivable for
  purchase of option to
  acquire Company
  stock.................         --     --         --       --           --    (196,500)    196,500            --
 Net income.............         --     --         --       --           --     981,832          --       981,832
                          --------- ------ ----------  -------  -----------  ----------   ---------   -----------
Balances, December 31,
 2001...................  2,500,000 $2,500 22,861,199  $22,862  $11,832,971  $2,487,617   $      --   $14,345,950
                          ========= ====== ==========  =======  ===========  ==========   =========   ===========
</TABLE>



       See accompanying notes to these consolidated financial statements.

                                       27
<PAGE>

                      INDUSTRIAL DATA SYSTEMS CORPORATION
                                AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           ------------------------------------
                                              1999        2000         2001
                                           ----------  -----------  -----------
<S>                                        <C>         <C>          <C>
Cash Flows from Operating Activities:
 Net income (loss).......................  $ (323,315) $   380,878  $   981,832
 Adjustments to reconcile net income
  (loss) to net cash provided by
  operating activities:
  Depreciation and amortization..........     144,304      216,237      265,758
  Deferred income tax expense (benefit)
   from continuing operations............      (5,000)     (49,000)     319,154
  (Gain) on sale of investments..........     (50,909)          --      (64,223)
  Loss from discontinued operations......     483,057           --           --
  Changes in current assets and
   liabilities, net of acquisitions:
  Trade receivables......................    (583,747)  (1,345,098)  (1,010,414)
  Inventory..............................      91,289      (93,533)     174,292
  Trading securities.....................     427,556           --           --
  Costs and estimated earnings in excess
   of billings...........................          --           --       71,472
  Prepaid expenses and other.............          --      139,072      402,454
  Accounts payable.......................     436,699      553,986     (533,121)
  Other liabilities......................    (316,231)      11,663      240,656
  Income taxes receivable (payable)......    (210,000)     213,013     (104,151)
                                           ----------  -----------  -----------
   Net cash provided by operating
    activities...........................      93,703       27,218      743,709
                                           ----------  -----------  -----------
Cash Flows from Investing Activities:
 Purchase of property and equipment......    (208,923)    (367,753)    (459,068)
 Purchase of bonds.......................          --     (100,000)          --
 Redemption of bonds.....................          --           --      464,223
                                           ----------  -----------  -----------
   Net cash provided by (used in)
    investing activities.................    (208,923)    (467,753)       5,155
                                           ----------  -----------  -----------
Cash Flows from Financing Activities:
 Borrowings on line of credit............          --      384,831    1,114,300
 Payments on line of credit..............          --     (315,000)    (361,617)
 Notes receivable from shareholder.......          --      (13,500)          --
 Short-term borrowings (repayments)......    (146,014)          --           --
 Capital lease borrowings (repayments)...          --      (19,684)     (40,514)
 Long-term borrowings (repayments).......      16,545      (17,492)    (458,718)
 Purchase of treasury stock..............     (67,045)          --           --
                                           ----------  -----------  -----------
   Net cash provided by (used in)
    financing activities.................    (196,514)      19,155      253,451
                                           ----------  -----------  -----------
   Net cash used in discontinued
    operations...........................    (250,115)          --           --
                                           ----------  -----------  -----------
Net Change in Cash and Cash Equivalents..    (561,849)    (421,380)   1,002,315
Cash and Cash Equivalents, at beginning
 of year.................................   1,225,821      663,972      242,592
                                           ----------  -----------  -----------
Cash and Cash Equivalents, at end of
 year....................................  $  663,972  $   242,592  $ 1,244,907
                                           ----------  -----------  -----------
Non-Cash Transactions:
 Acquisition of Petrocon Engineering with
  issuance of common and preferred stock
  and assumption of debt.................  $       --  $        --  $23,805,675
 Purchase price adjustment--adjustment to
  liabilities and goodwill...............     121,649           --           --
 Treasury stock received in rescission
  transaction............................      43,750           --           --
 Insurance acquired with notes payable...          --      133,493      228,254
 Property and equipment acquired under
  capital lease..........................          --      166,083       53,393
Supplemental Cash Flow Information
 Cash paid during the year for--
  Interest...............................      68,709       92,296       83,213
  Income taxes...........................     415,580      220,000      263,780
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       28
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Background and Basis of Presentation

 Acquisition

   Effective December 31, 2001, Industrial Data Systems Corporation (IDSC or
the Company) completed the purchase of all outstanding stock of Petrocon
Engineering, Inc. (Petrocon), a Texas-based engineering support services
company, for an aggregate price of approximately $23,806,000. As a result of
the acquisition, IDSC is expected to have greater depth of capabilities that
can serve a broader range of clients, provide the ability to handle larger,
more diverse projects, and construction management and inspection services not
previously available to IDSC. IDSC paid for the transaction through the
issuance of 9,800,000 shares of common stock, issuance of preferred stock and
the assumption of long-term debt of Petrocon. The acquisition was accounted
for using the purchase method of accounting. The fair market value of
Petrocon's assets and liabilities has been included in the balance sheet as of
December 31, 2001. The purchase price and allocation are as follows (in
thousands):

<TABLE>
   <S>                                                                <C>
   Debt assumed...................................................... $13,737
   Fair value of common stock issued.................................   6,637
   Fair value of preferred stock issued..............................   2,500
   IDSC transaction costs (including 96,281 shares of common stock
    issued to financial advisor).....................................     932
                                                                      -------
     Total purchase price............................................ $23,806

   Fair value of assets acquired..................................... $17,662
   Fair value of liabilities assumed.................................  (8,370)
                                                                      -------
   Net assets acquired...............................................   9,292
   Total purchase price..............................................  23,806
                                                                      -------
     Purchase price over net assets--goodwill........................ $14,514
                                                                      =======
</TABLE>

   Goodwill will not be deductible for tax purposes.

   As part of the merger transaction, Petrocon entered into an agreement and
plan of reorganization with Equus II Incorporated (Equus). Certain
indebtedness owed by Petrocon to Equus was renewed, restructured, reduced, and
extended. Equus agreed to exchange notes worth $9.7 million including accrued
interest, for $2.5 million in preferred stock, a new note for $3.0 million,
receive a payment of $2.0 million, and forgive $2.2 million of the outstanding
balance. This new note is subordinated to the Company's term loan with Fleet.
(See Note 8)

   The unaudited proforma combined historical results, as if Petrocon had been
acquired at the beginning of fiscal 1999, 2000 and 2001, respectively, are
estimated to be:

<TABLE>
<CAPTION>
                                                      1999      2000    2001
                                                    ---------  ------- -------
                                                         (In thousands,
                                                     except per share data)
   <S>                                              <C>        <C>     <C>
   Net sales....................................... $  93,233  $85,320 $91,725
   Net income (loss) from continuing operations....   (14,698)   1,260   2,991
   Net earnings (loss) per share from continuing
    operations--basic and diluted..................     (0.40)    0.03    0.07
</TABLE>

   The proforma results include amortization of the intangibles presented
above and reduction of forgiven and restructured interest expense on debt. The
proforma results does not purport to be indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each
fiscal period presented, nor are they necessarily indicative of future
consolidated results.

                                      29
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Basis of Presentation

   The consolidated results of operations and the cash flows for the years
ended December 31, 1999, 2000 and 2001 reflect IDSC pre-merger operations.
Since purchase transactions are accounted for prospectively and the
acquisition occurred effective December 31, 2001, Petrocon's operations are
not reflected in the results of operations for the year ended December 31,
2001. The balance sheet as of December 31, 2001 and the changes in
shareholders' equity do reflect the acquisition of Petrocon. All significant
intercompany balances and transactions have been eliminated.

2. Summary of Significant Accounting Policies

   Organization--Brief descriptions of the active companies included in the
consolidated group follow:

    Industrial Data Systems Corporation (IDSC)--a Nevada holding company.

    IDS Engineering, Inc. (IED)--a Texas corporation that provides general
    engineering services for industrial customers in the pipeline industry.

    Thermaire, Inc. dba Thermal Corporation--manufactures and fabricates
    air handling equipment for commercial heating, ventilation, and cooling
    systems.

    Constant Power Manufacturing, Inc. (CPM)--fabricates industrial grade
    uninterruptible electrical power systems and battery chargers and
    microprocessor systems to be sold to the high-end industrial market.

    Industrial Data Systems, Inc. (IDS)--provides the corporate oversight
    function.

    Petrocon Engineering, Inc. (PEI)--provides general engineering services
    for industrial customers primarily along the Texas Gulf Coast with
    specialties in the areas of distributive control systems, power
    distribution, process design and process safety management.

    Petrocon Engineering of Louisiana, Inc. (PEI-LA)--extends PEI's service
    area into southwest Louisiana.

    Petrocon Systems, Inc. (PSI)--provides design, fabrication,
    installation, start-up, checkout and maintenance of analyzers and PLC
    systems.

    Petrocon Technologies, Inc. (PTI)--inactivated in 1999, provided
    development, sales and marketing focused on Petrocon's licensed hybrid
    low NOX process.

    Petrocon Construction Resources, Inc. (PCR)--provides technical,
    inspection and operator personnel within client facilities.

    Triangle Engineers and Constructors, Inc. (TE&C)--provided engineering
    services and construction management services, inactivated in 2002.

    RPM Engineering, Inc. (RPM)--provides engineering services in southeast
    Louisiana.

   Cash and Cash Equivalents--Cash and cash equivalents include cash in bank
and investments in highly liquid money market mutual funds with maturity of
three months or less at December 31, 2001. Also included are certain
restricted funds in the amount of less than $0.1 million invested in Rabbi
trusts as of December 31, 2001. The Company's banking system provides for
daily replenishment of major bank accounts for check-clearing requirements.
Accordingly, there were negative book balances of $1.5 million December 31,
2001. Such balances result from outstanding checks that have not yet been paid
by the bank and are reclassified to accounts payable and accrued expenses in
the accompanying consolidated balance sheets.

                                      30
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Inventory--Inventory is composed primarily of raw materials and component
parts (computer components, sheet metal, copper tubing, blower fans and fan
motors) and is carried at the lower of cost or market value, with cost
determined on the first-in, first-out ("FIFO") method of accounting.

   Revenue Recognition--The Company's revenues are composed of product sales
and engineering service revenue. The Company recognizes service revenue as
soon as such services are performed and product sales upon shipment to the
customer. The majority of its services are provided through cost-plus
contracts.

   Profits and losses on fixed-fee contracts are recorded on the percentage-
of-completion method of accounting, measured by the percentage-of-contract
costs incurred to date to estimated total contract costs for each contract.
Contract costs include amounts paid to subcontractors. Anticipated losses on
uncompleted construction contracts are charged to operations as soon as such
losses can be estimated. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined.

   The asset, "costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability "billings in excess of costs and estimated profits on
uncompleted contracts" represents amounts billed in excess of revenues
recognized.

   Marketable Securities--Marketable securities to be held to maturity are
stated at amortized cost. Marketable securities classified as available-for-
sale are stated at market value, with unrealized gains and losses reported as
a separate component of shareholders' equity, net of deferred income taxes. If
a decline in market value is determined to be other than temporary, any such
loss is charged to earnings. Trading securities are stated at fair value, with
unrealized gains and losses recognized in earnings. The Company records the
purchases and sales of marketable securities and records realized gains and
losses on the trade date. Realized gains or losses on the sale of securities
are recognized on the specific identification method. As of 2001, the Company
no longer holds or issues financial instruments for trading purposes nor does
it hold interest rate, leveraged, or other type derivative instruments.

   Property and Equipment--All property and equipment is stated at cost,
adjusted for accumulated depreciation. Depreciation on most property and
equipment, other than land, building and improvements, is calculated using a
straight-line method over the estimated useful lives of the related assets.
Depreciation on buildings is calculated using a straight-line method over the
useful life, which is 40 years. Leasehold improvements are amortized over the
term of the related lease.

   Goodwill--For acquisitions prior to June 30, 2001, the Company capitalized
the excess purchase price over the fair value of net assets acquired
(goodwill) and amortized this intangible asset on a straight-line basis over
5-10 years. Since the acquisition occurred after June 30, 2001, the Company
will follow the newly released Statement of Financial Accounting Standards
(SFAS) No. 141 and SFAS No. 142, Business Combinations and Goodwill and Other
Intangible Assets. These pronouncements cease amortization of goodwill and
provide for annual testing of impairment. (See Note 4).

   Long-lived Assets--The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. The Company has not identified
any such impairment losses.

   Income Taxes--The Company accounts for deferred income taxes in accordance
with the asset and liability method, as prescribed in SFAS No. 109, Accounting
for Income Taxes, whereby deferred income taxes are

                                      31
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement and tax bases of its existing assets and liabilities.
The provision for income taxes represents the current tax payable or
refundable for the period plus or minus the tax effect of the net change in
the deferred tax assets and liabilities during the period.

   Stock Based Compensation--The Company applies SFAS No.123, Accounting for
Stock-Based Compensation, which encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on fair value. The Company has elected
to record compensation expense in accordance with Accounting Principles Board
(APB) Opinion No. 25, which calculates compensation as the difference between
an option's exercise price and the current price of the underlying stock. (For
equity instruments issued to employees, see Note 11 which contains required
pro forma disclosure of the impact of adopting SFAS No. 123)

   Earnings Per Share--Basic earnings per share was computed by dividing net
income by the weighted average common shares outstanding for the years ended
December 31, 1999, 2000 and 2001. Diluted earnings per share are computed
including the impact of all potentially dilutive securities. Potentially
dilutive securities that have not been included in the computation of earnings
per share include 200,000 options exercisable at $1.00 to $1.25 in 1999 and
2000, and 305,102 warrants exercisable at $6.15 and 1,064,244 options
exercisable at $0.96 to $6.24 in 2001. The following table sets forth the
shares outstanding for the earnings per share calculations for the years ended
December 31, 1999, 2000 and 2001.

<TABLE>
<CAPTION>
                                                1999        2000       2001
                                             ----------  ---------- ----------
   <S>                                       <C>         <C>        <C>
   Common stock issued, beginning of year... 13,078,718  12,964,918 12,964,918
   Weighted average common stock issued.....         --          --    271,131
   Weighted average common stock retired....    (23,183)         --         --
                                             ----------  ---------- ----------
   Shares used in computing basic and
    diluted earnings per share.............. 13,055,535  12,964,918 13,236,049
                                             ==========  ========== ==========
</TABLE>

   Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires the Company's management to make estimates
and assumptions that affect the amounts reported in these financial statements
and accompanying results. Actual results could differ from these estimates.

   Fair Value of Financial Instruments--The fair value of financial
instruments, primarily accounts receivable, notes receivable, bonds, accounts
payable and notes payable, closely approximate the carrying values of the
instruments due to the short-term maturities of such instruments.

   Comprehensive Income--Comprehensive income is defined as all changes in
shareholders' equity, exclusive of transactions with owners, such as capital
investments. Comprehensive income includes net income or loss, changes in
certain assets and liabilities that are reported directly in equity, such as
translation adjustments on investments in foreign subsidiaries and certain
changes in minimum pension liabilities. The Company's comprehensive income
(loss) is equal to net income (loss) for all periods presented in these
financial statements.

   Reclassifications--Amounts in prior years' financial statements are
reclassified as necessary to conform with the current year's presentation.
Such reclassifications had no effect on net income.

                                      32
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3. Notes Receivable--Stockholder

   In anticipation of the merger, the Company forgave a note receivable due
from the majority stockholder of the Company with principal and accrued
interest totaling $196,500. The note receivable was unsecured, due on demand
with an interest rate of 9% per annum. During the year ended December 31,
2000, the Company recognized interest income of approximately $13,500 on these
notes. The note receivable and accrued interest had been classified as a
reduction of shareholders' equity. (See Note 14 for disposition of this note.)

4. Recent Accounting Pronouncements

   In June 2001, SFAS No. 141 Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets were issued. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for under
the purchase method. It also establishes specific criteria for recognition of
intangible assets separately from goodwill and required unallocated negative
goodwill to be written off immediately as an extraordinary gain, rather than
deferred and amortized. SFAS No. 142 changes the accounting for goodwill and
other intangible assets with the most significant changes being: 1) goodwill
and intangible assets with indefinite lives will no longer be amortized; 2)
goodwill and intangible assets with indefinite lives will be tested for
impairment at least annually; and 3) the amortization period for intangible
assets with finite lives will no longer be limited to 40 years. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. At this time,
the Company cannot reasonably estimate the effect of the adoption of this
statement on its financial position, results of operations, or cash flows.

   SFAS No. 143 Asset Retirement Obligations was issued in June 2001,
establishing the accounting requirements for retirement obligations associated
with tangible long-lived assets, including 1) timing of the liability
recognition, 2) initial measurement of the liability, 3) allocation of asset
retirement cost to expense, 4) subsequent measurement of the liability, and 5)
financial statement disclosures. The statement requires that an asset
retirement cost should be capitalized as part of the cost of the related long-
lived asset and subsequently allocated to expense using a systematic and
rational method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS No. 143 will be reported as a cumulative effect of a change
in accounting principle. Management does not believe that the effect of the
adoption of this statement will have a material impact on its financial
position, results of operations, or cash flows.

   In October 2001, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets was issued, replacing SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The new pronouncement requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include
amounts for operating losses that have not yet occurred. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity
in a disposal transaction. The provisions of Statement No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and generally, are to be applied prospectively. Management does not
believe that the effect of the adoption of this statement will have a material
impact on its financial position, results of operations, or cash flows.

                                      33
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. Property and Equipment

   Property and equipment consisted of the following at December 31, 2000 and
2001 (in thousands):

<TABLE>
<CAPTION>
                                                                  2000    2001
                                                                 ------  ------
   <S>                                                           <C>     <C>
   Land......................................................... $   90  $  590
   Building.....................................................    605   2,557
   Computer equipment and software..............................    493     733
   Shop equipment...............................................    332     693
   Furniture and fixtures.......................................    215   1,050
   Building and leasehold improvements..........................    167     222
   Autos and trucks.............................................     --      27
                                                                 ------  ------
                                                                  1,902   5,872
   Accumulated depreciation and amortization....................   (498)   (749)
                                                                 ------  ------
   Property and equipment, net.................................. $1,404  $5,123
                                                                 ======  ======
</TABLE>

6. Detail of Certain Balance Sheet Accounts

   The components of trade receivables as of December 31, 2000 and 2001 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                               2000    2001
                                                              ------  -------
   <S>                                                        <C>     <C>
   Amounts billed at December 31............................. $3,573  $14,224
   Amounts billable at December 31, billed January of the
    following year...........................................     --      780
   Retainage.................................................     --      175
   Less--Allowance for uncollectible accounts................    (17)    (271)
                                                              ------  -------
     Trade receivables, net.................................. $3,556  $14,908
                                                              ======  =======
</TABLE>

   The components of accounts payable and accrued expenses as of December 31,
2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                                   2000   2001
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Accounts payable.............................................. $1,333 $3,678
   Bank overdraft................................................     --  1,468
   Accrued vacation..............................................    159  1,154
   Accrued compensation..........................................    149    566
   Reserve for legal exposures (Note 18).........................     --    950
   Other.........................................................     80  1,260
                                                                  ------ ------
   Accounts payable and accrued expenses......................... $1,721 $9,076
                                                                  ====== ======
</TABLE>

                                      34
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. Fixed-Fee Contracts

   Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at December 31, 2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                              2000     2001
                                                             -------  -------
<S>                                                          <C>      <C>
Costs incurred on uncompleted contracts..................... $ 1,745  $ 7,293
Estimated earnings on uncompleted contracts.................   1,004    1,091
                                                             -------  -------
Earned revenues.............................................   2,749    8,384
Less billings to date.......................................  (2,419)  (8,431)
                                                             -------  -------
Net cost and estimated earnings in excess (under) billings
 uncompleted contracts...................................... $   330  $   (47)
                                                             =======  =======
Costs and estimated earnings in excess of billings on
 uncompleted contracts...................................... $   330  $   731
Billings in excess of costs and estimated earnings on
 uncompleted contracts......................................      --     (778)
                                                             -------  -------
Net cost and estimated earnings in excess (under) billings
 uncompleted contracts...................................... $   330  $   (47)
                                                             =======  =======
</TABLE>

8. Line of Credit and Debt

   Effective December 31, 2001 as part of the merger, IDSC entered into a
financing arrangement with Fleet whereby all of Petrocon's outstanding debt
(the Credit Facility comprised of a line of credit and a term loan), was
refinanced. The new loan agreement positions the Fleet debt as senior to all
other debt and includes a line of credit limited to $15.0 million, subject to
borrowing base restrictions and a term loan in the amount of $5.0 million. The
credit facility is collateralized by substantially all the assets of the
Company. At December 31, 2001, $8.9 million was outstanding on the line of
credit and $0.5 million was outstanding on the term loan. Both the line of
credit and the term loan mature on June 14, 2003. The interest rate on the
line of credit is one quarter of one percent plus prime (5.0 percent at
December 31, 2001), and the commitment fee on the unused line of credit is
0.375 percent. The interest rate on the term loan is one-half of one percent
plus prime (5.25 percent at December 31, 2001). Monthly principal payments on
the term loan plus interest commenced January 1, 2002 and continue until
maturity. The remaining borrowings available under the line of credit as of
December 31, 2001, were $3.4 million after consideration of the borrowing base
limitations. The Company's Credit Facility contains covenants which require
the maintenance of certain ratios, including cumulative fixed charge coverage
and specified levels of certain other items including average borrowing
availability and various other covenants. This Credit Facility replaced a
revolving credit note that was collateralized with accounts receivable and
inventory of the Company. The previous note had a balance at December 31, 2000
of $386,000 with interest at prime plus 0.5% (10% at December 31, 2000).

                                      35
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As part of the merger consideration, Petrocon's pre-merger debt with Equus
was reorganized, restructured and reduced. Equus agreed to exchange notes
worth $9.7 million including accrued interest for $2.5 million in preferred
stock, a payment of $2.0 million, a forgiveness of $2.2 million, and a new
note for $3.0 million. The new note has interest at 9.5 percent per annum with
interest paid quarterly beginning February 15, 2002 and principal payments
being repaid quarterly beginning August 15, 2002. This note is subordinated to
the Company's term loan with Fleet. (Amounts below in thousands)

<TABLE>
<CAPTION>
                                                                 2000   2001
                                                                 ----  -------
<S>                                                              <C>   <C>
Fleet--
  Line of credit, prime plus 0.25% (5.00% at December 31, 2001),
   maturing in 2003............................................. $ --  $ 8,894
  Term loan, interest at prime plus 0.50% (5.25% at December 31,
   2001), due in monthly installments of $60, maturing through
   2003.........................................................   --      523
Equus--
  Note payable, interest at 9.5%, principal due quarterly in
   installments of $110, maturing through 2004..................   --    3,000
Frost--
  Line of credit, prime plus 0.5% (10% at December 31, 2000),
   maturing April 24, 2002, paid in full in 2001................  386       --
Vendors--
  Notes payable, interest at 8%, due monthly in decreasing
   amounts starting at $115, maturing in August 2004............   --    1,072
                                                                 ----  -------
                                                                  386   13,489
Less--current maturities........................................  (21)  (1,357)
                                                                 ----  -------
  Long-term debt, net of current portion........................ $365  $12,132
                                                                 ====  =======
</TABLE>

   Maturities of debt as of December 31, 2001, are as follows (in thousands):

<TABLE>
<CAPTION>
   Years Ending December 31,
   -------------------------
   <S>                                                                  <C>
     2002.............................................................. $ 1,357
     2003..............................................................   9,631
     2004..............................................................     601
     2005..............................................................   1,900
                                                                        -------
     Total of debt..................................................... $13,489
                                                                        =======
</TABLE>

   Current notes payable include a note which finances commercial insurance on
a short-term basis, with a balance of $275,000 and $434,000 as of December 31,
2000 and 2001, respectively.

9. Capital Leases and Operating Leases

   The Company leases equipment and office space under long-term lease
agreements. Some of the leases covering certain pieces of equipment, which
expire over the next five years, are classified as capital leases. Property
and equipment includes equipment under capital leases of approximately
$166,000 and $273,000, less accumulated amortization of approximately $18,000
and $41,000 at December 31, 2000 and 2001, respectively.

                                      36
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The future minimum lease payments for capital leases and for operating
leases (with initial or remaining non-cancelable terms in excess of one year)
as of December 31, 2001 follows below (in thousands):

<TABLE>
<CAPTION>
   Years Ending December 31,                                   Capital Operating
   -------------------------                                   ------- ---------
   <S>                                                         <C>     <C>
     2002.....................................................  $ 67    $1,147
     2003.....................................................    67       711
     2004.....................................................    65       645
     2005.....................................................    45       464
     2006.....................................................     5     1,877
                                                                ----    ------
   Total minimum lease payments...............................   249    $4,844
                                                                        ======
   Less amount representing interest..........................   (51)
                                                                ----
   Present value of net minimum lease payments................   198
   Less current maturities....................................    48
                                                                ----
   Principal amount of lease obligations......................  $150
                                                                ====
</TABLE>

   Rental expense for all operating leases, including those with terms less
than one year, amounted to approximately $109,000, $275,000 and $364,000 for
the years ended December 31, 1999, 2000 and 2001, respectively.

10. Profit Sharing Plan

   The Company has a 401(k) profit sharing plan (the "Plan") covering
substantially all employees. Under the terms of the Plan, the Company makes
matching contributions equal to 50% of employee contributions up to 6% of
employee compensation, as defined. Employees may make contributions up to 15%
of their compensation, subject to certain maximum contribution limitations.
The employer's contributions vest on a schedule of 25% per year for 4 years.
The Company made contributions to the Plan of approximately $120,000, $127,000
and $194,000, respectively, for the years ended December 31, 1999, 2000 and
2001, respectively.

11. Stock Option Plan

   The Company has a nonqualified stock option plan that provides for the
issuance of options up to 1,400,000 shares of common stock. The Option Plan
provides for grants of non-statutory options, incentive stock options,
restricted stock awards and stock appreciation rights. No compensation cost
has been recognized for grants under the Option Plan because the exercise
price of the options granted to employees equals the market price of the stock
on the date of the grants. If compensation cost at the grant date of the
Option Plan been determined based on the fair value consistent with the
provisions of SFAS No. 123, the Company's pre-tax income in 1999, 2000 and
2001 would not have changed significantly.

   Effective with the merger, over 1,700,000 shares were placed in escrow by a
group of significant Petrocon shareholders under the Option Escrow Agreement.
Under terms of this agreement, shares issued by IDSC under its option plan due
to the exercise of converted Petrocon options, will be replaced by shares from
the Option Escrow. The Option Escrow Agreement has the effect of preventing
dilution to IDSC shareholders due to exercise of converted Petrocon options.
The Option Escrow Agreement stays in effect until all existing options have
been exercised, terminated, or cancelled.

   The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1999, 2000 and 2001 dividend yield of
0%, expected volatility of 94%, 123% and 86%, risk-free interest rates of 6%
and 5.75%, and expected lives of two years.

                                      37
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Each option granted in 1999 and 2000 has an exercise price of $1.25 or
$1.00 per share, respectively, and vest over 48 months. The options granted in
2001 have exercise prices ranging from $0.96 to $6.24. The maximum term of the
options is ten years.

   The following table summarizes stock option activity:

<TABLE>
<CAPTION>
                                            Options at Exercise Prices
                                      ---------------------------------------
                                      $0.96-$1.25  $4.26   $6.24     Total
                                      ----------- ------- ------- -----------
<S>                                   <C>         <C>     <C>     <C>
Outstanding, January 1, 1999.........        --        --      --          --
  Granted............................   200,000        --      --     200,000
  Canceled or expired................        --        --      --          --
  Exercised..........................        --        --      --          --
                                        -------   ------- ------- -----------
Outstanding, December 31, 1999.......   200,000        --      --     200,000
  Granted............................    66,000        --      --      66,000
  Canceled or expired................   (40,000)       --      --     (40,000)
  Exercised..........................        --        --      --          --
                                        -------   ------- ------- -----------
Outstanding, December 31, 2000.......   226,000        --      --     226,000
  Granted............................    10,000        --      --      10,000
  Granted in connection with a
   merger............................   733,030   129,082 202,131   1,064,243
  Canceled or expired................   (27,500)       --      --     (27,500)
  Exercised..........................        --        --      --          --
                                        -------   ------- ------- -----------
Outstanding, December 31, 2001.......   941,530   129,082 202,131   1,272,743
Exercisable at December 31, 2001.....   507,807   129,082 121,945     758,834
Available for grant at December 31,
 2001................................                                 127,257
Weighted-average fair value of
 options, granted in 2001............                             $0.03-$0.29
Weighted-average fair value of
 options, granted in 1999 and 2000...                             $0.42-$0.43
Weighted-average exercise price at
 December 31, 2001...................                                   $1.84
Weighted-average remaining life of
 options outstanding at December 31,
 2001................................                                2.55 yrs
</TABLE>

12. Related-Party Transactions

   Petrocon leases office space from PEI Investments, a joint venture in which
Petrocon has a one-third interest, Mike Burrow (the Company's CEO) has a one-
third interest, and a shareholder who owns less than 1% of the Company's
common stock has a one-third interest. Rentals paid under these leases were
$0.1 million for 1999, 2000 and 2001. These leases expired in 2001 and have a
present annual rental rate of $0.1 million. Petrocon expects to renegotiate
the leases during 2002.

13. Concentration of Credit Risk and Major Customers

   The Company provides pipeline engineering and fabricated systems and
services primarily to major integrated oil and gas companies throughout the
world. It also fabricates power systems and battery chargers, and manufactures
air handling equipment for air conditioning and heating systems to commercial
companies primarily in the southern states. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company assesses its credit risk and provides an allowance for doubtful
accounts for any accounts which it deems doubtful for collection.

                                      38
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. The Company performs ongoing credit
evaluations as to the financial condition of its customers. Generally, no
collateral is required.

   For the years ended December 31, 1999, 2000 and 2001, the Company had sales
in the engineering segment totaling approximately $3.5 million, $4.2 million,
and $5.4 million to one, two and two major customers, respectively, which
represent approximately 25% of total revenues each year. At December 31, 2000
and 2001, the Company had amounts due from three and two customers who
individually had amounts due in excess of 10% of trade receivables totaling
$1.6 million and $3.2 million, respectively.

14. Shareholders' Equity

   On December 20, 2001, a special meeting of the shareholders of IDSC was
held to approve an amendment to the articles of incorporation creating a class
of preferred stock with 5,000,000 shares authorized for issuance and to adopt
the Agreement and Plan of Merger between IDSC and Petrocon including the
issuance of 9,800,000 shares of common stock to Petrocon's shareholders. In
addition, the shareholders approved the issuance of 2,500,000 shares of IDSC
preferred stock to Equus and 96,281 shares of IDSC common stock to the
Company's financial advisor. The aggregate purchase price was approximately
$23,806,000 including transaction expenses and assumption of debt. The common
stock was valued at $0.71 per share, which is the average price of IDSC common
stock three days prior to and subsequent to the announcement of the merger.
Par value for the preferred stock was $0.001 with a fair value of $1.00 per
share.

   At the May 14, 2001 meeting, in anticipation of the merger, the board
approved the forgiveness of $196,500 in amounts owed the Company by a
shareholder in exchange for options to buy back Company common stock as part
of the Option Pool Agreement, which terminates in 2006.

15. Federal Income Taxes

   The components of income tax expense (benefit) were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                 Years Ended
                                                                 December 31,
                                                                ----------------
                                                                1999  2000  2001
                                                                ----  ----  ----
   <S>                                                          <C>   <C>   <C>
   Current:
     Federal................................................... $145  $139  $220
     State.....................................................   11    33   135
                                                                ----  ----  ----
                                                                 156   172   355
   Deferred....................................................   (5)  (49)  319
                                                                ----  ----  ----
     Tax provision............................................. $151  $123  $674
                                                                ====  ====  ====
</TABLE>

                                      39
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The components of the Company's deferred tax liability consisted of the
following at December 31, 2000 and 2001 (in thousands):

<TABLE>
<CAPTION>
                                                                  2000   2001
                                                                  ----  -------
   <S>                                                            <C>   <C>
   Deferred tax asset:
     Allowance for doubtful accounts............................. $  6  $    92
     Net operating loss from prior ownership change..............   --    1,200
     Accruals not yet deductible for tax purposes................   --      397
     Valuation allowance.........................................   --   (1,621)
                                                                  ----  -------
       Net deferred tax assets...................................    6       68
   Deferred tax liabilities:
     Tax accounting change from cash basis to accrual basis--
      CPM Acquisition............................................  (43)      --
     Depreciation................................................  (11)     (68)
                                                                  ----  -------
       Deferred tax (liability) asset, net....................... $(48) $    --
                                                                  ====  =======
</TABLE>

   The following is a reconciliation of expected to actual income tax expense
from continuing operations (in thousands):

<TABLE>
<CAPTION>
                                                                1999 2000  2001
                                                                ---- ----  ----
   <S>                                                          <C>  <C>   <C>
   Federal income tax expense at 34%........................... $106 $129  $563
   State and foreign taxes.....................................   10   21    83
   Nondeductible expenses......................................    3    9    28
   Other.......................................................   32  (36)   --
                                                                ---- ----  ----
                                                                $151 $123  $674
                                                                ==== ====  ====
</TABLE>

   The Company benefited from a Petrocon net operating loss carryforward of
approximately $1,000,000 in the calculation of current tax expense. The
Company has additional net operating loss carryforward of approximately
$3,530,000 that are subject to limitations on utilization due to by prior
ownership changes. The Company has established a valuation allowance on the
entire net operating loss due to uncertainty of the ultimate realization of
this asset.

   The Company recorded a valuation allowance of $1,621,000 as of December 31,
2001.

16. Segment Information

   The Company operates in three business segments: (1) engineering consulting
services primarily to major integrated oil and gas companies; (2) engineered
systems, uninterruptible power systems, battery chargers and industrial grade
computer systems for specialty applications; and (3) manufacturing of air
handling equipment for commercial heating, ventilation and cooling systems.
Sales, operating income, identifiable assets, capital expenditures and
depreciation set forth in the following table are the results of these
segments. The amount in corporate and the corporate segment includes those
activities that are not allocated to the operating segments.

                                      40
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Segment information for the years 1999, 2000 and 2001 was as follows (in
thousands):

<TABLE>
<CAPTION>
                                        1999
   -------------------------------------------------------------------------------
                            Engineering Engineered
                             Services    Systems   Manufacturing Corporate  Total
                            ----------- ---------- ------------- --------- -------
   <S>                      <C>         <C>        <C>           <C>       <C>
   Net sales from external
    customers..............   $ 5,978     $3,109      $3,151      $    --  $12,238
   Operating profit
    (loss).................       790        120         (38)        (639)     233
   Depreciation and
    amortization...........        50         36          58           --      144
   Tangible assets.........     1,735      2,409       1,719           51    5,914
   Capital expenditures....       121         --          88           --      209

<CAPTION>
                                        2000
   -------------------------------------------------------------------------------
                            Engineering Engineered
                             Services    Systems   Manufacturing Corporate  Total
                            ----------- ---------- ------------- --------- -------
   <S>                      <C>         <C>        <C>           <C>       <C>
   Net sales from external
    customers..............   $10,740     $2,815      $3,421      $    --  $16,976
   Operating profit
    (loss).................     1,366        207         (24)      (1,028)     521
   Depreciation and
    amortization...........        96         36          84           --      216
   Tangible assets.........     3,788      1,076       1,600          588    7,052
   Capital expenditures....       316         28          24           --      368

<CAPTION>
                                        2001
   -------------------------------------------------------------------------------
                            Engineering Engineered
                             Services    Systems   Manufacturing Corporate  Total
                            ----------- ---------- ------------- --------- -------
   <S>                      <C>         <C>        <C>           <C>       <C>
   Net sales from external
    customers..............   $14,235     $3,575      $4,244      $    --  $22,054
   Operating profit
    (loss).................     1,571        (65)        277          (71)   1,712
   Depreciation and
    amortization...........       116          4          93           53      266
   Tangible assets.........    18,389      2,152       2,299          932   23,772
   Capital expenditures....       291         70         155           65      581
</TABLE>

17. Discontinued Operations

   On October 28, 1999, the Company entered into a settlement agreement with
the former owner of IDS FAB to rescind the original acquisition agreement
dated November 1, 1998. As a result of the settlement agreement, the Company
received the originally issued 50,000 shares of its common stock, valued at
$43,750 at the date of the rescission, back from the former owner of IDS FAB
and transferred the stock of IDS FAB to the former owner. All assets and
liabilities of IDS FAB were transferred back to and assumed by the former
owner of IDS FAB.

   In the first two fiscal quarters of the year ended December 31, 1999, prior
to determination to dispose of the segment, the Company had recognized a loss
of approximately $765,000 related to impairment of assets of IDS FAB. In the
fourth quarter of 1999, this impairment charge was reclassified to be included
in the loss on disposal of discontinued operations.

   The discontinued segment recognized no sales revenue in 1999. Additionally,
included in the loss on disposal of discontinued operations is approximately
$85,000 of legal fees related to the disposition.

                                      41
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


18. Contingencies

 Employment Agreements

   The Company has employment agreements with certain of its executive
officers, the terms of which expire in December 2004. Such agreements provide
for minimum salary levels, adjusted annually for cost-of-living changes, as
well as for incentive bonuses that are payable if specified management goals
are attained. The aggregate commitment for future salaries at December 31,
2001, excluding bonuses, was approximately $4.6 million.

 Litigation

   The Company is subject to legal proceedings and claims that have arisen in
the ordinary course of its business. Based on legal analysis and advice from
its attorneys, allowances have been made for any litigation that Management of
the Company believes could have a material adverse effect on its financial
condition or results of operations.

   Two claims that involve failure of contractual performance have been
identified by the Management of the Company and are covered by insurance. The
Company has accrued the costs subject to the insurance deductible of $100
thousand each. Petrocon was party to a lawsuit wherein certain former
employees asserted breach of contract. The Company has accrued $247 thousand
in unpaid settlement costs related to this lawsuit. Concurrent with the
merger, as a result of mediation with certain former executive officers, the
Company reached a settlement whereby the remaining balance of $450 thousand
must be paid in 24 equal monthly installments of approximately $12 thousand
with the balance of $175 thousand paid in the 25th month.

 Insurance

   The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, professional errors and
omissions, workers' compensation insurance and general umbrella policy. The
Company has not incurred significant claims in excess of insurance recoveries.
Petrocon is self-insured for health insurance claims. Provisions for expected
future payments are accrued based on the Company's experience.

                                      42
<PAGE>

             INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   19. Quarterly Financial Information (unaudited)

<TABLE>
<CAPTION>
                                                  1999
                                       ------------------------------------
                                       Qtr 1      Qtr 2      Qtr 3   Qtr 4
                                       ------     ------     ------  ------
                                        (In thousands except per
                                             share amounts)
<S>                                    <C>        <C>        <C>     <C>
Sales................................. $2,636     $3,219     $2,884  $3,499
Gross profit..........................    827        889        628     504
  Percent of sales....................   31.4%      27.6%      21.8%   14.4%
Income from continuing operations.....    190        340        117    (496)
Discontinued operations...............    (66)(a)   (886)(a)      6     465
Net income (loss).....................    124       (547)       123     (23)(b)
  Per common share--basic and diluted
   Continuing operations per share....   0.01       0.03       0.01    0.00
  Discontinued operations per Share...     --      (0.07)        --      --
    Net income (loss).................   0.01      (0.04)      0.01    0.00

<CAPTION>
                                                  2000
                                       ------------------------------------
                                       Qtr 1      Qtr 2      Qtr 3   Qtr 4
                                       ------     ------     ------  ------
                                        (In thousands except per
                                             share amounts)
<S>                                    <C>        <C>        <C>     <C>
Sales................................. $3,392     $3,332     $5,141  $5,111
Gross profit..........................    993        701      1,536     719
  Percent of sales....................   29.3%      21.1%      29.9%   14.1%
Net income (loss).....................    161       (154)(d)    297      77 (c)
  Per common share--basic and diluted
   Net income (loss)..................   0.01      (0.01)      0.02    0.01

<CAPTION>
                                                  2001
                                       ------------------------------------
                                       Qtr 1      Qtr 2      Qtr 3   Qtr 4
                                       ------     ------     ------  ------
                                        (In thousands except per
                                             share amounts)
<S>                                    <C>        <C>        <C>     <C>
Sales................................. $5,954     $5,149     $5,756  $5,195
Gross profit..........................  1,327      1,434      1,596     938
  Percent of sales....................   22.3%      27.9%      27.7%   18.1%
Net income............................    338        293        307      44 (c)
  Per common share--basic and diluted
   Net income.........................   0.03       0.02       0.02    0.00
</TABLE>
--------
(a) During the 1999, the Company entered into a settlement agreement with the
    former owner of IDS FAB to rescind the original acquisition agreement
    dated November 1, 1998. In the first two fiscal quarters of the year ended
    December 31, 1999, prior to determination to dispose of the segment, the
    Company had recognized a loss of approximately $765,000 related to
    impairment of assets of IDS FAB. In the fourth quarter of 1999, this
    impairment charge was reclassified to be included in the loss on disposal
    of discontinued operations.
(b) The loss in the fourth quarter of 1999 was primarily due to additional
    expenses related to the establishment of the Tulsa operation and related
    personnel and benefits costs. Also, fourth quarter earnings are generally
    lower as described in (c) below.
(c) The reduced net earnings in the fourth quarter of 1999, 2000 and 2001 are
    the result of the seasonality of the industry. Holidays and employee
    vacation exert downward pressure on profits for the fourth quarter.
    Sometimes during the first quarter, the budgets of our clients have not
    yet been approved resulting in a slow start.
(d) The decrease in the overall gross margin in the second quarter of 2000 was
    attributable to declines in the gross profit margins contributed by the
    manufacturing and engineered systems segments, to additional non-billable
    expenses in the Engineering segment and to an overall increase in
    corporate related expenses due the growing number of employees. Each
    segment experienced lower sales revenues in the 2000 period. Decreases in
    gross profit generated ranged from a decline of 21.6% in the engineered
    systems segment to a decline of 81.3% in the products segment, with the
    manufacturing segment experiencing a decline of 70.8% from the three month
    period in 2000. These declines were a result of the lower sales in these
    segments accompanied by higher production costs.

                                      43
<PAGE>

                         INDEPENDENT AUDITOR'S REPORT
                        ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders
Industrial Data Systems Corporation

   We have audited, in accordance with auditing standards, generally accepted
in the United States of America, the consolidated financial statements of
Industrial Data Systems Corporation and Subsidiaries included in this Form 10-
K and have issued our report thereon dated March 7, 2002. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The financial statement schedule listed in Item 16(b) herein
(Schedule II--Valuation and Qualifying Accounts) is the responsibility of the
Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The financial statement schedule has been subjected to
the auditing procedures applied to the audits of the basic financial
statements and in our opinion, is fairly stated in all material respects with
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

/s/ Hein + Associates LLP
-------------------------------------
Hein + Associates LLP

Houston, Texas
March 7, 2002

                                      44
<PAGE>

                                  SCHEDULE II

                      INDUSTRIAL DATA SYSTEMS CORPORATION

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                               (B)                               (E)
                            Balance at                (D)      Balance
           (A)             Beginning of    (C)    Deductions-  at End
       Description          the Period  Additions Write offs  of Period
-----------------------------------------------------------------------
<S>                        <C>          <C>       <C>         <C>
December 31, 1999
  Allowance for doubtful
   accounts...............     $40        $ --       $ 33       $  7
December 31, 2000
  Allowance for doubtful
   accounts...............     $ 7        $ 12       $  2       $ 17
December 31, 2001
  Allowance for doubtful
   accounts...............     $17        $254       $ --       $271
</TABLE>

Note:Column C(2) has been omitted, as all answers would be "none."
     The additions in 2001 are the result of the merger with Petrocon.

                                       45
<PAGE>

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

   There are no changes in or disagreements with the Company's accountants on
accounting and financial disclosure.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

   Incorporated herein by reference to certain information contained in the
Company's definitive proxy statement for its 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 2002.

Item 11. Executive Compensation

   Incorporated herein by reference to certain information contained in the
Company's definitive proxy statement for its 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   Incorporated herein by reference to certain information contained in the
Company's definitive proxy statement for its 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 2002.

Item 13. Certain Relationships and Related Transactions

   Incorporated herein by reference to certain information contained in the
Company's definitive proxy statement for its 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 2002.

                                      46
<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K

A. FINANCIAL STATEMENTS

   The consolidated financial statements are contained herein as listed on the
"Index" on page 23 hereof.

B. REPORTS ON FORM 8-K

   Although there were no reports on Form 8-K filed by the Company during the
quarter ended December 31, 2001, a Report of Unscheduled Material Events on
Form 8-K was filed on January 7, 2002 describing the merger with Petrocon and
an Amended Report of Unscheduled Material Events on Form 8-K/A was filed on
March 5, 2002 updating the financial information of Petrocon provided in the
Amendment No. 3 to Form S-4, filed on November 14, 2001. This Form 8-K/A
included Petrocon's result of operations for the third quarter of 2001 and
updated the pro forma schedules regarding the merger as originally provided in
the Amendment No. 3 to Form S-4.

C. DESCRIPTION AND INDEX OF EXHIBITS

<TABLE>
<CAPTION>
 Number                               Description
 ------                               -----------
 <C>    <S>
  2     Agreement and Plan of Reorganization for the Purchase of Industrial
        Data Systems, Incorporated, dated August 1, 1994 (1)

  2.1   Action by Written Consent of the Board of Directors for the Purchase of
        Industrial Data Systems, Incorporated, a Texas corporation, dated
        August 1, 1994 (1)

  2.2   Action by Written Consent of the Shareholders for the Purchase of
        Industrial Data Systems, Incorporated, a Texas corporation, dated
        August 1, 1994 (1)

  2.4   Escrow Agreement for the Purchase of Thermaire Incorporated, dba
        Thermal Corp., dated August 15, 1995 (1)

  2.5   Earnest Money Contract for the Purchase of Thermaire Incorporated, dba
        Thermal Corp.'s Manufacturing Facility, dated August 15, 1995 (1)

  2.6   Offering Memorandum, 504D Offering of 500,000 Shares of Common Stock in
        the State of Nevada, dated July 26, 1994 (1)

  2.7   Action by the Board of Directors regarding the 504D Stock Offering of
        2,499,999 Shares of Common Stock, dated July 10, 1996 (1)

  2.8   Agreement for Amendment and Substitution of Subscription Agreement and
        Notes, dated July 10, 1996 (1)

  2.9   Stock Acquisition Agreement, dated March 25, 1998, by and among
        Industrial Data Systems Corporation, John L. "Jack" Ripley, and
        Constant Power Manufacturing Incorporated. Previously filed as Exhibit
        2.1 on (4).

  2.23  Agreement and Plan of Merger by and between Industrial Data Systems
        Corporation, IDS Engineering Management, LC, PEI Acquisition, Inc. and
        Petrocon Engineering, Inc. (11)

  2.24  First Amendment to Agreement and Plan of Merger (13)

  2.25  Letter Agreement to Agreement and Plan of Merger (13)

  3     Articles of Incorporation, Industrial Data Systems Corporation, dated
        June 20, 1994 (1)

  3.1   Corporate Charter, Industrial Data Systems Corporation, dated June 22,
        1994 (1)

  3.2   Corporate Bylaws, Industrial Data Systems Corporation, dated October
        15, 1997. Previously filed as Exhibit 3 on (3)
</TABLE>


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<PAGE>

<TABLE>
 <C>   <S>
  3.10 Articles of Incorporation of IDS Engineering Management, LC (11)

  3.11 Regulations of IDS Engineering Management, LC (11)

  3.12 Articles of Incorporation PEI Acquisition, Inc. (11)

  3.13 Bylaws of PEI Acquisition, Inc. (11)

  3.14 Amendment to Articles of Incorporation of Industrial Data Systems
       Corporation dated December 20, 2001 (18)

  4.1  Form of Common Stock Certificate of Industrial Data Systems Corporation
       (13)

  4.2  Form of Certificate of Designation of Convertible Preferred Stock of
       Industrial Data Systems Corporation, dated December 21, 2001 (13)

  4.3  Form of Convertible Preferred Stock Certificate of Industrial Data
       Systems Corporation (12)

  4.4  Exchange Agreement--Letter to Mr. Robert A. Marks dated December 4, 2001
       (18)

  4.5  Exchange Agreement--Letter to Mr. Richard E. Mitchen dated December 4,
       2001 (18)

  5.1  Opinion of Rooker, Gibson and Later regarding of legality of stock
       issuance (13)

  8.1  Opinion of Gardere Wynne Sewell LLP regarding United States Tax Matters
       (13)(14)

  8.2  Opinion of Gardere Wynne Sewell LLP regarding tax treatment of merger
       (17)

 10.1  Adoption Agreement for Non-standardized Code 401(k) Profit Sharing Plan,
       dated January 1, 1993. Previously filed as Exhibit 10.5 on (1)

 10.2  Blanket Service Contract--Exxon Pipeline Company. Previously filed as
       Exhibit 10.6 on (2)

 10.3  Blanket Service Contract--Marathon Oil Company. Previously filed as
       Exhibit 10.7 on (2)

 10.4  Lease between Industrial Data Systems, Incorporated, a Texas
       corporation, and 319 Century Plaza Associates, Ltd., dated August 18,
       1997. Previously filed as Exhibit 10 on (3)

 10.5  First Amendment to Lease Agreement between Industrial Data Systems,
       Incorporated, a Texas corporation, and 319 Century Plaza Associates,
       dated September 19, 1997. Previously filed as Exhibit 10.1 on (3)

 10.6  Second Amendment to Lease Agreement between Industrial Data Systems,
       Incorporated, a Texas corporation, and 319 Century Plaza Associates,
       dated November 19, 1997. Previously filed as Exhibit 10.2 on (3)

 10.7  Pledge Agreement, dated March 25, 1998, by and between Industrial Data
       Systems Corporation, and John L. "Jack" Ripley. Previously filed as
       Exhibit 10.22 on (4)

 10.8  Fourth Amendment to Lease between Industrial Data Systems, Inc., a Texas
       corporation, and 600 C.C. Business Park Ltd., dated September 1, 1998.
       Previously filed as Exhibit 10.24 on (5)

 10.31 Settlement Agreement between the Company and Michael L. Moore.
       Previously filed as Exhibit 10.31 on (6)

 10.32 Blanket Service Contract with Caspian Consortium-R. Previously filed as
       Exhibit 10.32 on (7)

 10.33 Blanket Service Contract with Caspian Consortium-K. Previously filed as
       Exhibit 10.33 on (7)

 10.35 Master Equipment Lease between Unicapital BSB Leasing and Thermaire,
       Inc. dba Thermal Corporation. Previously filed as Exhibit 10.35 on (8)

 10.36 Promissory Note payable to The Frost National Bank, dated April 14,
       2000. Previously filed as Exhibit 10.36 on (9)
</TABLE>


                                       48
<PAGE>

<TABLE>
 <C>   <S>
 10.37 Loan Agreement with The Frost National Bank, dated April 24, 2000.
       Previously filed as Exhibit 10.37 on (9)

 10.38 Commercial Security Agreement with The Frost National Bank dated April
       24, 2000. Previously filed as Exhibit 10.38 on (9)

 10.39 Commercial Guaranty for the benefit of The Frost National Bank dated
       April 24, 2000. Previously filed as Exhibit 10.39 on (9)

 10.40 Business Park Lease for Tulsa Office Space. Previously filed as Exhibit
       10.40 on (10)

 10.41 Business Park Lease for Tulsa Office Space. Previously filed as Exhibit
       10.41 on (10)

 10.42 Standard Industrial Lease Agreement between Houston Industrial Assets,
       L.P. and Constant Power Manufacturing, Inc. dated May 30, 2001 (11)

 10.43 Settlement Agreement and Plan of Reorganization dated July 31, 2001
       among Petrocon Engineering, Inc., Industrial Data Systems Corporation,
       PEI Acquisition, Inc., and Equus II Incorporated (18)

 10.44 Promissory Note between Petrocon Engineering, Inc. and Equus II
       Incorporated dated December 21, 2001 (18)

 10.45 Form of Guaranty by and among Fleet Capital Corporation, Petrocon
       Engineering, Inc., PEI Acquisition, Inc., and Equus II Incorporated
       dated December 21, 2001 (18)

 10.46 Security Agreement among Fleet Capital Corporation, Petrocon
       Engineering, Inc., and Equus II Incorporated dated December 21,2001 (18)

 10.47 Mortgage and Security Agreement among Fleet Capital Corporation, Equus
       II Incorporated, and Petrocon Engineering, Inc. dated December 21, 2001
       (18)

 10.48 Option Pool Agreement between Industrial Data Systems Corporation and
       Alliance 2000, Ltd. Dated December 21, 2001 (18)

 10.49 Indemnification Escrow Agreement among Industrial Data Systems
       Corporation, PEI Acquisitions, the individuals listed as "Significant
       PEI Shareholders", and Johnny Williams, Escrow Agent dated December 21,
       2001 (18)

 10.50 Option Escrow Agreement among Industrial Data Systems Corporation, PEI
       Acquisitions, the individuals listed as "Significant PEI Shareholders",
       and Johnny Williams, Escrow Agent dated December 21, 2001 (18)

 10.51 Form of Lock-Up Agreement letter from Petrocon Engineering, Inc.
       shareholder(s) of record to Industrial Data Systems Corporation dated
       December 21, 2001 (18)

 10.52 Voting Agreement among Industrial Data Systems Corporation, Equus II
       Corporation, Alliance 2000, Ltd. and individuals listed as "Significant
       PEI Shareholders" dated December 21, 2001 (18)

 10.53 Second Amended and Restated Loan and Security Agreement by and among IDS
       Engineering, Inc., Thermaire, Inc., Constant Power Manufacturing, Inc.,
       Industrial Data Systems, Inc., IDS Engineering Management, LC, Petrocon
       Engineering, Inc., Triangle Engineers and Constructors, Inc., Petrocon
       Systems, Inc., Petrocon Engineering of Louisiana, Inc., R.P.M.
       Engineering, Inc., Petrocon Construction Resources, Inc., Alliance
       Engineering Associates, Inc., and Fleet Capital Corporation dated
       December 21, 2001 (18)

 10.54 Amended and Restated Revolving Note between Fleet Capital Corporation
       and IDS Engineering, Inc., Thermaire, Inc., Constant Power
       Manufacturing, Inc., Industrial Data Systems, Inc., IDS Engineering
       Management, LC, Petrocon Engineering, Inc., Triangle Engineers and
       Constructors, Inc., Petrocon Systems, Inc., Petrocon Engineering of
       Louisiana, Inc., R.P.M. Engineering, Inc., Petrocon Construction
       Resources, Inc., Alliance Engineering Associates, Inc., dated December
       21, 2001 (18)
</TABLE>


                                       49
<PAGE>

<TABLE>
 <C>   <S>
 10.55 Stock Pledge Agreement between Industrial Data Systems, Inc. and Fleet
       Capital Corporation dated December 21, 2001 (18)

 10.56 Stock Pledge Agreement between IDS Engineering Management, LC and Fleet
       Capital Corporation dated December 21, 2001 (18)

 10.57 Amended and Restated Stock Pledge Agreement between Petrocon
       Engineering, Inc. and Fleet Capital Corporation dated December 21, 2001
       (18)

 10.58 Continuing Guaranty Agreement between Fleet Capital Corporation and
       "Borrowers" known as IDS Engineering, Inc., Thermaire, Inc., Constant
       Power Manufacturing, Inc., Industrial Data Systems, Inc., IDS
       Engineering Management, LC, Petrocon Engineering, Inc., Triangle
       Engineers and Constructors, Inc., Petrocon Systems, Inc., Petrocon
       Engineering of Louisiana, Inc., R.P.M. Engineering, Inc., Petrocon
       Construction Resources, Inc., Alliance Engineering Associates, Inc.,
       dated December 21, 2001 (18)

 10.59 Amended and Restated Patent Security Agreement between Petrocon
       Engineering, Inc. and Fleet Capital Corporation dated December 21, 2001
       (18)

 10.60 Amended and Restated Patent Security Agreement between Petrocon
       Technologies, Inc. and Fleet Capital Corporation dated December 21, 2001
       (18)

 10.61 Amended and Restated Trademark Security Agreement between R.P.M.
       Engineering, Inc. and Fleet Capital Corporation dated December 21, 2001
       (18)

 10.62 Intercreditor Agreement by and among Fleet Capital Corporation, Equus II
       Incorporated, Petrocon Engineering, Inc. (Borrower) together with the
       Loan Party (Industrial Data Systems Corporation, IDS Engineering, Inc.,
       Thermaire, Inc., Constant Power Manufacturing, Inc., Industrial Data
       Systems, Inc., IDS Engineering Management, LC, Triangle Engineers and
       Constructors, Inc., Petrocon Systems, Inc., Petrocon Engineering of
       Louisiana, Inc., R.P.M. Engineering, Inc., Petrocon Construction
       Resources, Inc., Petrocon Technologies, Inc., and Alliance Engineering
       Associates, Inc. dated December 21, 2001 (18)

 11.1  Statement Regarding Computation of Per Share Earnings (13)

 21.1  Subsidiaries of the Registrant (18)

 23.3  Consent of Gardere Wynne Sewell LLP (included as Ex 8.1) (13)(14)

 24.1  Power of Attorney (12)

 99.2  Press Release dated August 1, 2001 announcing signing of definitive
       merger agreement with Petrocon Engineering, Inc. (11)

 99.3  Press Release dated December 24, 2001 announcing completion of merger
       with Petrocon Engineering, Inc. (16)
</TABLE>
--------
 (1) Exhibits incorporated by reference on the Company's Registration
     Statement on Form 10-SB filed with the Securities and Exchange Commission
     on January 27, 1997.
 (2) Exhibits incorporated by reference on the Company's Annual Report on Form
     10-KSB/A for the year ended December 31, 1996 filed with the Securities
     and Exchange Commission on May 14, 1997.
 (3) Exhibits incorporated by reference on the Company's Annual Report on Form
     10-KSB/A for the year ended December 31, 1997 filed with the Securities
     and Exchange Commission on April 10, 1998.
 (4) Exhibits incorporated by reference on the Company's Form 8-K filed April
     10, 1998 and Form 8-K/A filed April 29, 1998.
 (5) Exhibits incorporated by reference on the Company's Annual Report on Form
     10-KSB/A for the year ended December 31, 1998.
 (6) Exhibit incorporated by reference by the Company's Quarterly Report on
     Form 10-QSB for the quarter ended September 30, 1999 filed with the
     Securities and Exchange Commission on November 15, 1999.

                                      50
<PAGE>

 (7) Exhibits incorporated by reference on the Company's Annual Report on Form
     10-KSB for the year ended December 31, 1999.
 (8) Exhibit incorporated by reference on the Company's Quarterly Report on
     Form 10-QSB for the quarter ended March 31, 2000 filed with the
     Securities and Exchange Commission on May 15, 2000.
 (9) Exhibit incorporated by reference on the Company's Quarterly Report on
     Form 10-QSB for the quarter ended June 30, 2000 filed with the Securities
     and Exchange Commission on August 14, 2000.
(10) Exhibit incorporated by reference on the Company's Quarterly Report on
     Form 10-QSB quarter ended September 30, 2000 filed with the Securities
     and Exchange Commission on November 13, 2000.
(11) Exhibit incorporated by reference on the Company's Quarterly Report on
     Form 10-QSB for the quarter ended June 30, 2001 filed with the Securities
     and Exchange Commission on August 14, 2001.
(12) Exhibit incorporated by reference on Form S-4 filed with the Securities
     and Exchange Commission on August 24, 2001
(13) Exhibit incorporated by reference on Amendment One to Form S-4 filed with
     the Securities and Exchange Commission on October 19, 2001
(14) Exhibit incorporated by reference on Amendment Two to Form S-4 filed with
     the Securities and Exchange Commission on November 6, 2001
(15) Exhibit incorporated by reference on Amendment Three to Form S-4 filed
     with the Securities and Exchange Commission on November 16, 2001
(16) Exhibit incorporated by reference on Form 8-K filed with the Securities
     and Exchange Commission on January 7, 2002
(17) Exhibit incorporated by reference on Post Effective Amendment filed with
     the Securities and Exchange Commission on January 30, 2002
(18) Filed herewith

                                      51
<PAGE>

                                   SIGNATURES

   In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant has caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                          INDUSTRIAL DATA SYSTEMS CORPORATION

Dated: March 28, 2002

                                               /s/ Michael L. Burrow, P.E.
                                          By: _________________________________
                                             Michael L. Burrow, P.E.,
                                             Chairman of the Board, Chief
                                              Executive Officer, Director

                                               /s/ William A. Coskey, P.E.
                                          By: _________________________________
                                             William A. Coskey, P.E.,
                                             President, Chief Operating
                                              Officer, Director

                                                   /s/ Hulda L. Coskey
                                          By: _________________________________
                                             Hulda L. Coskey,
                                             Chief Governance Officer,
                                              Secretary, Director

                                              /s/ Jimmie N. Carpenter, P.E.
                                          By: _________________________________
                                             Jimmie N. Carpenter, Director

                                                 /s/ David W. Gent, P.E.
                                          By: _________________________________
                                             David W. Gent, P.E., Director

                                                   /s/ Randall B. Hale
                                          By: _________________________________
                                             Randall B. Hale, Director

                                                  /s/ David C. Roussel
                                          By: _________________________________
                                             David C. Roussel, Director

                                       52