<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   ----------

                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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


     For the fiscal year ended March 31, 1998

                                            OR

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

    
     For the transition period from ____________ to ____________

                         Commission file number 0-23073
                                                -------

                       INTERNATIONAL TOTAL SERVICES, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

                         Ohio                                34-1264201
         ---------------------------------                 -------------------
         (State or Other Jurisdiction                      (I.R.S. Employer
         of Incorporation or Organization)                  Identification No.)

                 Crown Centre
              5005 Rockside Road
               Independence, Ohio                                44131
         ---------------------------------                 -------------------
     (Address of Principal Executive Offices)                  (Zip Code)

Registrant's telephone number, including area code:  (216) 642-4522

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

       Title of Each Class             Name of Each Exchange on Which Registered
       -------------------             -----------------------------------------
              None                                       N/A

Securities registered pursuant to Section 12(g) of the Act: Common Shares,
without par value

         Indicated by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes   X  No 
    ----    ---

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


<PAGE>   2

         The aggregate market value of the common shares held by non-affiliates
of the registrant, based upon the closing market price on July 10, 1998, was
approximately $26,538,023.

         As of July 10, 1998, the registrant had 6,662,494 Common Shares issued
and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held September 18, 1998, into Part III, Items 10, 11, 12 and 13.

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

PART I
<S>      <C>      <C>                                                                                               <C>
         Item 1.  Business............................................................................................1
         Item 2.  Properties.........................................................................................10
         Item 3.  Legal Proceedings..................................................................................10
         Item 4.  Submission of Matters to a Vote of Security Holders................................................11
PART II .............................................................................................................12
         Item 5.  Market for Registrant's Common Shares and Related Shareholder Matters..............................12
         Item 6.  Selected Financial Data............................................................................13
         Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations..............13
         Item 7A.  Quantitative and Qualitative Disclosures about Market Risk........................................17
         Item 8.  Consolidated Financial Statements and Supplementary Data...........................................17
         Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............17
PART III ............................................................................................................18
         Item 10.  Directors and Executive Officers of the Registrant................................................18
         Item 11.  Executive Compensation............................................................................18
         Item 12.  Security Ownership of Certain Beneficial Owners and Management....................................18
         Item 13.  Certain Relationship and Related Transactions.....................................................18
PART IV .............................................................................................................19
         Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................19
</TABLE>


<PAGE>   3





                           FORWARD LOOKING STATEMENTS

--------------------------------------------------------------------------------

            This Annual Report on Form 10-K (this "Form 10-K") contains
statements that constitute forward looking statements. Those statements appear
in a number of places in this Form 10-K and in the documents incorporated by
reference herein and include statements regarding the intent, belief or current
expectations of International Total Services, Inc., an Ohio corporation (the
"Company" or "ITS"), its directors or its officers with respect to (i) potential
acquisitions by the Company; (ii) the Company's financing plans; and (iii)
trends affecting the Company's financial condition or results of operations.


            Prospective investors are cautioned that any forward looking
statements in this Form 10-K are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from projected results, including unanticipated losses of
service contracts, conditions in the aviation industry, and negative publicity
regarding the airline security and services and commercial security industries.
Readers are cautioned not to place undue reliance on forward looking statements.
Factors that could cause actual results to differ materially from projected
results include, but are not limited to, those factors discussed in the "Risk
Factors" section of the prospectus contained in the Company's Registration
Statement on Form S-1 (Registration No. 333-29463), as amended.
--------------------------------------------------------------------------------



                                     PART I

ITEM 1.  BUSINESS

            The Company's fiscal year ends on March 31, and its fiscal years are
identified by reference to the calendar year in which they end. For example, the
fiscal year ended March 31, 1998 is referred to as "fiscal 1998."

COMPANY OVERVIEW

            General. The Company is a leading domestic provider of aviation
contract support services and is establishing a growing presence in the security
services market. The Company provides services to customers in more than 329
cities in the United States and Europe. The Company has used its predeparture
screening business to establish a growing presence in the broader aviation
services market. Aviation services offered by the Company include skycap,
baggage handling and aircraft appearance services, and wheelchair and electric
cart operations. The Company's security services extend beyond aviation
security, and include the provision of commercial security services to
government and business clients, hospitals, arenas and museums. In September
1997, the Company completed its initial public offering (the "Initial
Offering"). The Company used the proceeds from the Initial Offering to repay
indebtedness and for general corporate purposes, including working capital and
to fund acquisitions.

            The Company has experienced significant revenue growth driven by the
expansion of the aviation staffing support service industry and as a result of
acquisitions and a trend toward consolidation in the market. The Company's
growth strategy is premised on using its experience in recruiting, training,
motivating and managing the large numbers of personnel needed to perform the
labor-intensive, task-repetitive functions that its services require. The
Company intends to continue to grow internally and through acquisitions. This
growth will be generated by using the Company's established business base as a
platform for expanding the services that it provides at existing locations and
for developing new service locations. The Company targets acquisition candidates
that add geographic scope to its existing businesses, broaden its service
offerings and expand its client base. Since the Initial Offering and through
June 30, 1998, the Company has used this strategy to complete 13 acquisitions.



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            The current strength of the United States economy, which has driven
unemployment to low levels has adversely affected the Company's ability to
attract and retain the workforce needed to provide the services required under
its service contracts. The difficulty in attracting these workers has resulted
in the Company's payment of increased overtime and has forced the Company to
increase the wages paid to employees in advance of increases in the rates paid
by the Company's customers. These factors have resulted in downward pressure on
the Company's gross margins. In early fiscal 1999, the Company began
implementing operational strategies that it believes will improve gross
margins, however, there can be no assurance that these strategies will be
successful or that, in the event of further improvements in the United States
economy, the Company's margins will not decrease further. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

            Recent Developments. The Company has completed three acquisitions
since the end of fiscal 1998. These acquisitions are described below.

            GIBRALTAR PROTECTION, INC. In April 1998, the Company acquired the
commercial security contracts and goodwill of Gibraltar Protection, Inc.,
headquartered in Torrance, California, for $1.3 million in cash. The acquired
contracts cover commercial security staffing throughout Los Angeles and Orange
county California.

            VERSATILE SERVICES, INC. In May 1998, the Company acquired the
contracts and goodwill of Versatile Services, Inc., headquartered in Honolulu,
Hawaii, for $0.1 million in cash. The acquired contracts cover skycap service in
Hawaii.

            SECURITY COORDINATORS, INC. In June 1998, the Company acquired the
commercial security contracts and related goodwill of Security Coordinators,
Inc., headquartered in San Antonio, Texas, for $1.5 million in cash. The
acquired contracts cover commercial security staffing throughout Texas.

AVIATION SERVICES

Industry Overview

            In 1973, the Federal Aviation Administration (the "FAA") mandated
that airlines conduct predeparture screening of all passengers at most airports
in the U.S. Because the labor-intensive nature of predeparture screening imposed
substantial administrative burdens, most airlines opted to contract out
predeparture screening and other security services to third party contractors.
Certain other airline services, such as food service and fueling, historically
have also been contracted out by the airlines. In the past several years, market
forces have driven airlines to outsource a number of other labor-intensive
aviation services in order to permit airline management to focus on the
essential aspects of its business and to reduce labor, benefit costs and
administrative overhead.

            As the costs of labor have increased, airlines now frequently
outsource baggage claim and check services, skycap, baggage handling, aircraft
appearance and wheelchair assistance services, and inter-gate cart services.
Ticketing and check-in services are also beginning to be outsourced. Many small,
regional carriers still provide their own ground handling and cleaning services,
offering additional growth opportunities for contractors such as the Company.

            Ramp and ground handling services have been the fastest growing part
of the Company's aviation services business, followed by predeparture screening
services and other aviation services, based on annual revenues.




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Aviation Services.

            Ramp and Ground Handling Services. The ramp and ground handling
services provided by the Company are described in the chart below.

<TABLE>
<CAPTION>
Service                                                       Description
-------                                                       -----------

<S>                                                    <C>
Baggage Handling................................       Conveyance of checked baggage from terminal to baggage compartment of plane 
                                                       and from plane to baggage carousel.

Aircraft Appearance.............................
                                                       Interior: cleaning interior parts of the aircraft between flights and at end
                                                       of the aircraft's flight day.
                                                       
                                                       Exterior: washing exterior of aircraft.

Lavatory and Water Services.....................       Use of equipment to empty lavatory and replace the water source with 
                                                       potable water.

De-icing........................................       Spraying ice-melting substance on aircraft prior to departure from gate, 
                                                       in accordance with customer specifications.
</TABLE>

            The Company derived approximately 32.4%, 14.2% and 12.7% of its
revenues from ramp and ground handling services in fiscal 1998, 1997 and 1996,
respectively.

            Airline Security Services. The Company is a leading provider of
domestic airline predeparture screening services. The Company currently employs
approximately 4,400 predeparture screeners in more than 127 U.S. airports in 38
states. The Company's predeparture screening services include conducting x-ray
or electromagnetic inspection of all carry-on baggage, manual searches of
suspicious baggage and metal-detector searches of all passengers. The Company
also provides passenger profiling services and document verification agents,
primarily in Europe and Asia, where airlines and airports have been obliged by
regulatory agencies and the political climate to devote significant resources
to the prevention of terrorist activity. Airlines contract with the Company to
provide document verification (customs) agents who interview passengers as they
enter or leave a country via an international flight. In the domestic market,
the Company also provides parked aircraft and employee parking lot security,
and the checking of employee identification cards and baggage. The Company
derived approximately 36.7%, 50.0% and 50.0% of its revenues from airline
security services in fiscal 1998, 1997 and 1996, respectively.    

            Other Aviation Services. The Company's other aviation services
include providing skycaps for curbside check-in, baggage assistance and help
with routine passenger problems, wheelchair operators to transport disabled or
elderly passengers to and from the check-in area and the plane, and electric
cart drivers to provide inter-gate transport for passengers who need to board
flights at distant gates. The Company derived approximately 12.4%, 19.6% and
22.7% of its revenues from these services in fiscal 1998, 1997 and 1996,
respectively.

COMMERCIAL SECURITY SERVICES

            The Company provides uniformed security officer services, business
and facility access control, security consulting, special event security and
security assessment to a broad range of commercial clients, office and
government buildings, airports, hospitals, malls, distribution centers, sports
arenas, museums and other facilities. The Company entered the commercial
security market in the early 1990s to further capitalize on its aviation
security experience. Industrial security is a $100 billion per year industry
that employed approximately 2 million people in 1996, according to the American
Society for Industrial Security in Arlington, Virginia ("ASIS"). ASIS data
indicates that the industry is highly fragmented, with approximately 160,000
companies registered as protection companies. Commercial security accounted for
approximately 16.3%, 11.7% and 11.0% of the Company's revenue in fiscal 1998,
1997, and 1996, respectively.



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SECURITY PRODUCTS DISTRIBUTION

            In addition to service offerings to the airline industry, the
Company distributes a line of security products through its subsidiary, Crown
Technical Systems, Inc. ("CTS"), including airport and commercial security
checkpoint products and hand-held metal detectors. In 1992, CTS introduced the
High Efficiency Screening System ("HESS"), which replaces the standard
checkpoint configuration currently found in most U.S. airports. CTS also offers,
either with the entire HESS system or alone, an exit lane motion detector that
replaces the exit lane guard currently found at most checkpoints. CTS also
offers a separate line of hand-held and walk-through metal detectors that it
sells to banks, schools, governmental entities and large businesses. CTS also
markets control access equipment, including swipe card and other products to
control access to secured areas, and closed circuit television monitoring
equipment to domestic and international customers.

            The Company derived approximately 2.1%, 3.0% and 2.2% of its
revenues from sales of security products in fiscal 1998, 1997 and 1996,
respectively.

GROWTH

            The Company expects to grow internally and through acquisitions. The
Company focuses on using its experience in recruiting, training, motivating and
managing the large numbers of personnel needed to handle labor-intensive,
task-repetitive jobs to capitalize on the trend toward outsourcing
labor-intensive services. The Company believes that its airline security
business provides an effective platform from which to take advantage of
opportunities in other elements of the airline services business. The Company
also believes that its experience in managing the personnel requirements of its
airline security business provides opportunities to expand into related
labor-intensive service businesses, such as commercial security services.

Growth Through Expansion of Existing Businesses.

            The Company believes that the management and administrative
resources it has developed to manage its operations in 329 cities provide it
with the capacity to expand in a number of geographic areas without significant
additional overhead costs. By leveraging its existing administrative base, the
Company seeks to increase its share of the highly fragmented aviation and
commercial security market.

            The Company's use of its "installed base" of airline security
business to increase the range of other services that it provides to its airline
customers is an equally important element of its growth strategy. The Company
believes that the administrative base supporting the Company's airline security
services at an airport can be used to support other services without significant
additional costs, which can give the Company an important advantage in competing
with other providers of airline services on the basis of price. The Company's
division and field management teams actively seek these opportunities and are
experienced in exploiting them. The Company has experienced recent growth in the
demand for its ramp and ground handling and cabin appearance services and
expects these services to provide opportunities for continued growth. The
Company intends to identify new business opportunities and to use its existing
marketing, management and administrative systems, as well as its existing
airline relationships, to expand its reach in these areas. Because all 
carriers, regardless of location, need aircraft appearance, baggage handling 
and passenger related services, the Company believes the potential market for 
these services is as large as, if not larger than, the airline security market.

            Outside of the airline industry, the Company provides uniformed
security officers in a wide range of commercial settings. The Company, with an
administrative infrastructure in 41 states, believes that it has the ability to
expand in this market without significant additional overhead costs.

Growth Through Acquisitions.

            When making a domestic acquisition, the Company acquires only the
existing contracts and equipment needed to fulfill the contracts. When making a
European acquisition, the Company acquires all of the outstanding capital stock
of a business. The Company is willing to retain members of an acquired company's
management team that it 


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believes can contribute expertise. Management believes the Company has certain
advantages resulting from the Company's size and administrative infrastructure
that may enable it to implement its acquisition strategy more successfully than
its competitors. Specifically, management believes that its self-insurance and
risk management practices and its centralized administration of payroll and
billing functions have resulted in a lower cost structure than many of its
competitors.

            Aviation Services Acquisitions. In fiscal 1998, the Company
completed seven aviation services acquisitions, six of which were completed
after the Initial Offering. These acquisitions are described below.

            INTEX AVIATION SERVICES, INC. In April 1997, the Company acquired
the ground handling service contracts and goodwill of Intex Aviation Services,
Inc. ("Intex"), headquartered in Greenville, South Carolina, for $4.8 million in
cash. The contracts acquired from Intex cover ramp and ground handling services,
including baggage handling, lavatory and water services, aircraft appearance,
and ground support and facility services, in 30 locations across the United
States.

            ARC SECURITY, INC. In October 1997, the Company acquired the
aviation service contracts and goodwill of ARC Security, Inc., headquartered in
Atlanta, Georgia, for $9.0 million in cash. The acquired contracts cover airline
security, pre-board passenger screening, and aircraft appearance services in the
eastern and southern United States for all 12 major airlines.

            WHITE LION AVIATION SECURITY, LTD. In October 1997, the Company
purchased White Lion Aviation Security, Ltd. ("White Lion"), headquartered in
London, England, for $0.7 million in cash. White Lion offers aviation security,
expedited baggage and cargo delivery services at the Stanstead Airport, a
growing hub airport located outside of London, and has service contracts with a
number of international air carriers.

            ASI, INC. In October 1997, the Company purchased the contracts and
goodwill of ASI, Inc., headquartered in Providence, Rhode Island, for $0.1
million in cash. The acquired contracts cover aircraft appearance and baggage
handling services.

            NEPTUNE EQUIPMENT AND FACILITIES, INC. In December 1997 and February
1998, the Company acquired six aviation service contracts and goodwill from
Neptune Equipment and Facilities, Inc. ("Neptune") for $0.4 million in cash.
Neptune provided ground equipment maintenance, aircraft appearance, janitorial
and Crown Room staffing services. All of the acquired contracts are for
facilities located where the Company had existing operations.

            OS SECURITY SERVICE GMBH. In December 1997, the Company purchased
OS Security Services GMBH ("OS Security"), located in Frankfurt, Germany, for
$0.3 million in cash. OS Security provides aviation security for eight major
European and international airlines and has stations at four major German
airports: Dusseldorf, Berlin, Hamburg and Stuttgart. OS Security performs
aircraft guarding, passenger profiling, and baggage and cargo screening
services, as well as VIP escorting and collection services

            SKY VALET, INC. In February 1998, the Company acquired the aviation
staffing contracts and goodwill of Sky Valet, Inc., headquartered in West Palm
Beach, Florida, for $0.8 million in cash. The acquired contracts cover services
in Florida, Massachusetts, Mississippi, Pennsylvania, South Carolina, Tennessee
and Texas.

            Commercial Security Acquisitions. The Company completed three
commercial security acquisitions in fiscal 1998.

            CURTIS SECURITY SERVICES, INC. In October 1997, the Company acquired
the contracts and goodwill of Curtis Security Services, Inc., headquartered in
San Francisco, California, for $0.7 million in cash. The acquired contracts
cover commercial security services to approximately 50 Fortune 500 clients
located in California, Nevada and several other western states.

            STOREHIRE UK LTD. In January 1998, the Company purchased Storehire
UK Ltd. ("Storehire"), headquartered in London, England, for $0.7 million in
cash. Storehire provides secure lockable storage units for


                                      -5-
<PAGE>   8

commercial, professional and personal use, and operates in Stanstead Airport.
This acquisition complemented the Company's acquisition of White Lion.

            SECUREX, INC. In February 1998, the Company acquired the contracts
and goodwill of Securex, Inc., headquartered in Tampa, Florida, for $5.4 million
in cash. The acquired contracts cover commercial security staffing, credential
checkers, ticket checkers, ticket setters and other outsourcing services.


COMPETITION

            Ramp and Ground Handling Services. Airlines have found it
cost-effective to outsource ramp and ground handling services because these
services often require an investment in hard equipment, which can be expensive
for carriers with few flights. The Company has taken advantage of the
opportunity to offer a package of new or refurbished equipment, maintenance and
manpower, all for a per-hour labor charge. In addition, the Company considers
potential revenue gains from ground handling and passenger business when
negotiating new security business, and is sometimes able to package combinations
of services to clients at a lower overall cost than it could offer for one type
of service alone. The Company has typically offered ground handling or passenger
services as "add on" services to its screening business. It also offers these
services on a stand-alone basis at certain locations. In this area, the Company
competes with the airlines, Signature Flight Support Services, AMR Services,
Ogden Allied Support Services, Hudson General, and Service Master Co.

            The Company has sought to increase the volume of its aircraft
appearance business by focusing on providing service in accordance with detailed
specifications and using advanced cleaning equipment. The Company conducts an
Aircraft Appearance and Facility Audit Program through which it continually
monitors its own performance. Under this program, the Company's supervisors and
managers conduct a predetermined number of audits based on the number of planes
serviced for a particular client. The Company provides the results of the audit
to the client regularly, emphasizing areas requiring improvement. The Company
believes that its clients appreciate the continuous and honest feedback the
audit program provides and that this approach enables the Company to correct
problems that might not otherwise come to its attention until the client became
dissatisfied. The Company believes, based on discussions with its customers,
that it is the only cleaning service provider that has such a program. The
Company's competitors in aircraft appearance are the airlines, Signature Flight
Support Services, AMR Services, Ogden Allied Support Services, Hudson General,
and Service Master Co.

            Airline Security Services. Contracts for predeparture screening
services tend to be highly competitive among a handful of experienced providers
and are generally awarded to the low-cost provider. At the same time, the
airlines are sensitive about security lapses and may cancel a contract based on
even minor security breaches. While the Company believes it has an advantage
because of its size and overhead in underbidding other companies, the Company
faces the same challenge as its competitors do--finding qualified employees to
provide consistent service at the minimum wage rates offered by the airlines for
screeners in the current economic environment. See "Growth." The Company's
principal competitors in domestic predeparture screening include Globe Aviation
Securities Corporation, AHL Services, Inc. and Huntleigh, Inc.

            In the international security arena, where training and service
generally are more important, the Company strives to distinguish itself by
developing training programs and screening methods that meet the demands of its
customers. The Company's passenger profilers are trained in questioning
techniques that are designed to elicit cooperation and to avoid offense to
innocent travelers. In addition, because the Company's method of profiling is
less intrusive than other security methods, the Company considers it to be more
cost-effective and passenger-friendly than other systems. Currently, the Company
has a small number of contracts to provide these services in Europe and Asia.
The Company's main competitors for international profiling and screening
services are, ICTS International, N.V., AHL Services, Inc. and International
Aviation Security, Inc.

            Passenger Services. Customer service is as important as cost in the
awarding of domestic passenger service contracts. Because passenger service
providers such as skycaps, wheelchair operators and cart drivers have a high
level of interaction with passengers, the Company has developed specialized
training programs that emphasize customer


                                      -6-
<PAGE>   9

service and empathy. In 1996, the Company was awarded a contract to provide
Continental Airlines, Inc. skycaps nationwide. The Company's main competitors
for passenger services include the airlines, AHL, Globe Aviation Securities
Corporation, and Huntleigh, Inc.

            Commercial Security. The commercial security field is highly
fragmented. There are as many as 160,000 separate providers of commercial and
industrial security services, and the Company does not believe that any
participant has a significant share of the market. While the Company has made
only minor inroads into this market, the Company's competitive strength in this
area comes from its low overhead costs and its ability to assimilate acquired
commercial security businesses into its existing administrative structure. In
the commercial security field, the major providers include Borg-Warner Security
Corporation, Guardsmark, Inc. and The Wackenhut Corporation.

            The Company competes in international, national, regional and local
markets with specialized contract service providers, outsourcing companies, and
its clients' and potential clients' internal service staffs. While substantial
consolidation is occurring in the Company's markets, portions of these markets
remain extremely competitive and highly fragmented, with limited barriers to
entry. Industry participants compete on the quality of service provided, their
ability to provide national and international services, and the range of
services offered. The Company believes its primary competitive advantage is its
low administrative overhead, which enables it to offer competitive costs for
large contracts. The Company has been successful in minimizing its workers'
compensation and liability insurance costs and in leveraging its administrative
base to add new contracts with minimal increase in overhead cost. In addition,
the Company believes that it offers a broader range of services than many of its
competitors.

SALES AND MARKETING

            The Company believes that strengthening and maintaining
relationships with personnel at various levels of its clients' organizations
will continue to be an integral element of its sales and marketing efforts.
There are eight sales executives servicing the Company's four operating
divisions throughout the United States and Europe. The Company's four division
vice presidents in the United States and Europe also have sales responsibilities
and a portion of their incentive compensation is dependent on meeting
established sales goals.

            The Company expects to continue its internal growth through a
focused marketing approach based on expanding the services provided to existing
customers and increasing the volume of services provided in targeted markets.
The Company is further developing national sales and marketing strategies aimed
at improving the consistency of its sales approach. The Company's broad,
long-term global presence provides a strong foundation from which to expand into
additional international markets.

            In November 1997, the Company hired a Vice President of Marketing to
lead the Company's marketing initiatives. These initiatives include the
development of branded services, direct mail marketing, creation of local,
regional and national marketing plans, strategic positioning for preferred
provider partnerships, integration of high technology components, and
coordination of the Company's participation in trade shows and other sales
activities. Additionally, the corporate marketing department conducts quarterly
training sessions for sales executives. These training sessions include
presentation and customer service skills, database management and methods for
cross-selling the Company's products and services.

MANAGEMENT AND REPORTING SYSTEMS

            In fiscal 1996, the Company implemented measures to improve its cost
structure and competitive position in preparation for more aggressive growth.
These changes included reductions in corporate headquarters staff and executive
compensation, the development of divisional budgeting systems and the
implementation of compensation programs tied to the achievement of expected
performance levels. In addition, the Company enhanced its management and control
systems in order to improve accounts receivable collection and streamline its
purchasing arrangements. Consequently, operating profit has improved from 3.1%
in fiscal 1996 to 6.1% in fiscal 1998.

            Chairman and Chief Executive Officer Robert Weitzel, who co-founded
the Company in 1978, has substantial experience in the airline services and
commercial security industries. Mr. Weitzel has been the Company's 


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<PAGE>   10

strategic leader since 1987 and has directed over 40 acquisitions. President and
Chief Operating Officer James Singer, who joined the Company in April 1997, was
formerly President-Airline Services Division of AMR Services, and brings to the
Company broad experience in ground handling and passenger services operations.
Vice President, Finance Brian Kenyon joined the Company in April 1998 and will
be instrumental in improving financial reporting systems and the Company's
management information systems. Mr. Kenyon most recently was Director of
Financial Analysis at Signature Brands USA, Inc. Scott Brewer is the Vice
President, General Counsel of the Company. He has served as Vice President since
April 1995 and General Counsel since 1993. Mr. Brewer was in a private law
practice from October 1988 to August 1993.

            The Company's business organization include, four regional
divisions--Eastern, Central, Western and International, as well as CTS. Each
division has its own controller, human resource manger and sales executive, as
well as quality control and training functions. In July 1998, the Company
disbanded its industrial security division and transferred its industrial
security operations to its regional divisions.

            The Company is currently installing an updated version, that the
Company has been informed by its vendors is fully year 2000 compliant, of the
system that processes the majority of its transactions. This new version will
replace the Company's current version and the Company believes that this
version will be fully operational before year 2000 issues begin to impact the 
Company. In addition, the Company will have an outside consultant perform a
review of its other information systems to determine if any other areas of
exposure exist. The cost of this new version, and of any other new information
systems, will be capitalized and depreciated over their estimated useful lives 
for financial reporting purposes.

WORKFORCE MANAGEMENT

            As of July 8, 1998, the Company had approximately 15,000 full and
part-time employees engaged in performing its client services. The Company
experiences annual turnover of approximately 100%, and believes that maximizing
employee retention is important to reducing operating costs and providing high
quality service to its clients. Accordingly, the Company places significant
emphasis on motivating its employees and reducing turnover. In January 1997, the
Company instituted an employee medical benefit plan that provides medical
benefits to its eligible hourly employees. In addition, the Company grants
various bonuses and awards to exceptional employees, in part to further enhance
retention. These include bonuses for detecting weapons and other illegal
objects, including those detected during FAA-mandated tests. The Company also
provides a 401(k) program for all employees who have been with the Company at
least one year.

            Because employee turnover is inherent in the nature of its business,
the Company allocates significant resources to recruiting potential employees.
Each applicant must complete an interview and a written application that
includes inquiry concerning prior criminal convictions. In addition, FAA
regulations require that each applicant provide proof of citizenship or resident
alien status, and each applicant is subject to a five or ten-year background
verification, depending upon the position, and a pre-employment drug screen. For
persons with unescorted access to secured areas, a criminal background
verification procedure, which is conducted by the Federal Bureau of
Investigation, is triggered by any 12-month gap in employment history that
cannot be explained through independent verification. The Company's policy is
not to hire applicants whose criminal background verification checks reveal
prior criminal convictions.

CUSTOMERS AND CONTRACT TERMS

            The Company derives a significant portion of its revenues from a few
clients. In fiscal 1998, Delta Air Lines, Inc. (26.0%), Continental Airlines,
Inc. (14.7%), Trans World Airlines, Inc. (4.6%), U.S. Airways, Inc. (4.2%),
Southwest Airlines Co. (4.0%), and United Airlines, Inc. (3.8%) accounted for
57.3% of the Company's revenues. During fiscal 1998, 1997 and 1996, the
Company's ten largest clients accounted for an aggregate of 66.5%, 68.6% and
71.2% respectively, of the Company's revenues.

            The Company's contracts with clients, including those that it
obtains through acquisitions, generally have one to three year terms but are
cancelable by either party on 30 to 90 days notice. The Company invoices its
aviation services clients weekly or biweekly. The Company invoices its
commercial security clients weekly, which is typical in 


                                      -8-
<PAGE>   11

that field. In addition, the Company's contracts with airlines typically provide
that the Company will indemnify the client against claims for property damage,
or death of or personal injury to any person, arising out of the negligent acts
or omissions of ITS, unless the claim results from a negligent act of the
client.

            The services provided by the Company require it to train and manage
effectively low wage workforces with high turnover rates. From time to time, the
Company has failed to meet test standards or a client's service expectations at
a particular location, and, like its competitors, has had contracts terminated
because of customer dissatisfaction with various aspects of its performance. The
Company's predeparture screening services are tested daily at numerous
locations, both internally and by the FAA, to determine the Company's ability to
detect weapons passing through checkpoints. Failure to pass FAA tests may result
in fines to the airline responsible for the checkpoint, which the Company
reimburses pursuant to its contracts in amounts up to $11,000 per test failure.
These reimbursements have not had a material impact on the Company.

            The risk of contract termination as a result of actual or perceived
service failures is enhanced by the substantial publicity that, because of
public concern over airline security issues, often attends errors in the
provision of screening services. Failure to meet test or other performance
standards may result in fines, or the loss of a contract or service location or
the Company's license to perform services, and any such loss could have a
material adverse effect on the Company's reputation, business, results of
operations and financial condition. The Company does not believe that any test
failure, or series of test failures, without other performance deficiencies, has
resulted in the loss of a contract or service location.

GOVERNMENT REGULATION

            Certain of the Company's clients are subject to various regulations
and directives issued by the FAA. Under current regulations, independent
contractors, such as the Company, that perform services for air carriers and
airport authorities share responsibility for aviation security with air
carriers, airport authorities, the FAA and various other federal, state and
local agencies. At airports throughout the United States, the FAA tests security
systems and conducts threat and vulnerability assessments. Through the use of
its regulatory powers, the FAA directs the aviation industry to implement
measures that address existing and anticipated threat situations.

            FAA regulations require each air carrier and airport authority to
implement an FAA-approved security program. Airport authorities are responsible
for maintaining a secure environment on airport grounds and for providing law
enforcement support and training. Air carriers are responsible for the security
of all people and items connected to their aircraft, including passengers,
baggage, and maintenance and flight crews. The FAA has promulgated regulations
requiring air carriers to conduct predeparture screening of all passengers and
property that will be carried in an aircraft cabin. These regulations also
provide basic standards for the screeners, and equipment and procedures to be
used in predeparture screening activities. FAA regulations also mandate
pre-employment background checks of persons hired to serve as screeners.
Although an air carrier is permitted to outsource its screening function, FAA
regulations require the air carrier to provide oversight in order to assure that
all requirements are met. For example, FAA regulations require an air carrier's
ground security coordinator to review security-related functions and initiate
corrective action for noncompliance, and to conduct an annual evaluation of each
person assigned screening duties. In addition to the oversight responsibilities
imposed on air carriers, the FAA itself regularly conducts tests of predeparture
screening checkpoints at U.S. airports. Failure to meet requirements imposed by
the FAA or the air carrier or the failure of various tests administered by the
FAA can result in fines and other penalties to the responsible air carrier,
which are in turn passed on to the screening company under the terms of the
contract between the provider and the carrier. Regulatory compliance problems
and test failures may also result in the termination of a security contract or
of services at the affected site. In addition, certain initiatives reviewing
airport security are currently underway. The Company cannot predict the outcome
of these initiatives.

            The Company's aviation and commercial security services are subject
to regulation by various state and local authorities. The Company is also
required to obtain and maintain various licenses and permits from state and
local authorities to provide aviation and commercial security services, as well
as certain other services.


                                      -9-
<PAGE>   12


ITEM 2. PROPERTIES

            The Company leases approximately 20,548 square feet in Independence,
Ohio for its corporate headquarters. The initial term of the lease expires in
2001 and may be extended, at the option of the Company, until 2006. The Company
leases space in numerous facilities in the United States and Europe to contain
local offices. None of these local office leases are material to the Company's
operations.

ITEM 3. LEGAL PROCEEDINGS

            Because the Company's employees function in public facilities and in
the workplaces of other businesses, the Company is exposed to possible claims by
its clients' customers and employees of discrimination, harassment and
negligence, and similar claims. The Company is subject to liability for the acts
or negligence of its employees while on assignment that cause personal injury or
damages, and to claims of misuse of client proprietary information or theft of
client property. As a provider of security services, the Company faces potential
liability for claims that may arise from any terrorist activity occurring in
circumstances associated with the Company. Although the Company maintains
insurance coverage against such potential liabilities, any such claim against
the Company might exceed the amount of such insurance coverage or fall outside
the type of activities covered by such insurance.

            In May 1997, a United States District Court in Philadelphia,
Pennsylvania, rendered a judgment in the amount of $900,000 against the Company
in connection with an employment discrimination lawsuit. The Company believes
that it has accrued adequate reserves to cover the ultimate cost of this action
and is contesting the judgment on appeal.

            The Company is also involved in various legal proceedings, including
routine civil actions instituted by the FAA with respect to test failures,
background checks and recordkeeping matters that arise in the ordinary course of
its business. The Company does not believe that the ultimate outcome of these
proceedings will have a material adverse effect on the Company's business,
assets, financial condition or results of operations.





                                      -10-
<PAGE>   13

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

            There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.

                               EXECUTIVE OFFICERS

            Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the
following information is reported below.

            Executive officers of the Company are elected by, and serve at the
discretion of, the Board of Directors until their successors are duly chosen and
qualified.

            The executive officers of the Company are as follows:


<TABLE>
                              Name                             Age       Position
                              ----                             ---       --------

<S>                                                            <C>   <C>                                      
Robert A. Weitzel .........................................    63    Chairman of the Board of Directors and
                                                                     Chief Executive Officer

James O. Singer ...........................................    53    Director, President and Chief Operating Officer

Scott E. Brewer ...........................................    36    Vice President and General Counsel

Brian S. Kenyon ...........................................    34    Vice President, Finance

Peter J. Collins ..........................................    58    Vice President of Eastern Division

Stephen P. Metzler ........................................    40    Vice President of Central Division

Gene R. Empey .............................................    53    Vice President of Western Division

Dillard D. Woodson ........................................    49    Vice President of International Division
</TABLE>

            The following is a biographical summary of the business experience
of the executive officers of the Company.

            Robert A. Weitzel, a Director since 1987, is the Chairman of the
Board and Chief Executive Officer of the Company. He has served as the Chief
Executive Officer of the Company since 1987 and was President from 1987 to April
1997. He served as Senior Vice President from 1982 to 1987 and Vice President
from 1978 to 1982.

            James O. Singer, a Director since June 1997, has been President and
Chief Operating Officer since joining the Company in April 1997. Mr. Singer was
employed by AMR Services Corporation, an aviation services company, as
President-Airline Services Division and later served in Business Development for
Europe from May 1989 to March 1995. From April 1995 until April 1997, Mr. Singer
worked as a consultant in the aviation industry.

            Brian S. Kenyon is Vice President, Finance. He has served in this
capacity since April 1998. From December 1996 to April 1998 he served as
Director, Financial Analysis for Signature Brands USA, Inc., a publicly traded
consumer products company. From October 1990 to December 1996 he was employed by
NACCO Industries, Inc., a publicly traded holding company, where he last served
as Manager of Shareholder Relations and External Reporting. From December 1986
to October 1990 he was employed by Coopers & Lybrand, where he last served as a
Senior Associate Auditor.

            Scott E. Brewer is the Vice President and General Counsel of the
Company. He has served as Vice President since April 1995 and General Counsel
since September 1993. Mr. Brewer was in the private practice of law from October
1988 to August 1993.

            Peter J. Collins is the Eastern Division President. He has served in
this position since October 1997. From August 1995 to October 1997 he served as
a District Manager for the Southern District for the Company. From July


                                      -11-
<PAGE>   14

1991 to August 1995 he was employed by Pennzoil Corporation, where he last
served as a multi-store manager in their retail operations. Prior to July 1995,
he was employed by Eastern Airlines for 30 years where he held a number of
positions.

            Stephen Metzler is the Central Division President of the Company. He
has served in this capacity since April 1996. He served as Vice President
Eastern Division from May 1995 to April 1996 and District Manager from May 1994
to May 1995. He served as Aircraft Appearance Manager from December 1991 to May
1994.

            Gene Empey is the Western Division President of the Company. He has
served in this capacity since December 1988.

            Dillard Woodson is the International Division President of the
Company. He has served in this capacity since February 1997. He served as the
Vice President of Systems and Training from February 1996 to February 1997. He
served as the Technical Management Consultant to CSA Airlines in Prague from
January 1994 to February 1996. He served as the General Manager for Liberia for
Intercon Security Ltd., a commercial security company, from April 1993 to June
1993. Mr. Woodson was an artillery officer in the United States Marine Corps
from 1968 to June 1993.

            There are no arrangements or understandings known to the Company
between any executive officer and any other person pursuant to which any
executive officer was elected to office. There is no family relationship between
any director or executive officer and any other director or executive officer of
the Company.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS

(a)         MARKET INFORMATION

            The Company's Common Shares are traded in the Nasdaq National Market
under the symbol "ITSW." The following table sets forth for the indicated
periods the high and low market prices for the Common Shares:

<TABLE>
<CAPTION>
                                                                        Price Range
                                                                        -----------
Fiscal Year ended March 31, 1998                                  High               Low
                                                                  ----               ---
<S>                                                               <C>              <C>   
        Third Quarter (beginning September 19, 1997)              $18.75           $13.00
 
        Fourth Quarter                                            $24.13           $15.75
</TABLE>

(b)         SHAREHOLDER INFORMATION

            As of June 30, 1998, there were 17 record holders of Common Shares
and approximately 650 beneficial owners.

(c)         DIVIDEND INFORMATION

            The Company has never paid, and does not anticipate paying in the
foreseeable future, cash dividends on the Common Shares because it intends to
retain its earnings to finance the expansion of its business and for general
corporate purposes. In addition, the Company's ability to pay cash dividends is
limited by the terms of its revolving line of credit from its senior lender.

(d)         SALES OF UNREGISTERED SECURITIES

            In March 1997, prior to the Initial Offering, the Company issued
4,125.64 Common Shares, to Robert A. Weitzel, the Company's Chairman of the
Board and Chief Executive Officer, in exchange for his interest in a former


                                      -12-
<PAGE>   15

provider of leasing services to the Company. This issuance was valued at $9.08
per Common Share and was made in reliance on the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933.

ITEM 6.  SELECTED FINANCIAL DATA

         The selected financial data of the Company for the years ended March
31, 1995, 1996, 1997 and 1998 are derived from audited financial statements.
The selected financial data of the Company for the year ended March 31,
1994 has been derived from unaudited financial statements. Those unaudited
financial statements include all adjustments, consisting only of normal
recurring accruals, which the Company considers necessary for a fair
presentation of its financial position and results of operations for those
periods.

<TABLE>  
<CAPTION>
         
                                                                             Year Ended March 31,                   
                                                       ---------------------------------------------------------------- 
                                                            1994        1995         1996        1997           1998   
                                                       ------------ ----------- -----------  ----------    ------------
                                                           (Amounts in Thousands, except per share and employee data)
<S>                                                     <C>          <C>          <C>          <C>          <C>        
STATEMENTS OF OPERATIONS DATA:                                                                                      
        Revenues.............................           $  78,173    $  92,654    $  95,900    $  115,745   $ 173,235  
        Cost of Revenues ....................              66,103       79,981       81,341        98,338     145,968  
                                                        ---------    ---------    ---------    ----------   ---------  
                                                                                                                       
        Gross profit.........................              12,070       12,673       14,559        17,407      27,267  
        General and administrative expenses..              11,075       12,655       11,603        13,334      16,677  
                                                        ---------    ---------    ---------    ----------   ---------  
                                                                                                                       
        Operating income.....................                 995           18        2,956         4,073      10,590  
                                                                                                                       
        Interest expense-net.................                  34          188          523           637         719
        Other expense........................                   0            0          437           503         868  
                                                        ---------    ---------    ---------    ----------   ---------  
                                                                                                                       
        Income (loss) before                                                                                           
            income taxes.....................                 961         (170)       1,996         2,933       9,003  
        Income taxes.........................               1,035          548          958         1,237       3,758  
                                                        ---------    ---------    ---------    ----------   ---------  
                                                                                                                       
            Net income (loss)................           $     (74)   $     718    $   1,038    $    1,696   $   5,245  
                                                        =========    =========    =========    ==========   =========  
                                                                                                                       
        Net income (loss) per share:                                                                          
            Basic............................           $   (0.01)   $   (0.11)   $    0.18    $     0.33   $    1.01  
            Diluted..........................           $   (0.01)   $   (0.11)   $    0.18    $     0.33   $    1.00  
        Weighted average common shares:                                                                          
            Basic............................               6,446        6,293        5,776         5,089       5,215  
            Diluted..........................               6,446        6,293        5,776         5,089       5,265  
                                                                                                                       
OPERATING DATA (AT PERIOD END):                                                                                        
        Number of employees..................               9,000        9,900        9,900        10,700      15,000  
                                                                                                                       
BALANCE SHEET DATA (AT PERIOD END):                                                                                 
        Cash and cash equivalents............                 769        1,267        1,873         1,452       1,032  
        Working capital (deficit)............              (1,351)      (4,425)       (2,951)         324       9,137  
        Total assets.........................              14,843       20,295        20,892       27,001      58,567  
        Short-term bank debt and current                                                                               
          maturities of long-term debt.......                 875        5,658         4,806        2,520           0  
        Long-term obligations, net of current                                                                          
          maturities.........................                   0          152           164        7,555         544  
        Retained earnings....................               3,678        2,961         3,998        2,784       8,029  
        shareholders' equity.................               4,273        3,139         3,978        3,195      39,103  

</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


         The Company is a leading domestic provider of aviation contract support
services and is establishing a growing presence in the security services market.
The Company provides services to customers in more than 329 cities in the United
States and Europe. The Company has used its predeparture screening business to
establish a growing presence in the broader aviation services market. Aviation
services offered by the Company include skycap, baggage handling and aircraft
appearance services, and wheelchair and electric cart operations. The Company's
security services extend beyond aviation security, and include the provision of
commercial security services to government and business clients, hospitals,
arenas and museums. The Company's revenues have grown from $95.9 million in
fiscal 1996 to $173.2 million in fiscal 1998, reflecting a compound annual
growth rate of 40 percent. The revenue growth for fiscal 1998 and 1997 was 50
percent and 21 percent, respectively.

         Gross margins associated with airline security services are typically
lower than gross margins on other airlines services, reflecting the maturity of
the market for airline security services and the intensity of price competition
in that market. While airline security services have long been outsourced,
airlines have only recently begun to outsource many other services.
Consequently, the market for these other services is more fragmented and less
mature than the market for airline security services. The Company anticipates
that, as the airlines services market matures, gross margins will experience
compression as a result of increasing competition in the market and the
increasing importance of cost considerations to the airlines that outsource
these services. Gross margins associated with commercial security services
typically exceed those achieved for airline security services.

         The Company's services are provided under contracts that generally have
terms of one to three years but are cancelable by either party on 30 to 90 days
notice. Although contract terms vary significantly, clients generally pay an
hourly rate for services provided. Certain services, such as aircraft lavatory
cleaning, are billed on a flat fee for service basis, and certain others are
billed at a fixed monthly rate. The Company recognizes revenues as the related
services are performed.

         Prior to fiscal 1996, ITS's strategy included using technological
innovation to drive the growth of its business, and the Company made research
and development expenditures of approximately $500,000 in support of this
strategy. In recognition of the importance of cost considerations in customer
purchasing decisions, in fiscal 1996 the Company decided to reduce its cost
structure in order to enhance its competitive position. As a consequence of this
decision, ITS made several important operational changes that contributed to a
significant improvement in its financial results. These changes included
reductions in corporate headquarters staff and executive compensation, which
aggregated approximately $500,000, the development of divisional budgeting
systems and the implementation of compensation programs tied to the achievement
of budgeted performance levels. The Company also made efforts to enhance its
management and control systems in order to improve accounts receivable
collection and streamline its purchasing arrangements.

         Acquisitions played an important role in the Company's revenue and
earnings growth during fiscal 1998 and 1997, and they are expected to remain an
important component of ITS's growth strategy during future periods. ITS seeks
acquisition candidates that will add geographic coverage to the Company's
existing businesses, broaden its service offerings and expand its customer base.
The Company's recent domestic acquisitions have involved the purchase of service
contracts and property and equipment related to those contracts, but not the
liabilities associated with the sellers' businesses. Management believes that
the acquisition of service contracts, rather than of stock or of assets
unrelated to those contracts, significantly reduces the risks associated with
and the costs of integrating acquired operations.

                                      -13-
<PAGE>   16

         In fiscal 1998, ITS completed eleven acquisitions of service contracts,
all of which were accounted for under the purchase method, and accordingly their
operating results are included in ITS's consolidated financial statements for
all periods subsequent to the date of the acquisition. All of these acquisitions
were in the Company's core operations of aviation staffing and support services
and commercial security. These acquisitions contributed approximately $46.3
million in total revenues during fiscal 1998. During fiscal 1997, the Company
completed six acquisitions of service contracts, all of which were accounted for
under the purchase method. All of the acquisitions completed in fiscal 1997
involved providers of airline security and commercial security services. These
acquisitions contributed approximately $5.9 million in total revenues during
fiscal 1997. The Company has financed its acquisitions with borrowings under its
credit facility, cash from the proceeds of the Initial Public Offering completed
in September 1997, and internally generated cash.

RESULTS OF OPERATIONS


         The following table sets forth ITS' results of operations in both
dollars and as a percentage of revenues for the years ended March 31:

<TABLE>
<CAPTION>
                                               1998*                       1997*                         1996*
                                      -----------------------      -----------------------      ------------------------
<S>                                   <C>               <C>        <C>               <C>        <C>               <C>   
Revenues .........................    $ 173,235         100.0%     $ 115,745         100.0%     $  95,900         100.0%
Cost of operating revenues .......      145,968          84.3%        98,338          85.0%        81,341          84.8%
                                      ---------     ---------      ---------     ---------      ---------     ---------
    Gross profit .................       27,267          15.7%        17,407          15.0%        14,559          15.2%
Selling, general & admin. expenses       16,677           9.6%        13,334          11.5%        11,603          12.1%
                                      ---------     ---------      ---------     ---------      ---------     ---------
    Operating profit .............       10,590           6.1%         4,073           3.5%         2,956           3.1%
Other expense ....................         (868)         (0.5)%         (503)         (0.4)%         (437)         (0.5)%
Interest expense .................         (719)         (0.4)%         (637)         (0.6)%         (523)         (0.5)%
                                      ---------     ---------      ---------     ---------      ---------     ---------
    Income before income taxes ...        9,003           5.2%         2,933           2.5%         1,996           2.1%
Income taxes .....................        3,758           2.2%         1,237           1.1%           958           1.0%
                                      ---------     ---------      ---------     ---------      ---------     ---------
    Net income ...................    $   5,245           3.0%     $   1,696           1.4%     $   1,038           1.1%
                                      =========     =========      =========     =========      =========     =========
</TABLE>

* (dollars in thousands)


YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED MARCH 31, 1997


         Revenues. Revenues in fiscal 1998 increased by $57.5 million, or 49.7
percent as compared with fiscal 1997. The increase is attributable to an
increase in revenues from the eleven acquisitions completed during the year, the
inclusion of a full year of revenues from the six acquisitions completed in
fiscal 1997, and internal growth. The eleven acquisitions completed in fiscal
1998 contributed $46.3 million to the total increase in revenues for the year,
with $42.3 million in aviation services and $4.0 million in industrial security
services. The inclusion of a full year of operating results from the six
acquisitions completed in fiscal 1997 contributed $6.8 million to revenues.
Internal growth contributed the remainder of the increase in revenues in fiscal
1998 compared with fiscal 1997.

         Gross Profit. Gross profit was $27.3 million in fiscal 1998 compared
with $17.4 million fiscal 1997, an increase of $9.9 million, or 56.9 percent.
The eleven acquisitions completed in fiscal 1998, and the inclusion of a full
year of operating results from the six acquisitions completed in fiscal 1997,
contributed $6.2 million and $0.7 million, respectively to the increased gross
profit. As a percentage of revenues, gross profit was 15.7 percent in fiscal
1998, compared with 15.0 percent in fiscal 1997. The increase in gross profit as
a percent of sales is attributable to the shift in the Company's sales mix to
higher margin services such as ground handling, passenger services and
industrial security and away from lower margin preboard screening services. The
current strength of the United States economy, which has driven unemployment to
low levels has adversely impacted the Company's ability to attract and retain
the workforce needed to provide the services required under its service
contracts. The difficulty in attracting these workers has resulted in the
Company's payment of increased overtime and has forced the Company to increase
the wages paid to employees in advance of increases in the rates paid by the
Company's customers. These factors have resulted in downward pressure on


                                      -14-
<PAGE>   17

the Company's gross margins. In early fiscal 1999, the Company began 
implementing operational strategies that the Company believes will improve its
gross margins, however, there can be no assurance that these strategies will be
successful.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1998 were $16.7 million compared with $13.3
million in the prior year, an increase of $3.4 million, or 25.6 percent. The
increase primarily reflects expenses associated with the operations of acquired
businesses. Measured as a percentage of net sales, these expenses were 9.6
percent in fiscal 1998 and 11.5 percent in fiscal 1997. This decrease is
attributable to improved overhead absorption resulting from the growth of
revenues over the prior year.

         Interest Expense. Interest expense increased in fiscal 1998 to $0.7
million from $0.6 million in fiscal 1997 because of an increase in average
borrowings, primarily incurred to fund acquisitions.

         Income Taxes. The Company's consolidated effective income tax rate in
fiscal 1998 was 41.7 percent compared with 42.2 percent in fiscal 1997. The
decrease in the Company's effective tax rate in fiscal 1998 is due to reduced
overall tax rates on foreign earnings taxed at rates in excess of the U.S.
statutory tax rate. In addition, a decrease in expenses that are not deductible
for tax purposes lowered the Company's effective tax rate.

         Net Income. As a result of the increased revenues and reduction in
selling, general and administrative expenses as a percentage of revenues, the
Company's net income increased to $5.2 million in fiscal 1998 from $1.7 million
in fiscal 1997, an increase of 206 percent.


YEAR ENDED MARCH 31, 1997 COMPARED WITH YEAR ENDED MARCH 31, 1996


         Revenues. Revenues in fiscal 1997 increased by $19.8 million, or 20.7
percent, as compared to fiscal 1996. This increase is attributable to an
increase in revenues from the six acquisitions that were completed during the
year, and from the addition of continuous bag search services that were required
by the FAA during the year, as well as increased revenues from passing along to
customers the U.S. minimum wage increase commencing October 1, 1996 and an
increase in revenues from existing customers for aircraft cleaning and ground
handling. Of the $19.8 million increase in revenues, $5.9 million was
attributable to the acquisitions ($3.2 million in predeparture screening and
$2.7 million in industrial security), $4.2 million to continuous bag search,
$2.3 million to the minimum wage increase, $1.4 million to aircraft cleaning and
ground handling and the remainder due to internal growth.

         Gross Profit. Gross profit was $17.4 million in fiscal 1997 compared
with $14.6 million in fiscal 1996, an increase of $2.8 million, or 19.6 percent.
Approximately $1.4 million of the increase resulted from higher margin contracts
of acquired businesses. Approximately $1.0 million of the increase resulted from
an increase in hourly rates under certain contracts and higher utilization of
personnel and improved operating efficiencies. Company-wide cost reduction
measures, including decreases in worker's compensation and liability insurance
rates contributed approximately $400,000 to the increase in gross profit.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1997 were $13.3 million compared with $11.6
million in the prior year, an increase of $1.7 million, or 14.7 percent. The
increase primarily reflects expenses associated with the operations of acquired
businesses. Measured as a percentage of net sales, these expenses were 11.5
percent in fiscal 1997 and 12.1 percent in fiscal 1996. The decrease in these
expenses as a percentage of sales was attributable to improved overhead
absorption resulting from the growth of revenues over the prior year. On a pro
forma basis, after giving effect to the Intex acquisition, the Company's
selling, general and administrative


                                      -15-
<PAGE>   18

expenses for fiscal 1997 would have been 11.3 percent of total revenues,
primarily as a result of improved overhead absorption resulting from the larger
pro forma revenue base.

         Interest Expense. Interest expense increased in fiscal 1997 to $0.6
million from $0.5 million in fiscal 1996 because of an increase in the amount 
of debt outstanding. The debt was incurred primarily in connection with the
acquisitions.

         Income Taxes. The Company's consolidated effective income tax rate in
fiscal 1997 was 42.2 percent as compared to 48.0 percent in fiscal 1996. The
Company's effective tax rate will vary from period to period depending on the
breakdown of earnings among the various operating subsidiaries and the treatment
of earnings items by the relevant tax authorities and income tax effects
deferred from prior periods.

         Net Income. As a result of the foregoing, the Company's net income
increased to $1.7 million in fiscal 1997 from $1.0 million in fiscal 1996, an
increase of 70.0 percent.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

         The Company's business is labor intensive. Consequently, it has
substantial needs for cash throughout its fiscal year. During fiscal 1998, the
Company's cash requirements were heightened by its acquisition program and the
need to support the higher levels of revenue resulting from those acquisitions.
Operating activities generated cash of approximately $1.5 million. Financing
activities generated net cash of $20.4 million during fiscal 1998 primarily as a
result of the $30 million of net proceeds from the Company's Initial Offering, 
offset by the repayment of $7.1 million of long-term debt and the net repayment
of $2.4 million of short-term borrowings.

         Principal uses of funds, in addition to working capital requirements,
included expenditures associated with the Company's acquisition program. During
fiscal 1998, these included $19.0 million in acquisitions of service contracts,
related goodwill and noncompete agreements and $1.7 million for related property
and equipment. In addition, the Company spent $1.5 million on purchases of
property and equipment.

         In April 1997, the Company acquired substantially all of the aviation
services business of Intex by purchasing various existing contracts. Under the
terms of the purchase agreement, the Company's $2.6 million deposit was credited
toward the purchase price. The total purchase price, payable to the former owner
of Intex, was determined on the basis of a multiple of monthly revenues on the
acquired contracts for the period from April 1, 1997 to June 30, 1997. The
balance of the purchase price was paid on July 15, 1997. After the acquisition,
the Company lost contracts worth $2.5 million in annual revenue, which was
deducted from the purchase price based on a multiple of monthly revenue.

         The Company has a two-year revolving credit facility providing maximum
availability of $30 million, subject to certain borrowing base limitations. This
facility expires in September 1999 and is secured by substantially all of the
Company's assets. The interest rate on this credit facility is based on either
LIBOR or the bank's base lending rate, plus a margin depending on the Company's
ratio of its debt to tangible net-worth. Borrowings under this credit facility
currently bear interest at LIBOR plus 1.5 percent. The credit facility contains
customary restrictions and covenants, which limit the Company's ability to incur
additional indebtedness and pay dividends, and require the Company to maintain
prescribed debt-to-equity and fixed charge coverage ratios, and minimum net
worth levels, and to satisfy certain other financial covenants.

         The Company anticipates making capital expenditures in fiscal 1999 of
approximately $1.6 million primarily related to office space and equipment
improvements and computer software and systems. In addition, the Company
anticipates that it will continue making significant expenditures to fund its
ongoing acquisition program.

         The Company believes that operating cash flows and amounts available
under its credit facility will be sufficient to meet its anticipated cash
requirements through the end of fiscal 1999.


                                      -16-
<PAGE>   19

RECENTLY ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS

         During the first quarter of 1998, the AICPA's Accounting Standards
Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. This SOP requires that costs of start-up activities be expensed as
incurred. SOP 98-5 is required to be adopted for financial statements with
fiscal years beginning after December 15, 1998 and requires the cumulative
effect of the accounting change to be reported in net income in the year of
adoption. The Company believes adoption of this standard will not have a
material impact on the Company's financial position or results of operations.

         During the first quarter of 1998, the Financial Accounting Standards
Board issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. These
standards are effective for fiscal years beginning after December 15, 1997. The
Company believes adoption of these standards will not have a material impact on
the Company's financial disclosures.

YEAR 2000 BUSINESS MATTERS

            The Company is currently installing an updated version, that the
Company has been informed by its vendors is fully year 2000 compliant, of the
system that processes the majority of its transactions. This new version will
replace the Company's current version and the Company believes that this
version will be fully operational before year 2000 issues begin to impact the 
Company. In addition, the Company will have an outside consultant perform a
review of its other information systems to determine if any other areas of
exposure exist. The cost of this new version, and of any other new information
systems, will be capitalized and depreciated over their estimated useful lives 
for financial reporting purposes.


FORWARD LOOKING STATEMENTS

         This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains statements that constitute forward 
looking statements. Those statements appear in a number of places in this MD&A
Section and include statements regarding the intent, belief or current
expectations of International Total Services, Inc., its directors or its
officers with respect to (i) potential acquisitions by the Company; (ii) the
Company's financing plans; and (iii) trends affecting the Company's financial
condition or results of operations.

         Prospective investors are cautioned that any forward looking statements
in this MD&A Section are made pursuant to the safe harbor provisions of the 
Private Securities Litigation Reform Act of 1995. Forward looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from projected results, including unanticipated losses of
service contracts, conditions in the aviation industry, and negative publicity
regarding the airline security and services and commercial security industries.
Readers are cautioned not to place undue reliance on forward looking
statements. Factors that could cause actual results to differ materially from
projected results include, but are not limited to, those factors discussed in
the "Risk Factors" section of the prospectus contained in the Company's
Registration Statement on Form S-1 (Registration No. 333-29463), as amended.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                  Not applicable.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  See Index to Consolidated Financial Statements on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

                  Not applicable.

                                      -17-
<PAGE>   20

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            The information required by this Item 10 is incorporated by
reference to the information under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement in connection with its Annual Meeting of Shareholders
to be held on September 18, 1998, and the information under the heading
"Executive Officers" in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

            The information required by this Item 11 is incorporated by
reference to the information under the heading "Executive Compensation"
contained in the Company's Proxy Statement in connection with its Annual Meeting
of Shareholders to be held on September 18, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            The information required by this Item 12 is incorporated by
reference to the information under the heading "Security Ownership of Certain
Beneficial Owners and Management" contained in the Company's Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on September 18,
1998.

ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS

            The information required by Item 13 is incorporated herein by
reference to the information set forth under the heading "Certain Relationships
and Related Transactions" contained in the Company's Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on September 18,
1998.



                                      -18-
<PAGE>   21

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)            FINANCIAL STATEMENTS

                  See Index to Consolidated Financial Statements on page F-1.

(a)(2)            FINANCIAL STATEMENT SCHEDULES

                  Schedule II -- Valuation and Qualifying Accounts

(a)(3)            EXHIBITS

<TABLE>
<CAPTION>
      Exhibit No.                          Description
      -----------                          -----------
<S>     <C>       <C>     <C>    

          3.1             Amended and Restated Articles of Incorporation*

          3.2             Amended and Restated Code of Regulations*

          4.1             Specimen Common Share Certificate*

         10.1             Employment Agreement between the Company and Robert A. Weitzel*

         10.2             Employment Agreement between the Company and James O. Singer*

         10.3             Employment Agreement between the Company and Scott E. Brewer*

         10.4             Employment Agreement between the Company and Brian S. Kenyon

         10.5             Employment Agreement between the Company and Robert A. Swartz*

         10.9             Directors' Deferred Compensation Plan*

         10.10            Long-Term Incentive Plan*

         10.11            Third Amended and Restated Consolidated Replacement Credit Facility and Security
                          Agreement, dated as of March 31, 1997, between Bank One, Cleveland, NA, and the
                          Registrant*

         10.12            First Amendment to Third Amended and Restated Consolidated Replacement Credit Facility
                          and Security Agreement, dated as of October 10, 1997, between Bank One, Cleveland, NA
                          and the Registrant

         10.13            Amended and Restated Replacement Promissory Note executed by the Registrant in favor of
                          Bank One, NA, successor by merger to Bank One, Cleveland, NA

         21.1             Subsidiaries*

         27.1             Financial Data Schedule

         *        Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
                  333-29463), as amended.

(b)               REPORTS ON FORM 8-K

                  Current Report on Form 8-K dated February 20, 1998, as amended by the Current Report on Form 8-K/A
                  filed with the Commission on May 6, 1998.
</TABLE>



                                      -19-
<PAGE>   22

                                   SIGNATURES

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

<TABLE>
<S>                                            <C>
July 13, 1998                                  INTERNATIONAL TOTAL SERVICES, INC.

                                               By: /s/ Robert A. Weitzel
                                                  -------------------------------------------
                                                  Robert A. Weitzel
                                                  Director, Chairman of the Board of Directors
                                                  and Chief Executive Officer
</TABLE>

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


<TABLE>
<S>                                            <C>
July 13, 1998                                  /s/ Robert A. Weitzel
                                               -------------------------------------------
                                               Robert A. Weitzel
                                               Director, Chairman of the Board of Directors
                                               and Chief Executive Officer


July 13, 1998                                  /s/ Brian S. Kenyon 
                                               -------------------------------------------
                                               Brian S. Kenyon 
                                               Vice President, Finance
                                               (Principal Accounting Officer)


July 13, 1998                                  /s/ Ivan J. Winfield 
                                               -------------------------------------------
                                               Ivan J. Winfield 
                                               Director


July 13, 1998                           
                                               -------------------------------------------
                                               Lee C. Howley, Jr. 
                                               Director


July 13, 1998                                  /s/ James O. Singer
                                               -------------------------------------------
                                               James O. Singer
                                               Director


July 13, 1998                                  /s/ Jerry V. Jarret
                                               -------------------------------------------
                                               Jerry V. Jarrett
                                               Director
</TABLE>




                                      -20-
<PAGE>   23

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                  PAGE
                                                                                                  ----
<S>                                                                                                 <C>
International Total Services, Inc. and Subsidiaries

     Report of Independent Certified Public Accountants...........................................  F-2

     Consolidated Balance Sheets as of March 31, 1998 and 1997....................................  F-3

     Consolidated Statements of Income for the years ended
         March 31, 1998, 1997 and 1996............................................................  F-5

     Consolidated Statements of Shareholders' Equity for the years ended
         March 31, 1998, 1997 and 1996............................................................  F-6

     Consolidated Statements of Cash Flows for the years ended
         March 31, 1998, 1997 and 1996............................................................  F-7

     Notes to Consolidated Financial Statements...................................................  F-8
</TABLE>


                                     F-1

<PAGE>   24


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Shareholders and Board of Directors
INTERNATIONAL TOTAL SERVICES, INC.


We have audited the accompanying consolidated balance sheets of International
Total Services, Inc. and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Total Services, Inc. and subsidiaries as of March 31, 1998 and
1997, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles.



                                              GRANT THORNTON LLP
Cleveland, Ohio
May 15, 1998


                                     F-2
<PAGE>   25
              INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                    March 31
                             (Amounts in thousands)


                                     ASSETS
<TABLE>
<CAPTION>

                                                                                        1998                       1997
                                                                                     --------------              -------------
                                                                                     
<S>                                                                                         <C>                        <C>    
Current Assets
   Cash and cash equivalents                                                         $        1,032              $       1,452
   Accounts receivable - net of allowance for doubtful
        accounts of $100 in each year                                                        20,768                     11,784
   Deferred taxes                                                                             1,453                      1,494
   Uniforms                                                                                   2,686                        770
   Other current assets                                                                       1,684                        786
                                                                                     --------------              -------------
          Total current assets                                                               27,623                     16,286

   Notes receivable from Officers                                                                --                        445

Property and Equipment
   Security equipment                                                                         3,682                      2,759
   Service equipment                                                                          2,362                      1,657
   Computer equipment                                                                         2,049                      1,758
   Furniture and fixtures                                                                       994                        860
   Leasehold improvements                                                                        56                         56
   Autos                                                                                      1,607                        500
                                                                                     --------------              -------------
                                                                                             10,750                      7,590
   Less accumulated depreciation and amortization                                             5,255                      4,336
                                                                                     --------------              -------------

          Property and equipment - net                                                        5,495                      3,254

Intangibles, less accumulated amortization of
   $1,636 and  $648 in 1998 and 1997, respectively                                           25,295                      4,346
Security Deposits and Other                                                                     154                      2,670
                                                                                     --------------              -------------
                                                                                             25,449                      7,016
                                                                                     --------------              -------------


               TOTAL ASSETS                                                          $       58,567              $      27,001
                                                                                     ==============              =============
</TABLE>
      The accompanying notes are an integral part of these statements.

                                      F-3

<PAGE>   26

             INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES

                   CONSOLIDATED BALANCE SHEETS - CONTINUED

                                  March 31
                (Amounts in thousands, except per share data)



                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                            1998                       1997
                                                                                          -------------            ---------------
<S>                                                                                             <C>                        <C>    
                                                                                                                   
Current Liabilities
   Trade accounts payable                                                                 $       4,590            $         2,748
   Notes payable to bank                                                                              -                      2,400
   Current maturities of long-term obligations                                                        -                        120
   Accrued payroll and payroll taxes                                                             11,938                      8,703
   Other accrued expenses                                                                         1,860                      1,418
   Income taxes payable                                                                              98                        573
                                                                                          -------------            ---------------

            Total current liabilities                                                            18,486                     15,962


Deferred Taxes                                                                                      434                        289


Long-Term Obligations                                                                               544                      7,555


Shareholders' Equity
    Common shares, without par value, stated at $.01 per share -
        authorized  20,000 shares, issued and outstanding
        6,662 and 3,660 shares in 1998 and 1997, respectively                                        67                         37
    Additional paid-in capital                                                                   31,211                        473
    Cumulative translation adjustment                                                              (204)                       (99)
    Retained earnings                                                                             8,029                      2,784
                                                                                          -------------            ---------------

          Total shareholders' equity                                                             39,103                      3,195
                                                                                          -------------            ---------------

                       TOTAL LIABILITIES AND
                            SHAREHOLDERS' EQUITY                                          $      58,567            $        27,001
                                                                                          =============            ===============
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>   27

               INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                          For the years ended March 31
                  (Amounts in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                   1998                    1997                   1996
                                                                --------------          --------------         --------------

<S>                                                             <C>                     <C>                    <C>           
Operating revenues                                              $      173,235          $      115,745         $       95,900
                                                                --------------          --------------         --------------

Cost of operating revenues                                             145,968                  98,338                 81,341
                                                                --------------          --------------         --------------

          Gross profit                                                  27,267                  17,407                 14,559

Selling, general and administrative expenses                            16,677                  13,334                 11,603
                                                                --------------          --------------         --------------

          Operating profit                                              10,590                   4,073                  2,956

Interest expense - net                                                     719                     637                    523
Other expense                                                              868                     503                    437
                                                                --------------          --------------         --------------
                                                                         1,587                   1,140                    960
                                                                --------------          --------------         --------------

          Income before income taxes                                     9,003                   2,933                  1,996

Income taxes                                                             3,758                   1,237                    958
                                                                --------------          --------------         --------------


          NET INCOME                                            $        5,245          $        1,696         $        1,038
                                                                ==============          ==============         ==============

NET INCOME PER SHARE

   Basic                                                        $         1.01          $         0.33         $         0.18
                                                                ==============          ==============         ==============

   Diluted                                                      $         1.00          $         0.33         $         0.18
                                                                ==============          ==============         ==============

WEIGHTED AVERAGE NUMBER OF SHARES

   Basic                                                                 5,215                   5,089                  5,776
                                                                ==============          ==============         ==============

   Diluted                                                               5,265                   5,089                  5,776
                                                                ==============          ==============         ==============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>   28
               INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                For the years ended March 31, 1998, 1997 and 1996
                            (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                        CUMULATIVE                           
                                                                             ADDITIONAL TRANSLATION       
                                                        PREFERRED   COMMON    PAID-IN    ADJUSTMENT    RETAINED         
                                                          STOCK     SHARES    CAPITAL     AND OTHER    EARNINGS         
                                                        --------   ------- -----------  -----------    ---------
<S>                                                       <C>        <C>   <C>            <C>            <C>                
BALANCE AT MARCH 31, 1995                               $   220      $ 64  $    362       $  (60)         $ 2,960            

Translation adjustment                                        -         -         -          (69)               -            

Sale of marketable securities                                 -         -         -           51                -            

Purchase of common shares for treasury                        -         -         -            -                -            

Issuance of common shares from treasury                       -         -         -            -                -            

Net income                                                    -         -         -            -            1,038            
                                                        -------      ----  --------       ------         --------

BALANCE AT MARCH 31, 1996                                   220        64       362          (78)           3,998            

Purchase of common shares for treasury                        -         -         -            -                -            

Issuance of common shares from treasury                       -         -       171            -                -            

Translation adjustment                                        -         -         -          (21)               -            

Dividends declared - Class E Preferred Stock                  -         -         -            -              (52)           

Redeem Class E Preferred Stock                             (200)        -         -            -                -            

Acquisition and merger of affiliate                           -         -        35            -           (1,219)           

Retirement of Treasury Stock                                (20)      (27)      (95)           -           (1,639)           

Net income                                                    -         -         -            -            1,696            
                                                        -------      ----  --------       ------         --------

BALANCE AT MARCH 31, 1997                                     -        37       473          (99)           2,784            

Purchase of common shares                                     -         -      (165)           -                -            

Contribution of common shares by shareholder                  -         -       805            -                -            

Initial Public Offering - issuance of common shares           -        30    29,963            -                -            

Translation adjustment                                        -         -         -         (105)               -            

Other                                                         -         -       135            -                -            

Net income                                                    -         -         -            -            5,245            
                                                        -------      ----  --------       ------         --------

BALANCE AT MARCH 31, 1998                               $     -      $ 67  $ 31,211       $ (204)        $  8,029            
                                                        =======      ====  ========       ======         ========       
</TABLE>
<TABLE>
<CAPTION>
                                                                                   TOTAL
                                                               TREASURY         SHAREHOLDERS'
                                                                 STOCK             EQUITY
                                                              --------          ------------
<S>                                                           <C>               <C>    
BALANCE AT MARCH 31, 1995                                     $  (406)          $  3,140

Translation adjustment                                              -                (69)

Sale of marketable securities                                       -                 51

Purchase of common shares for treasury                           (200)              (200)

Issuance of common shares from treasury                            18                 18

Net income                                                          -              1,038
                                                              --------          --------

BALANCE AT MARCH 31, 1996                                        (588)             3,978

Purchase of common shares for treasury                         (1,226)            (1,226)

Issuance of common shares from treasury                            31                202

Translation adjustment                                              -                (21)

Dividends declared - Class E Preferred Stock                        -                (52)

Redeem Class E Preferred Stock                                      -               (200)

Acquisition and merger of affiliate                                 2             (1,182)

Retirement of Treasury Stock                                    1,781                  -

Net income                                                          -              1,696
                                                              --------          --------

BALANCE AT MARCH 31, 1997                                           -              3,195

Purchase of common shares                                           -               (165)

Contribution of common shares by shareholder                        -                805

Initial Public Offering - issuance of common shares                 -             29,993

Translation adjustment                                              -               (105)

Other                                                               -                135

Net income                                                          -              5,245
                                                              --------          --------
BALANCE AT MARCH 31, 1998                                     $     -           $ 39,103
                                                              ========          ========

</TABLE>

    The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>   29
               INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                          For the years ended March 31
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                               1998               1997               1996
                                                                          ---------------    ----------------   ----------------
<S>                                                                       <C>                <C>                <C>            
OPERATING ACTIVITIES:
   Net income                                                             $        5,245     $         1,696    $         1,038
   Adjustments to reconcile net income to net cash
       provided by operating activities:
           Depreciation                                                              948                 837                897
           Amortization                                                              988                 208                268
           Other                                                                      18                 500               (123)
           Deferred income taxes                                                     185                (310)              (295)
           Changes in working capital:
               Accounts receivable                                                (8,984)             (2,709)              (501)
               Other current and noncurrent assets                                (2,747)               (518)                12
               Trade accounts payable                                              1,842                 315                404
               Accrued expenses                                                    4,007               1,924                264
                                                                          ---------------    ----------------   ----------------

                    Net cash provided by operating activities                      1,502               1,943              1,964

INVESTING ACTIVITIES:
   Additions to property and equipment                                            (1,508)             (1,052)              (900)
   Proceeds received from sale of equipment                                            -                 160                543
   Proceeds from sale of marketable securities                                         -                   -                109
   Property and equipment of acquired businesses                                  (1,699)                  -                  -
   Payments for acquisitions of businesses, primarily
       by purchase of security contracts                                         (19,042)             (2,760)                 -
   Deposit on acquisition of business of Intex Aviation
      Services, Inc.                                                                   -              (2,571)                 -
                                                                          ---------------    ----------------   ----------------

                Net cash used in investing activities                            (22,249)             (6,223)              (248)

FINANCING ACTIVITIES:
   Net proceeds from Initial Public Offering                                      29,993                   -                  -
   Net borrowings (payments) on note payable to bank                              (2,400)              2,005               (819)
   (Payments) borrowings on subordinated debt                                     (3,000)              3,000                  -
   Principal payments on long-term debt                                           (4,131)                (52)               (99)
   Purchase of Company common shares                                                (165)             (1,227)              (200)
   Other                                                                             135                 154                 77
                                                                          ---------------    ----------------   ----------------

                Net cash provided by (used in) financing activities               20,432               3,880             (1,041)

Effect of exchange rates on cash                                                    (105)                (21)               (69)
                                                                          ---------------    ----------------   ----------------

                NET (DECREASE) INCREASE IN CASH                                     (420)               (421)               606

Cash and cash equivalents at beginning of year                                     1,452               1,873              1,267
                                                                          ---------------    ----------------   ----------------

Cash and cash equivalents at end of year                                  $        1,032     $         1,452    $         1,873
                                                                          ===============    ================   ================

------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------------------------
   Cash paid for:
        Interest                                                          $          841     $           782    $           610
                                                                          ===============    ================   ================

        Income taxes                                                      $        3,943     $         1,231    $         1,138
                                                                          ===============    ================   ================
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-7
<PAGE>   30

               International Total Services, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    A summary of the significant accounting policies consistently applied in the
    preparation of the combined financial statements follows. All 1997 and 1996
    share and per share amounts have been adjusted for the 12,892.62 for 1 stock
    split declared on June 17, 1997. Certain reclassifications have been made to
    the 1997 and 1996 consolidated financial statements to conform with the 1998
    presentation.

    The Company's fiscal year ends on March 31. All references to fiscal years
    in these notes to the consolidated financial statements represent the year
    in which the fiscal period ends (i.e. fiscal 1998 is the year ended March
    31, 1998) unless otherwise noted.

    BUSINESS

    International Total Services, Inc. (the Company) is a provider of aviation
    security and other aviation services, providing personnel and management
    support to airlines at airports primarily in the United States and Europe.
    The Company also provides commercial security services to various businesses
    in the United States. One airline customer accounted for 26.0%, 7.0% and
    5.9% of operating revenues for the years ended March 31, 1998, 1997 and
    1996, respectively. Another airline customer accounted for 14.7%, 18.9% and
    18.3% of operating revenues for the same periods. Furthermore, five airline
    customers, including the two noted above, accounted for approximately 54%,
    44% and 39% of operating revenues for the years ended March 31, 1998, 1997
    and 1996, respectively, and 43%, 35% and 39%, respectively of accounts
    receivable at those dates.

    PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
    and its wholly-owned foreign and domestic subsidiaries. All significant
    intercompany balances and transactions have been eliminated in
    consolidation.

    TRANSLATION OF FOREIGN CURRENCIES

    All balance sheet accounts of foreign operations are translated into U.S.
    dollars at the year-end rate of exchange, and statement of earnings items
    are translated at the weighted average exchange rate for the year. The
    resulting translation adjustments are made directly to a separate component
    of stockholders' equity. Certain foreign activities are considered to be an
    extension of the U.S. operations, and the gain or loss resulting from
    remeasuring these transactions into U.S. dollars are included in income.
    Gains or losses from other foreign currency transactions, such as those
    resulting from the settlement of foreign receivables or payables, are also
    included in the statement of earnings.

                                      F-8
<PAGE>   31


               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

    CASH FLOW STATEMENT

    For purposes of the Statement of Cash Flows, the Company considers all
    short-term, highly liquid debt instruments purchased with a maturity of
    three months or less to be cash equivalents.

    During fiscal 1998 and 1997, the Company entered into the following noncash
    transactions:

            (1)   During fiscal 1998, the Company's principal shareholder, who
                  is also the Company's chairman and chief executive officer,
                  contributed 73,101 common shares, valued at approximately
                  $805,000, to a former employee to settle the Company's
                  previously recorded liability to him.

            (2)   During fiscal 1997, the Company redeemed 200 shares of Class E
                  preferred shares from its principal shareholder in settlement
                  of a $200,000 note receivable from him. In addition, the
                  Company declared $52,000 in dividends, including all dividend
                  arrearages, on the preferred shares and paid the dividends by
                  reducing the accrued interest receivable due on the note.

            (3)   During fiscal 1997, the Company acquired an affiliated entity
                  in a transaction accounted for in a manner similar to a
                  pooling. The acquisition was completed by issuing 4,126 common
                  shares from treasury to the Company's (and the affiliate's)
                  principal shareholder, paying $12,500 to the other
                  shareholders of the affiliate and by offsetting $1.7 million
                  in notes and accrued interest receivable due to the Company
                  from the shareholders of the affiliate against corresponding
                  obligations of the affiliate to such shareholders. The notes
                  and interest receivable included $1.3 million due from the
                  Company's principal shareholder. The shareholders of the
                  affiliate were also officers of the Company.

    FAIR VALUE OF FINANCIAL INSTRUMENTS

    Management has determined that at March 31, 1998 and 1997, the fair value of
    financial instruments included in the balance sheets approximated their
    carrying values.

    With respect to cash and cash equivalents, net trade receivables and
    payables, this determination was based on the relatively short period to
    maturity of these instruments. With respect to long-term debt, the
    assessment was based on borrowing rates currently available to the Company
    for debt with comparable maturities.

                                      F-9
<PAGE>   32

               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

    UNIFORMS

    Uniforms consists of uniforms on hand that have not been issued to employees
    and uniforms in service. Uniforms in service are recorded at cost and
    amortized over their expected useful lives of 18 months.

    PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost. Depreciation is provided over the
    estimated useful lives of the respective assets, principally five or seven
    years, using the straight-line method.

    INTANGIBLES

    Intangibles primarily consist of goodwill resulting from the acquisition by
    the Company of various aviation service and commercial security businesses,
    primarily through the assumption of security service contracts. Intangibles
    additionally include the fair value of the service contracts and, as
    applicable, covenants not to compete also acquired in those acquisitions.

    Goodwill, resulting from the acquisition of service contracts, is being
    amortized over the estimated life of the contracts, including renewals
    (generally 20 years), based on the Company's historical retention rate,
    giving consideration to additional business obtained or obtainable as a
    result of entering new markets by the acquisition of existing contracts. The
    service contracts and covenants not to compete are being amortized over
    their remaining lives of up to five years. Amortization of intangibles was
    $988,000, $208,000 and $268,000 for the fiscal years ended March 31, 1998,
    1997 and 1996, respectively. Management of the Company assesses the
    recoverability of its long-lived assets by using projected undiscounted
    future cash flows to determine whether the carrying amount of the asset can
    be recovered over its remaining life. The evaluation of long-lived assets
    also takes into consideration operating results and trends and prospects of
    the Company. Based on the assessments made, management believes that there
    has been no impairment of the Company's long-lived assets.

    USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amount of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the financial
    statements and the reported amounts of revenues and expenses during the
    reporting period. Actual results could differ from those estimates.

                                      F-10
<PAGE>   33

               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

    ACCOUNTING STANDARDS

    During the first quarter of 1998, the AICPA's Accounting Standards Executive
    Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities.
    This SOP requires that costs of start-up activities be expensed as incurred.
    SOP 98-5 is required to be adopted for financial statements with fiscal
    years beginning after December 15, 1998 and requires the cumulative effect
    of the accounting change to be reported in net income in the year of
    adoption. The Company believes adoption of this standard will not have a
    material impact on the Company's financial position or results of
    operations.

    During the first quarter of 1998, the Financial Accounting Standards Board
    issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131,
    Disclosures About Segments of an Enterprise and Related Information. These
    standards are effective for fiscal years beginning after December 15, 1997.
    The Company believes adoption of these standards will not have a material
    impact on the Company's financial disclosures.

NOTE B - INITIAL PUBLIC OFFERING

    On September 24, 1997, the Company completed a public offering of 3,021,477
    common shares and received net proceeds of approximately $30 million. A
    portion of the proceeds were used to repay outstanding debt and the balance
    was used for general corporate purposes, including the acquisition of
    service contracts.

NOTE C - CAPITAL STOCK

    The Company has authorized 5 million preferred shares. The Company had
    issued ten shares of Class A preferred stock for $20,000 and 200 shares of
    Class E preferred stock for $200,000. All preferred shares were redeemed and
    retired in 1997. Prior to their redemption, in March 1997, the Company
    declared and paid dividends on the Class E preferred shares in the amount of
    $52,000, which amount included all dividends in arrears at that date.

    During the fiscal years ended March 31, 1998, 1997 and 1996, the Company
    reacquired 19,339 common shares, 2,028,477 common shares and 286,099 common
    shares, respectively. During the 1997 and 1996 fiscal years, the Company
    reissued 70,909 of those shares, including 45,124 common shares valued at
    $203,000 that were granted to certain officers in November 1996.

                                      F-11
<PAGE>   34

               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE D - FINANCING ARRANGEMENTS

      The Company has a committed credit facility secured by all domestic
      accounts receivable, equipment, and other assets. The facility originally
      consisted of a revolving promissory note of $10,500,000, a $2,000,000 term
      loan and a $900,000 term loan. The credit facility was amended and
      restated effective October 10, 1997. The restated credit facility provides
      borrowings under a revolving promissory note up to $30 million through
      September 30, 1999, limited to a formula percentage of eligible
      receivables. The revolving promissory note bears interest at a variable
      rate based on the Company's total debt to tangible net worth ranging from
      LIBOR plus 1.50% to the bank's prime rate plus 3%. The interest rate on
      borrowings outstanding at March 31, 1998 was LIBOR (5.625% at March 31,
      1998) plus 1.5%. The credit facility is collateralized by substantially
      all accounts receivable and property and equipment, and contains various
      covenants, the most restrictive of which limit capital expenditures and
      require the Company to maintain certain financial ratios.

      NOTES PAYABLE TO BANK

      Notes payable to bank consisted of the $2,000,000 term loan and the
      $900,000 term loan (with a balance of $400,000 at March 31, 1997) which
      were paid in full in September 1997 from the proceeds of the initial
      public offering. The term loans had maturity dates in 1997 and,
      accordingly, were classified as current liabilities at March 31, 1997.

      LONG-TERM OBLIGATIONS

      Long-term obligations consist of the following at March 31:
<TABLE>
<CAPTION>

                                              ===============================
                                                      1998              1997
                                              ------------- -----------------
<S>                                                   <C>             <C>   
   Revolving promissory note                          $544            $4,358
   Subordinated debt                                     -             3,000
   Other                                                 -               317
                                              ------------- -----------------
                                                       544             7,675
      Less current portion                               -               120
                                              ------------- -----------------
                                                      $544            $7,555
                                              ============= =================
</TABLE>

      The subordinated debt consisted of a promissory note payable, bearing
      interest at 20%, due in twelve quarterly principal installments of
      $250,000 each, beginning in February 1999. The note, which was
      subordinated to all borrowings provided under the bank credit facility,
      was fully repaid from the proceeds of the initial public offering.

                                      F-12
<PAGE>   35
               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)

NOTE E - INCOME TAXES

  The provision for income taxes consists of the following for the years ended
March 31:
<TABLE>
<CAPTION>

                                                                 1998                  1997                  1996
                                                           -----------------     -----------------     ------------------
<S>                                                        <C>                   <C>                   <C>              
PRETAX INCOME
      Domestic                                             $          8,560      $          2,497      $           1,635
      Foreign                                                           443                   436                    361
                                                           -----------------     -----------------     ------------------

            TOTAL                                          $          9,003      $          2,933      $           1,996
                                                           =================     =================     ==================

CURRENT
      Federal                                              $          2,650      $          1,095     $              884
      State                                                             700                   253                    233
      Foreign                                                           223                   199                    136
                                                           -----------------     -----------------     ------------------
            Total current                                             3,573                 1,547                  1,253

DEFERRED
      Federal                                                           143                  (260)                  (251)
      State                                                              42                   (50)                   (44)
                                                           -----------------     -----------------     ------------------
            Total deferred                                              185                  (310)                  (295)
                                                           -----------------     -----------------     ------------------

            TOTAL PROVISION                                $          3,758      $          1,237      $             958
                                                           =================     =================     ==================
</TABLE>


   A reconciliation of the provision for income taxes computed at the United
   States federal statutory tax rate to the Company's effective tax rate is as
   follows:
<TABLE>
<CAPTION>

                                                                 1998                  1997                  1996
                                                           -----------------     -----------------     ------------------
<S>                                                        <C>                   <C>                   <C>              
            Tax at U.S. federal income
               tax rate (34%)                              $          3,061      $            997      $             679
            State income taxes - net of
               U.S. federal tax benefit                                 490                   128                    124
            Difference between foreign
               and U.S. federal tax rates                                72                    51                     14
            Nondeductible items                                          57                    60                    154
            Other - net                                                  78                     1                    (13)
                                                           -----------------     -----------------     ------------------

                                                           $          3,758      $          1,237      $             958
                                                           =================     =================     ==================

            Effective tax rates                                        41.7%                 42.2%                  48.0%
                                                           =================     =================     ==================
</TABLE>

                                      F-13
<PAGE>   36
               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)



NOTE E - INCOME TAXES - CONTINUED

  Deferred income taxes reflect the tax effect of temporary differences between 
  the carrying amounts of assets and liabilities for financial reporting 
  purposes and for income tax purposes.  Significant components of deferred tax 
  assets and liabilities relate to the following at March 31:
<TABLE>
<CAPTION>

                                                                1998                 1997                 1996
                                                           ---------------      ---------------      ---------------
<S>                                                        <C>                  <C>                  <C>           
DEFERRED TAX ASSETS:
      Deferred compensation                                $           81       $          428       $          360
      Accrued workers' compensation                                   545                  360                  400
      Accrued legal expenses                                          571                  536                  324
      Other accruals not currently deductible                         240                  180                  164
      Amortization of intangibles                                      35                   51                   22
      Allowance for doubtful accounts                                  40                   40                   40
      State income taxes                                               63                   46                   30
      Other                                                           132                   50                   55
                                                           ---------------      ---------------      ---------------

            TOTAL DEFERRED TAX ASSETS                      $        1,707       $        1,691       $        1,395
                                                           ===============      ===============      ===============


DEFERRED TAX LIABILITIES:
      Depreciation                                         $          620       $          340       $          412
      Deferred expenses                                                34                  112                   57
      Other                                                            34                   34                   31
                                                           ---------------      ---------------      ---------------

            TOTAL DEFERRED TAX LIABILITIES                 $          688       $          486       $          500
                                                           ===============      ===============      ===============

            NET DEFERRED TAX ASSETS                        $        1,019       $        1,205       $          895
                                                           ===============      ===============      ===============
</TABLE>


  The net deferred tax assets are classified in the balance sheet as follows at
  March 31:
<TABLE>
<CAPTION>

                                                                1998                 1997
                                                           ---------------      ---------------

<S>                                                        <C>                  <C>           
            Current deferred income taxes                  $        1,453       $        1,494

            Noncurrent deferred income taxes                         (434)                (289)
                                                           ---------------      ---------------

                Net deferred tax assets                    $        1,019       $        1,205
                                                           ===============      ===============
</TABLE>

                                      F-14
<PAGE>   37


               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE F - LEASE OBLIGATIONS

    The Company leases certain equipment and facilities under operating leases
    that expire at various dates through December 31, 2004. The future minimum
    lease commitments under these operating leases are as follows:
<TABLE>
<CAPTION>

        YEARS ENDED MARCH 31,
---------------------------------------
<S>                                             <C>   
                 1999                           $1,696
                 2000                            1,300
                 2001                            1,199
                 2002                              873
                 2003                              304
              Thereafter                           376
                                        ---------------
                                                $5,748
                                        ===============
</TABLE>


    Rent expense incurred under operating leases was $2.2 million, $1.4 million
    and $1.7 million for the years ended March 31, 1998, 1997 and 1996, 
    respectively.

NOTE G - RELATED PARTY TRANSACTIONS

    Notes receivable from officers at March 31, 1997 consisted of two notes due
    from the Company's principal shareholder, plus accrued interest thereon. The
    notes, which aggregated approximately $325,000, were fully repaid in
    September 1997. Interest income on shareholder notes amounted to $14,000,
    $119,000 and $137,000 in the years ended March 31, 1998, 1997 and 1996,
    respectively.

NOTE H - LITIGATION

    The Company is subject to on-going legal proceedings and claims which arise
    in the ordinary course of its business. While the ultimate outcome of these
    matters cannot be reasonably estimated at this time, these actions, when
    ultimately settled or adjudicated, will not, in the opinion of management,
    have a material adverse effect on the financial condition or results of
    operations of the Company. The Company has accrued for matters where
    management has determined that it is probable a liability for which a loss
    or range of loss can be reasonably estimated has been incurred.

                                      F-15
<PAGE>   38


               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)



NOTE I - WORKERS' COMPENSATION INSURANCE

    The Company carries workers' compensation insurance that provides coverage
    to all employees except for those in states that require coverage under the
    state's workers' compensation funds. The insurance coverage has a deductible
    of $250,000 per occurrence and an aggregate deductible of $950,000 per
    policy. Under the terms of the insurance agreements, the Company has
    $130,000 in cash on deposit with insurance carriers and an outstanding
    letter of credit in the amount of $1,022,000 at March 31, 1998. These funds
    and letter of credit serve as collateral for any claims incurred but not
    reported. The Company has an accrued liability for unpaid claims and claims
    incurred but not reported of $1.4 million, $900,000 and $714,000 at March
    31, 1998, 1997 and 1996, respectively.


NOTE J - NET INCOME PER SHARE

    Net income per share - basic is based on the weighted average number of
    shares outstanding during each period.

    Net income per share - diluted gives effect to the net additional shares 
    that would have been issued had all dilutive stock options been exercised. 
    The Company had no other potential common stock outstanding.

    The table below presents the information used to compute net income per
    share, with and without dilution:
<TABLE>
<CAPTION>

                                              ==================================================================
                                                              FOR THE YEAR ENDED MARCH 31, 1998
                                              ------------------------------------------------------------------
                                                          INCOME                 SHARES               PER SHARE
                                                     (NUMERATOR)          (DENOMINATOR)                  AMOUNT
                                              ------------------------------------------------------------------
<S>                                                       <C>                     <C>               <C>        
Net income                                                $5,245                  5,215             $1.01 Basic
                                                                                         =======================
Effect of dilutive securities:
   Stock options                                               -                     50
                                              ------------------------------------------
                                                          $5,245                  5,265           $1.00 Diluted
                                              ==================================================================
</TABLE>

                                      F-16
<PAGE>   39

               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE K - LONG-TERM INCENTIVE PLAN

    In September 1997, the Company adopted the Long-Term Incentive Plan (the
    "Plan") for its officers and directors. The Company accounts for the Plan
    under APB Opinion No. 25 and related interpretations. The Plan allows the
    Company to grant options to officers and directors for up to 267,015 common
    shares. Options currently outstanding become exercisable one to five years
    from the grant date and expire 10 years after the grant date. The options
    are exercisable at the market price of the Company's common shares on the
    date of grant. Accordingly, no compensation cost has been recognized for the
    Plan. Had compensation cost for the Plan been determined based on the fair
    value of the options at the grant date consistent with the method of
    Statement of Financial Accounting Standards No. 123, Accounting for
    Stock-Based Compensation (SFAS 123), the Company's net income and earnings
    per share would have been reduced to the proforma amounts indicated below.
<TABLE>
<CAPTION>
                                                  ========================
                                                      MARCH 31, 1998
                                                  ------------------------
<S>                                                       <C>   
NET INCOME
   As reported                                            $5,245
   Proforma                                               $4,949
NET INCOME PER SHARE - BASIC
   As reported                                             $1.01
   Proforma                                                $ .95
NET INCOME PER SHARE - DILUTED
   As reported                                             $1.00
   Proforma                                                $ .94
</TABLE>


    The fair value of each option grant is estimated on the date of grant using
    the Black-Scholes options-pricing model with the following weighted-average
    assumptions: expected volatility of 45 percent; risk-free interest rate of
    6.24%; and expected lives of 10 years.


                                      F-17
<PAGE>   40




               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE K - LONG-TERM INCENTIVE PLAN - CONTINUED

    A summary of the status of the Company's plan as of and for the year ended
March 31, 1998 is as follows:
<TABLE>
<CAPTION>

                                                                                        WEIGHTED AVERAGE
                                                                   SHARES                 EXERCISE PRICE
                                                            ---------------------------------------------
<S>                                                                 <C>                           <C>   
Outstanding at beginning of year                                        -                         $    -
Granted                                                               265                          11.25
                                                            ---------------------------------------------
Outstanding at end of year                                            265                         $11.25
                                                            =============================================


Options exercisable at end of year                                      0
                                                            ==============

Weighted average fair value of options
   granted during the year                                          $7.43
                                                            ==============

Weighted average remaining contractual
   life (years)                                                      9.49
                                                            ==============
</TABLE>

                                      F-18

<PAGE>   41



               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          March 31, 1998, 1997 and 1996
      (Tabular amounts in thousands, except per share and percentage data)


NOTE L - ACQUISITIONS OF OPERATING CONTRACTS

    During the fiscal year ended March 31, 1998, the Company acquired aviation
    service and commercial security contracts and related property and equipment
    of $1.7 million from ten entities for an aggregate purchase price of
    approximately $23.3 million. During the fiscal year ended March 31, 1997,
    the Company acquired security operating contracts from six entities for an
    aggregate purchase price of approximately $2.8 million. The Company believes
    the purchase of these contracts to be substantially equivalent to the
    purchase of businesses. Accordingly, the acquisitions have been accounted
    for under the purchase method of accounting. The purchase prices have been
    allocated to the contracts and, where applicable, covenants not to compete,
    based upon their estimated fair market values; the excess of the purchase
    prices over those values have been allocated to goodwill, which is being
    charged to operations on a straight-line basis over 20 years (see Note A).
    The operating results related to the acquired contracts have been included
    in the Company's results of operations from the respective dates of
    acquisition.

    The following unaudited pro forma results of operations give effect to the
    above acquisitions as if the 1997 acquisitions had been made at April 1,
    1995 and the 1998 acquisitions had been made at April 1, 1996:
<TABLE>
<CAPTION>

                                   =================================================
                                                 YEARS ENDED MARCH 31,
                                   -------------------------------------------------
                                             1998             1997             1996
                                   -------------------------------------------------
<S>                                      <C>              <C>              <C>     
Operating revenues                       $214,297         $203,515         $116,246
Net income                                 $6,607           $5,550           $2,341
Net income per share:
   Basic                                    $1.27            $1.09            $0.41
   Diluted                                  $1.25            $1.09            $0.41
</TABLE>

    The pro forma results of operations have been prepared for comparative
    purposes only and do not purport to present actual operating results had the
    acquisitions been made at the beginning of each year, or of results which
    may occur in the future.

                                      F-19
<PAGE>   42


               International Total Services, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                        March 31, 1998, 1997 and 1996

     (Tabular amounts in thousands, except per share and percentage data)




NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

    The following is a summary of the unaudited quarterly  results of operations
    for the years ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------

                                        JUNE 30       SEPTEMBER 30       DECEMBER 31         MARCH 31
------------------------------------------------------------------------------------------------------
          FISCAL 1998
---------------------------------
<S>                                     <C>                <C>               <C>              <C>    
Operating revenues                      $38,364            $38,604           $46,240          $50,027
Gross profit                              6,540              6,312             7,418            6,997
Net income                                  853              1,125             1,826            1,441
Net income per share -
  basic                                   $0.23              $0.29             $0.27            $0.22
Net income per share -
  diluted                                 $0.23              $0.29             $0.27            $0.21
------------------------------------------------------------------------------------------------------
        FISCAL 1997 (1)
---------------------------------
Operating revenues                      $24,082            $29,195           $31,885          $30,583
Gross profit                              3,663              4,599             4,952            4,193
Net income                                  442                549               552              153
Net income per share -
  basic                                   $0.08              $0.10             $0.10            $0.04
Net income per share -
  diluted                                 $0.08              $0.10             $0.10            $0.04
</TABLE>


       (1)   The amounts reported above have been restated from those that were
             previously reported in the Company's quarterly reports on Form 10-Q
             to reflect the reclassification from revenue to other expense of
             discounts given to customers.

                                      F-20

<PAGE>   43


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                  ON SCHEDULES




Shareholders and Board of Directors
INTERNATIONAL TOTAL SERVICES, INC.


In connection with our audit of the consolidated financial statements of
International Total Services, Inc. and Subsidiaries referred to in our report
dated May 15, 1998, we have also audited Schedule II for each of the three years
in the period ended March 31, 1998. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.



                                                  GRANT THORNTON LLP


Cleveland, Ohio
May 15, 1998


                                     S-1

<PAGE>   44




                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

               INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES

                For the years ended March 31, 1998, 1997 and 1996

                             (Amounts in thousands)

<TABLE>
<CAPTION>

                         COLUMN A                COLUMN B                COLUMN C                   COLUMN D         COLUMN E

                                                             --------------------------------
                                                                         ADDITIONS
                                                             --------------------------------
                                                BALANCE AT   CHARGED TO                                             BALANCE AT
                                                 BEGINNING   COSTS AND           CHARGED TO                           END OF
    YEAR                DESCRIPTION              OF PERIOD    EXPENSES         OTHER ACCOUNTS      DEDUCTIONS         PERIOD
----------  -------------------------------  --------------- ----------      ----------------     -------------     ----------

<S> <C>                                      <C>             <C>                                  <C>               <C>       
    1996    Allowance for doubtful accounts  $           100 $      111                           $        111      $      100

    1997    Allowance for doubtful accounts  $           100 $       57                           $         57      $      100

    1998    Allowance for doubtful accounts  $           100 $      319                           $        319      $      100
</TABLE>

                                     S-2

<PAGE>   45


                                EXHIBIT INDEX
                                -------------

Exhibit No.                        Description
-----------                        -----------
   3.1           Amended and Restated Articles of Incorporation*

   3.2           Amended and Restated Code of Regulations*
            
   4.1           Specimen Common Share Certificate*

  10.1           Employment Agreement between the Company and Robert A. Weitzel*

  10.2           Employment Agreement between the Company and James O. Singer*

  10.3           Employment Agreement between the Company and Scott E. Brewer* 

  10.4           Employment Agreement between the Company and Brian S. Kenyon

  10.5           Employment Agreement between the Company and Robert A. Swartz*

  10.9           Directors' Deferred Compensation Plan*

  10.10          Long-Term Incentive Plan*

  10.11          Third Amended and Restated Consolidated Replacement Credit
                 Facility and Security Agreement, dated as of March 31, 1997, 
                 between Bank One, Cleveland, NA, and the Registrant*

  10.12          First Amendment to Third Amended and Restated Consolidated
                 Replacement Credit Facility and Security Agreement, dated as 
                 of October 10, 1997, between Bank One, Cleveland, NA, 
                 and the Registrant

  10.13          Amended and Restated Replacement Promissory Note executed by
                 the Registrant in favor of Bank One, NA, successor by merger 
                 to Bank One, Cleveland, NA

  21.1           Subsidiaries*

  27.1           Financial Data Schedule


  *       Incorporated by reference from the Company's Registration Statement
          on Form S-1 (Registration No. 333-29463), as amended.