With the rapid development of technology, incorporation of Information Communication Technology (ICT) for formative assessment purpose has been increasing over the past decade. This article describes the design and development of identification of students' misconceptions in an individualized learning environment (iSMILE) system that includes accommodations for students' misconceptions in order to improve student's conceptual understanding and finally learning outcome. The assessment process is carried out by preparing two-level multiple-choice questions. Misconceptions are identified for each instructional objective to make a root question and linked questions. Depending on the answers provided by the student in first level, the linked questions are given to get more information regarding the misconception. Based on the first and second level answers of students, feedbacks are provided with the misconception identified. One of the most important differences of our iSMILE system, with respect to the other developed systems, is the inclusion of misconception based feedback. The iSMILE system has been developed by using open source ICT tools (like MySQL, Apache, etc.) which make the system free of cost and accessible and editable by any instructor from anywhere and at any time.